Over the last few months, it has been my contention that Optus is retreating from the broadband market. I based this view on my observation of Optus’s activities in the market, and the announcements made by them during that time. My conclusions about Optus were:
No further investments in infrastructure;
No iTV roll-out beyond the 3,000 test connections;
After a decade of cable TV, only 65,000 cable modem subscribers;
The refocusing of the company on corporate customers and mobile subscribers.
I invited Optus to discuss this with me and a discussion subsequently took place with the company’s residential broadband leaders.
What I learned from this discussion was that Optus was not retreating from the residential broadband. My new understanding is that it has changed its direction. Instead of building out its own infrastructure they intend to pursue residential broadband opportunities based, of course, on their own HFC network and on developments of the (Telstra) wholesale market. While this wholesale market is currently unappealing for developing competitive residential services, changes are underway – these include line-sharing and the unbundling of the local loop, both of which are currently under investigation by the regulator.
I argued that this is more an opportunistic than a strategic approach. I consider that this would make Optus little more than a reseller, like the hundreds of others ISPs and service providers in the market. Optus’s counter-argument was that it had a far stronger brand than any of the other service providers and that their brand, linked with the very successful bundling of services, would differentiate them from the rest of the market. Their strategy is built on the brand rather than on the exploitation of the infrastructure. While there is nothing wrong with this –I even agree with it – at the same time it underscores my argument that the infrastructure is a natural monopoly and that there will be no competition at that level.
Optus’s financial recovery further demonstrates that its strategy is paying off and nobody can argue with that. However, in my opinion the scene has dramatically changed. There won’t be any major infrastructure investment from Optus, and this was the underlying promise from the company at their inception, back in the early 1990s – they were to be Telstra’s main infrastructure competitor. The reality of the times has forced them to change this direction, but it does make the company more of a service provider than a telco – albeit the strongest service provider of them all. Yes, profitability will increase but the longer-term larger cash flows are not going to be there. The size of the company will obviously be limited by the new direction it has taken. Financially far more prudent, true, but no real threat to Telstra anymore.
For a while they will still have their own HFC cable TV network, but in the absence of further investments this will become largely obsolete towards the end of this decade. Obviously they will make the most of it and there is still a long way to go before fibre-to-the-home takes over – and then, of course, the company will be a major SP on the fibre network.
My problem is that, given the current financial environment, I can’t argue against this strategy, but, at the same time, we are losing the only serious infrastructure competitor to Telstra. We have all learned from the last five years of deregulation that those who own the network run the game. All the others have to fight over the crumbs (Telstra has 95% of total industry profits). Optus’s choice is to go for the more profitable crumbs and forget about the big league.
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