BuddeBlog

While much attention has been given to the incredible changes that are occurring in telecommunications, in Australia, many of the changes currently taking place in the media world don’t receive the same degree of attention.

This is a clear indication of the absence of dynamics in the Australian market.

In the USA, in particular, the developments are mind-boggling. Competition between the telecoms and cable TV companies has resulted in the latter group rapidly evolving in a totally new media direction. For example, the cable TV market dominates the broadband market, with a 50% market share. Since the mid-1990s the operators have upgraded their networks to allow for a range of digital and interactive services.

In Australia, the traditional broadcasters have been dominated by the Nine Network over the last few years and in the process have taken a somewhat laid-back approach. It became rather lazy and is certainly was not driving change in the market.

Seven has been bruised in the various new media deals but perhaps has learned some good lessons in the process. They received a boost from taking over the lead in ratings from Nine during 2006. Its new Yahoo!7 venture is also showing some leadership in multi media initiatives. The Ten Network operates in a niche market, which it will develop further.

Content-wise, Austar is a copy of Foxtel and is more interested in selling the business. As a matter of fact, the pay TV market is a de facto monopoly, since the two operators don’t play in each other’s market. The battle regarding the control of these two networks will be one of the most exciting events of the year, as it will bring together the most powerful media and communication companies and personalities.

Despite this, the digitalisation of pay TV has certainly brought some interesting new activities into the market. While I am not impressed by the very limited Video-on-Demand (VoD) service on offer here, I do like their interactive news service and use it several times a week.

Converging and supplementing media services

The cable TV companies in the USA, Europe and Asia are also behind the incumbent telcos’ current losses of market share in the telephone market – they are making a real impact through adding Voice over Internet Protocol (VoIP) and mobile offerings to their traditional pay TV and broadband packages.

At the same time, their core business remains entertainment, and it is in this area that even more interesting developments are taking place, with VoD, DVRs and a range of interactive TV developments entering the market.

The customer focus of the telecoms market is clearly moving away from basic telephone services towards a media rich environment. Media companies have a much better understanding of this market than telephone companies (fixed or mobile for that matter).

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By late 2006, Fairfax had taken the most strategic step in the period following the media reforms.

On the surface it might seem to be a rather traditional move, a merger of newspapers, but I believe it is a sound strategy, since it makes the company much stronger; and it also begins the all-important process of winning back the leadership position it once held in the Australia media market. As we all know, you have to be big and strong if you want to play in this market, or else the others will just cut you into pieces and gobble you up.

However, this isn’t the key issue for me. What I find significant is the fact that this move demonstrates that Fairfax fully understands the shift that is taking place in the media. The New Media are leading a process of media democratization and the focus is now moving from international and national to local and ‘me’.

Look at all the major new media developments that are currently taking place – the majority of them are ‘local’or ‘me’ services.

In acquiring the Rural Press, Fairfax has bought itself a gateway position in many communities in Australia and New Zealand, from which it can exploit the ‘local’ trend – not just through newspapers, but increasingly through Internet portals delivering local video, audio and text and graphics services.

I believe that the company will learn from this, and perhaps get a better understanding of how to transfer these local concepts from regional Australia to its media activities in its metro markets.

There will no doubt be a major shift in advertising spending from national to local, and with the merger Fairfax is in a prime position to profit from this shift.

The company could also play a key role in the ‘broadbanding of the local communities’. During my campaigns in regional Australia over the last five years one of the major problems was to get the telcos and ISP to take a leadership role. Utilities have played a much more leading role and it’s to be hoped that this will now also be complemented by the local media companies.

We need a group of strong partners to make the broadbanding of local communities happen, and the Fairfax move is a major step in that direction.

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Latin America has come a long way since the economic recession of 1999-2003. From a negative GDP growth of 0.4% in 2002, the region has been registering average GDP growth levels of around 5% in the past three years or so. But this is still not enough to overcome the region’s social and economic problems, which include high levels of political conflict or crime in some countries, as well as significant inequalities throughout most of the region, between the rich and the poor and between rural and urban populations.

This has led to dissatisfaction with the existing economic models, prompting two countries, Venezuela and Bolivia, to re-nationalise their incumbent telcos in early 2007.

The question of whether state-owned or privately-owned operators are more likely to improve a country’s teledensity is at the forefront of telecom debates in Latin America.

The fact is that most state-owned companies have proved to be inefficient, obsolete, and corrupt, but there are exceptions to this reality in Latin America. Uruguay’s Antel is often quoted as a notable example of a state-owned operator that has provided the country with 100% telephony coverage, and is reasonably advanced technologically. In Costa Rica, the state-owned monopoly telco ICE has been criticised for poor service quality and obsolescence, yet the country has one of the highest fixed-line teledensity rates in Latin America – considerably higher than would be expected from its GDP per capita compared with the rest of the region.

On the one hand, private operators have no interest in areas that are not going to be lucrative in the relatively short term. Therefore, they normally avoid investing in rural or economically backward areas. This ensures that poor populations remain poor, since the presence of communications infrastructure is an important factor for development. Yet, in the long run, poverty will be a handicap for private investors, since it restricts the number of people able to afford telecom services, thus lowering the saturation threshold.

On the other hand, competition among private operators appears to have worked well in many countries, particularly in Chile, where early privatisation and liberalisation have made its telecom market the most mature in Latin America. Like Uruguay, Chile has 100% telephony coverage.

If we use Uruguay, Costa Rica and Chile as examples, we find that fixed-line teledensity is higher in the first two, while Chile is lagging behind in this sector. In the mobile market, Chile has the highest penetration rate in Latin America, while Costa Rica lags far behind with a mobile penetration that is much lower than what would be expected given the country’s relatively high GDP per capita. Until 2004, Uruguay’s mobile penetration was considerably lower than the Latin American average. Unprecedented growth in 2005-2006, however, brought mobile penetration to a level that matches the country’s GDP per capita.

The fact is that competition in the mobile market does appear to stimulate rapid expansion of telecom access in developing nations, while the nature of fixed-line infrastructure makes competition more difficult. Besides, having duplicate networks ends up being a waste of resources in countries that cannot afford wastage. Therefore, there could be an argument for nationalising the fixed-line infrastructure, if it can be managed efficiently, but leaving the mobile market open to competition. The other solution would be to introduce real competition in the fixed-line market by unbundling the local loop, something that has yet to happen in Latin America.

See also:
Latin America
Latin America Annual Publications

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Year 2007

Financial highlights for the 12 months to March 2007 were as follows:

• 2.6% drop in service revenue.
• 13.1% EBITDA decline.

 

Vodafone blamed mobile termination rate cuts for this decline during 2006/07.

 

 

Year 2006

Financial highlights for the 12 months to March 2006 were as follows:

• Total revenue of $1.30 billion, up 8% on the previous year of $1.20 billion.
• Profit of $152 million, down 16% on the previous year.
• Expenses increased because of the higher cost of new services, higher handset, staff and finance costs and the additional cost involved in running both the 2G and 3G networks.

 

 

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The benefits of Smart Grids are slowly becoming accepted. One of the catalysts for change has been that more and more utilities around the world are recognising the mounting problems presented by energy and environmental concerns. These concerns include:

• inevitable limitations on energy generation, while usage is skyrocketing;
• the decades-old networks are under greater stress;
• the utility workforces are aging and there is a resource squeeze;
• increased use of alternative energy sources in their networks;
• wastage of energy and the resulting high penalties; and
• the inevitability of carbon trading.

At present the infrastructure of the utilities is unable to deal with all of these concerns, so the usual “do-nothing” approach, or more of the same narrow(band) thinking, is no longer an option.

The utilities which are anticipating these developments are embracing the concept of an end-to-end solution in the total energy chain – from energy generation to network operation, distribution and retail services at the customer level. Those companies also understand that the consumer is part of the solution and will need to play a key role in the process.

However, the fragmentation of the industry (generation, distribution, retail) enables companies to pass the buck on to the next segment in the market. Some segments actually have no incentive whatsoever to implement energy saving solutions because they are making huge profits from energy wasting and stresses in peak demand.

It therefore doesn’t make sense for one part of the chain to move forward while another part is holding back.

Leadership is all that is needed
We are certainly not saying that smart grids are the silver bullet. We think there is now a widespread understanding that we need to address many elements of various environmental issues:

• old generators need to be upgraded and modernised;
• new alternative energy sources need to be implemented;
• energy efficiency standards for appliances and building construction need to be improved,
• education to enhance awareness about energy savings; and indeed
• smart grids.

In order to address the issues of the energy crisis, global warming and energy saving, an end-to-end business solution is required. Fiddling with one aspect only is not going to do the job.

All the technology which is needed for a smart grid is in place, so technology is not the issue.

What is needed is industry leadership, and even more importantly, government leadership.

We also believe that most of the finance required to implement smart grids will become available. Over the next decade billions will be allocated to energy networks so, with regulatory vision and leadership, smart grids can, to a large extent, be financed by existing investments.

Utilities need to be modernised
Unfortunately many electrical engineers working in the utilities have little understanding of IT and what new end-to-end business solutions can do for their network and energy management. It has been stated that the ICT industry, technologically, at least, is 10 years ahead of the utilities industry.

However, the industry is also heavily regulated and the government determines what the utilities can or can’t build. So in the absence of any encouragement or promotion from the regulator, it is understandable that many utilities are not going to build a smart grid within such a regulated environment.

This will necessitate regulators taking a different perspective on purely economic return models. The triple bottom line, which includes the social impact of not acting now as well the harsh economic analysis of recent government reports, needs to be considered by regulators to support business innovation to solve these problems. If we don’t act now, the economic and social impact will be much more severe in 20 years.

At the same time, major breakdowns in the old energy networks which involve massive outages and disasters at substations are causing the engineers to look at modern telecoms and IT technologies to help solve some of these problems. “Doing nothing” has been a great strategy for the last decade, but it is not going to work in the future.

Tightened environmental and energy legislation will inevitably result in higher penalties, and so this is another reason for utilities to start looking at smart grid solutions.

Further information is available from separate reports:

Global – Utilities Broadband – Smart Grids;

Australia – Utilities Broadband – Smart Grids.

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Commodity-based industry – commodity-based customer feedback
The reality is that our current telecoms market is commodity-based.

The industry is reluctant to admit this but, in the end, they simply sell calls or access – whether fixed, mobile, Internet (it is the Internet, not access to it, that the customer is interested in), SMS and a few other telecoms bits and pieces. As an example, the value-add is more in the mobile phone than in the actual mobile telecoms service.

This is because, for most of its existence, the industry has been based on a monopoly – or at least on the monopolistic behaviour of the key players. All monopolised commodity markets are basically price-driven and this eliminates the need for a great deal of customer service. Customers have little choice and the regulatory emphasis is on price rather than on service. The telcos maintain huge bureaucracies to bill their customers, to collect their money and to manage the large engineering field staff and are less focused on customer service.

As a consequence the feedback from customers about these services has also been (and still is) commodity- and price-driven – access problems, billing problems, etc.

Unless the structure of the industry changes this will continue to be the case, and the current problems will continue to be the key consumer issues.

Open networks will involve more and new players
However other forces clearly indicate that changes are on the way. The trend is towards open networks and this will result in more organisations becoming involved in the delivery of services over these telecoms networks. Some of these will be straightforward content/service providers; others will package various services together and become distributors and marketers, some will simply be billers or will provide network management services, data centre services, security etc – services that we at BuddeComm classify as value-added infrastructure services.

These open networks will provide end-to-end facilities enabling, for instance, energy companies to provide smart grid applications; the heath sector to operate patient monitoring services; plus a range of interactive video educational programs. These providers will have complete control over the network portion allocated for such services. The role of the telcos will simply be the provision of infrastructure.

Some of these services will be provided by national organisations but, increasingly, overseas organisations will play a larger role as well.

First changes within the next three years
It will take some years before the infrastructure for such activities is in place (in terms of both regulation and technology) but networks will begin to emerge in metropolitan markets within the next three years.

And these developments are not limited to the fixed networks. The mobile networks, also, will open up their networks also to allow for similar services to be delivered over the mobile networks. There is already a clear trend towards ‘off deck’ services, where mobile users go directly to the Internet to access services specially designed for mobile users, bypassing the operators’ mobile portals.

Consumer will become more central
So, for some time to come the consumer issues of today will be the issues of tomorrow – access and billing. But in a rapidly changing environment it will become increasingly more difficult to distinguish who is responsible for the service, and to identify who is answerable for the problems that customers are facing. Often two or more companies may be involved.

This becomes an even more complex issue when overseas companies are involved. We need only look at Google, YouTube, etc to see what we can expect. And as many of these services include an advertising and marketing element further complexities will emerge, and issues will cross the borders of the various national regulators.

Not that this will be too difficult to sort out, but processes need to be developed to cater for the changing environment.

The main advantage for customers will be that the competition will shift from commodity to applications. With open networks many organisations will offer competing services over the infrastructure and customers will have far more control of the selection of the companies they want to do business with.

Customers will also participate more actively in this new telecoms environment, and they, also, will become involved in providing services – this, in itself, will add a new dynamic to the regulatory environment.

National healthcare, education and energy services
As the value of the industry to customers moves from access to applications issues such as equal access will become prominent, especially when healthcare and education services become involved.

A problem that is already emerging in Europe is that those who most need these services are also often the people who can least afford them. Telcos will roll out infrastructure and make it available to those people who want to pay for it. This will lead to complaints about access that might not necessarily fit within the current regulatory framework – who will be responsible for what?

Over time the market will sort it out – the problems will occur in the transition period
As is the case with many commodity products, over time telecom commodities, also, will simply be built into the end-user product. They will not be charged for separately, and if things go wrong some of these packages may need to be unravelled in order to establish where the problem lies. Based on global economic trends, BuddeComm has estimated that, in the end, telecoms might simply be just 10% of the total cost of an (electronic) product bought by a customer.

These issues will sort themselves out. The companies who deal with the customer are ultimately responsible for the service and they need to have their own processes in place to deal with customer problems and complaints. On-net competition will drive this development.

However it will be some time before this new environment matures and meanwhile things may become rather messy. Our current processes are ill-equipped to manage this issue, and this will lead to an increase in customer dissatisfaction and customer complaints.

Apart from that, these massive changes will bring with them their own problems. One only has to look at some of the problems that occurred when ADSL was introduced. These problems were solved by the industry but they attracted immediate political attention, and situations like this can easily be blown out of proportion.

It is, therefore, critical that contingency plans be established to deal with the problems that will inevitably arise during such periods.

Paul Budde

Global – Analysis – Changing societies and the role of telecoms

Global – Analysis – The Future of Voice (Fixed, Mobile, VoIP)

Global – Analysis – Transitions to a Digital Industry

Global – Analysis – Industry – High-Level Strategic Thinking

Global – Analysis – Industry – Structural Separation

Global – Analysis – The Industry Moving into 2008

Global – Internet – E-health

Global – Utilities Broadband – Smart Grids

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Key Telstra financial highlights for the six months ending December 2007 were as follows:

·         Sales revenue grew by 5.3% or $622 million to $12,252 million.

·         Total income (excluding finance income) grew by 5.8% or $682 million to $12,479 million.

·         Operating expenses (before depreciation and amortisation) grew by 6.2% or $427 million to $7,307 million.

·         EBIT grew by 6.2% or $182 million to $3,120 million.

·         EBIT grew by 1.5% to $2,983 million excluding a $100 million distribution from Foxtel and $37 million gain on sale of our investment in eBusiness.

·         Profit for the period grew by 13.4% or $230 million to $1,942 million.

·         Accrued capital expenditure of $2,320 million, up 17.5%.

·         Mobiles revenue grew by 14.5% or $404 million to $3,186 million.

·         Retail Broadband revenue grew 65.2% or $333 million to $844 million.

·         Sensis sales revenue grew by 7.8% or $69 million to $954 million.

·         PSTN revenue declined by 2.1% or $72 million to $3,391 million.

The result was underpinned by strong sales across all retail business units and key product segments, including broadband, mobiles, PSTN and Sensis.

For fiscal 2008, the company by February 2008 expected reported outcomes of:

·         Total revenue growth of 3-4% (up from guidance of 2-3% growth).

·         EBITDA growth of 4-5% (up from guidance of 3-4% growth).

·         EBIT growth of 6-8% (up from guidance of 5-7% growth).

Telstra’s retail business units generated strong revenue growth and gained market share. Retail sales revenue grew 7.6% for the half, with sales revenue growing 8.5% in Telstra Consumer and Channels, 9.3% in Telstra Business and 4.5% in Telstra Enterprise and Government.

Total expenses increased by 5.6% to $9.4 billion, linked to transformation related activity, including higher redundancy costs, with CDMA migration and strong mobile and broadband volumes leading to increased cost of goods sold.

Operating expenses are expected to increase in 2008 as the costs of the IT component of Telstra’s transformation peak, before starting to decline as it turn off its legacy systems and network platforms. The second stage of the IT transformation – TR2 – was on schedule to be in production by the end of 2008.

Total workforce decreased 1,768 for the half and has reduced by 7,875 since 1 July 2005 (excluding acquisition and divestment activity). Telstra believes that it is well placed to meet the top end of its previously announced headcount reduction targets of 6,000-8,000 by the end of fiscal 2008 and 12,000 by the end of fiscal 2010.

 

Table 37 – Telstra overall financial results, six months to December – 2006 – 2007

Financial results	2006	2007	Change
	$ million
Sales revenue	11,630	12,252	5.3%
Total income (excl. finance income)	11,797	12,479	5.8%
EBITDA	4,916	5,172	5.2%
EBIT	2,938	3,120	6.2%
Profit for the period	1,712	1,942	13.4%

(Source: Telstra annual reports)

 

Table 38 – Telstra segment revenue, six months to December – 2006 – 2007

Segment revenue	2006	2007	Change
	$ million
Telstra Consumer, Marketing & Channels	4,707	5,054	7.4%
Telstra Business	1,658	1,815	9.5%
Telstra Enterprise & Government	2,194	2,291	4.4%
Telstra Wholesale	1,330	1,263	-5.0%
Telstra Operations	130	135	3.8%
Sensis	886	953	7.6%
CSL New World	519	485	-6.6%
TelstraClear	287	287	0.0%
Other	34	58	70.6%
Total	11,745	12,341	5.1%

(Source: Telstra annual reports)

 

Mobile data revenue increased 46.1% to $716 million with non-SMS data (including datacards, streaming TV, music downloads, video calls and other data-intensive services) now generating more than half of mobile data revenue.

 

Table 39 – Telstra operating revenues, six months to December – 2006 – 2007

Total for division	2006	2007	Change
	$ million
PSTN products	3,463	3,391	-2.1%
Fixed telephony	4,599	4,536	-1.4%
Mobile	2,782	3,186	14.5%
Internet	878	1,190	35.5%
IP & data access	791	857	8.3%
Total sales revenue	11,797	12,479	5.8%

(Source: Telstra annual reports)

 

PSTN revenue declined to $3.4 billion, a 2.1% slowdown compared with 5.8% and 7.8% declines in the first halves of fiscal 2007 and 2006 respectively. Retail PSTN revenue increased 0.3% and retail lines grew by 48,000. However, wholesale line losses to ULL services led to a total SIO decline of 203,000 in the half to 9.55 million. PSTN ARPU also increased.

 

Table 40 – Telstra operating revenue, fixed telephony, six months to December – 2006 – 2007

Fixed telephony	2006	2007	Change
	$ million
Basic access	1,663	1,657	-0.4%
Local calls	432	388	-10.2%
PSTN value-added services	125	134	7.2%
National long-distance calls	408	385	-5.6%
Fixed-to-mobile	608	615	1.2%
International direct	94	92	-2.1%
Fixed interconnection	133	120	-9.8%
Total PSTN products	3,463	3,391	-2.1%
Total fixed telephony	4,599	4,536	-1.4%

(Source: Telstra annual reports)

 

ARPUs strengthened. The ARPU premium of postpaid 3G customers over their 2G counterparts has been sustained above $20. 3G revenues overtook 2G revenues for the first time in the December quarter of 2007.

 

Table 41 – Telstra operating revenue, mobiles, six months to December – 2006 – 2007

Mobiles	2006	2007	Change
	$ million
Mobile services, retail & interconnection	2,399	2,701	12.6%
Mobile services, wholesale	26	26	0.0%
Mobile handsets	357	459	28.6%
Total mobiles	2,782	3,186	14.5%

(Source: Telstra annual reports)

 

ARPU increased 6.8%, driven by the growing proportion of customers on high value Liberty plans.

 

Additional revenue generated from retail broadband now exceeded the revenue decline in the PSTN business. Retail broadband customer numbers grew strongly to 2.6 million, with 439,000 added in the half of 2007. Telstra’s retail broadband market share increased by 1% in the half to 48%, with Telstra adding customers at three times the rate of its nearest competitor.

 

Table 42 – Telstra operating revenue, Internet, six months to December – 2006 – 2007

Internet	2006	2007	Change
	$ million
Narrowband	79	52	-34.2%
Retail broadband	511	844	65.2%
Wholesale broadband	278	278	0.0%
Other	10	16	60.0%
Total Internet	878	1,190	35.5%

(Source: Telstra annual reports)

 

Table 43 – Telstra operating revenue, IP & data access, six months to December – 2006 – 2007

IP & data access	2006	2007	Change
	$ million
Internet direct	62	73	17.7%
Specialised data	377	350	-7.2%
Global products	45	45	0.0%
IP access	180	252	40.0%
Wholesale Internet & data	127	137	7.9%
Total IP & data access	791	857	8.3%

(Source: Telstra annual reports)

 

Table 44 – Telstra operating revenue, other, six months to December – 2006 – 2007

Other operating revenue	2006	2007	Change
	$ million
Business services and applications	499	501	0.4%
Advertising & directories	879	948	7.8%
CSL New World	519	485	-6.6%
TelstraClear	286	287	0.3%
Offshore services revenue	173	174	0.6%
Pay TV bundling	164	204	24.4%
Other minor items	135	133	-1.5%
Elimination for wireless broadband	-75)	-249	232.0%

(Source: Telstra annual reports)

 

Table 45 – Telstra (Foxtel) pay TV bundling revenue, subscribers, six months to December – 2006 – 2007

Pay TV bundling	2006	2007	Change
	Subscribers (’000)
Pay TV bundling revenue (million)	$164	$204	24.4%
Foxtel pay TV bundling subscribers	309	394	27.5%
Austar pay TV bundling subscribers	38	32	-15.8%
Total pay TV bundling subscribers	347	426	22.8%

(Source: Telstra annual reports)

Note: Statistical data represents management’s best estimates.

 

Sensis grew its sales revenue by 7.8% to $954 million with the Yellow and White directories and emerging businesses delivering strong results.

 

Yellow revenue increased 3.2% to $543 million print revenues growing 0.2% and online revenue up 21.5%, while White Pages revenue grew 10.3% to $161 million.

 

Emerging businesses, such as Whereis and MediaSmart, grew 27%. SouFun posted revenue growth of 68% and EBITDA growth of 97%.

 

Classifieds revenue declined by 13.8% to $56 million, largely as a result of competitive factors in the print market, which are causing declines in both circulation and the number of advertisers. Growth in online classifieds products has not offset the decline in print products.

 

Table 46 – Sensis financial summary, six months to December – 2006 – 2007

Sector	2006	2007	Change
	$ million
Total income	889	953	7.2%
Total expenses	496	563	13.5%
EBITDA	448	461	2.9%
EBIT	393	390	-0.8%
CAPEX	68	97	42.6%
EBITDA margin	50.4%	48.4%	-2.0%

(Source: Telstra Financial Results)

Note: Amounts included for Sensis represent the contribution included in Telstra’s consolidated result.

 

Table 47 – Sensis revenue by operating division, six months to December – 2006 – 2007

Sector	2006	2007	Change
	$ million
Yellow revenue	526	543	3.2%
White Pages revenue	146	161	10.3%
Classified revenue	65	56	-13.8%
Emerging business	63	80	27.0%
SouFun revenue	24	43	79.2%
Voice	55	65	18.2%
Total advertising & directories	879	948	7.8%
Other	6	6	0.0%
Total Sensis sales revenue	885	954	7.8%

(Source: Telstra Financial Results)

Note: Amounts included for Sensis represent the contribution included in Telstra’s consolidated result.

 

 

Results for year ending June 2007

Overall results

Highlights for Telstra’s financial results for the 12 months to June 2007, compared with the corresponding 12 months were:

·         Sales revenue grew by 4.2% or $961 million to $23,673 million.

·         Total income (excluding finance income) grew by 3.9% or $898 million to $23,960 million.

·         Operating expenses (before depreciation and amortisation) grew by 4.4% or $600 million to $14,092 million.

·         EBIT grew by 5.1% or $282 million to $5,779 million.

·         EBIT excluding the impairment of the Trading Post mastheads grew by 7.1% to $5,889 million.

·         Profit for the year grew by 2.9% or $92 million to $3,275 million.

·         Cash operating capital expenditure (excluding investments) of $5,652 million, up 32.8%.

·         Free cashflow declined by 36.7% or $1,680 million to $2,899 million.

·         Mobile revenue grew by 13.9% or $695 million to $5,701 million.

·         Retail Broadband revenue grew 66.2% or $483 million to $1,213 million.

·         Sensis external income grew by 8.0% or $147 million to $1,974 million.

·         PSTN revenue declined by 4.1% or $309 million to $7,190 million.

 

Table 48 – Telstra Group sales revenue, EBITDA, EBIT and net profit – 2002 – 2007

Year ends Jun	Sales revenue	EBITDA	EBIT	Net profit
2002
2003	1.5%	-3.2%	-8.1%	8.8%
2004	1.2%	10.7%	15.1%	21.2%
2005	6.9%	2.8%	20.9%	4.4%
2006	2.7%	-8.4%	-20.8%	-26.0%
2007	4.2%	3.0%	5.1%	2.9%

(Source: BuddeComm based on company data)

 

Table 49 – Telstra Group revenue by segment – 2006 – 2007

Segment (year ends June)	2006	2007	Annual change
	$ million
Telstra Consumer, Marketing & Channels	8,879	9,509	7.1%
Telstra Business	3,163	3,241	2.5%
Telstra Enterprise & Government	4,531	4,529	0.0%
Telstra Wholesale	2,902	2,957	1.9%
Sensis	1,835	1,968	7.2%
Telstra International	1,481	1,606	8.4%
Telstra Operations	307	243	-20.8%
Other	116	108	-6.9%
Eliminations	-480	-452	5.8%
Total Telstra	22,734	23,709	4.3%

(Source: Telstra annual reports)

 

Table 50 – Telstra Group EBIT by segment – 2006 – 2007

Segment (year ends June)	2006	2007	Annual change
	$ million
Telstra Consumer, Marketing & Channels	5,634	5,593	-0.7%
Telstra Business	2,541	2,592	2.0%
Telstra Enterprise & Government	2,636	2,609	-1.0%
Telstra Wholesale	2,694	2,867	6.4%
Sensis	863	752	-12.9%
Telstra International	156	61	-60.9%
Telstra Operations	-4,173	-3,593	6.2%
Other	-4,883	-4,827	1.1%
Eliminations	29	45	55.2%
Total Telstra	5,497	5,779	5.1%

(Source: Telstra annual reports)

 

Table 51 – Telstra Group revenue by service – 2006 – 2007

Service	2006	2007	Annual change
	$ million
Total fixed telephony	9,567	9,260	-3.2%
Total mobiles	5,006	5,701	13.9%
Total Internet	1,437	1,945	35.4%
Total IP & data access	1,584	1,627	2.7%
Business services and applications	1,055	1,053	-0.2%
Specialised data	884	796	-10.0%
Advertising & directories	1,711	1,835	7.2%
CSL New World	830	1,000	20.5%
TelstraClear	620	573	-7.6%
Offshore services revenue	295	348	18.0%
Pay TV bundling	320	344	7.5%
Other minor items	360	271	-24.7%
Elimination from wireless broadband	-73	-284	289.0%
Sales revenue	22,712	23,673	4.2%
Other revenue	22	36	63.6%
Total revenue	22,734	23,709	4.3%
Other income	328	251	-23.5%
Total income	23,062	23,960	3.9%

(Source: Telstra annual reports)

 

 

PSTN revenue

Table 52 – Telstra fixed telephony revenue – 2006 – 2007

Service	2006	2007	Annual change
	$ million
PSTN products	7,499	7,190	-4.1%
ISDN products	806	749	-7.1%
Inbound calling products	414	413	-0.2%
Payphones	104	92	-11.5%
Customer premises equipment	274	318	16.1%
Intercarrier access services	152	181	19.1%
Other fixed telephony	318	317	-0.3%
Total fixed telephony	9,567	9,260	-3.2%

(Source: Telstra annual reports)

 

Table 53 – Telstra PSTN products revenue – 2006 – 2007

Service	2006	2007	Annual change
	$ million
Basic access revenue:
·         Retail	2,591	2,587	-0.2%
·         Domestic wholesale	726	746	2.8%
Total basic access revenue	3,317	3,333	0.5%
Local call revenue	1,023	845	-17.4%
PSTN value-added services	246	257	4.5%
National long-distance call revenue	319	808	-11.5%
Fixed-to-mobile revenue	1,490	1,487	0.2%
International direct revenue	201	184	-8.5%
Fixed interconnection	309	276	-10.7%
Total PSTN revenue	7,499	7,190	-4.1%

(Source: Telstra annual reports)

 

Total PSTN products revenue declined by 4.1% to $7,190 million during fiscal 2007; this decline has slowed when compared with the 6.8% decline in fiscal 2006. In particular, total retail access lines in service stopped declining and held steady for the first time since 2001.

 

The decline in fixed to mobile revenue was contained at 0.2%, compared with a decline of 4.9% during the prior corresponding period. PSTN retail churn has also turned positive in fiscal 2007.

 

Volumes reduced across local calls, national long distance calls, international direct calls and fixed interconnection. Yields also declined in local calls, national long-distance calls, fixed to mobile calls and international direct calls due to competitive pricing pressure, higher demand for alternative products, as well as impact of newly introduced subscription pricing plans on certain categories.

 

Local call revenue decreased by 17.4% to $845 million, with both retail and wholesale revenues being negatively impacted by ongoing product substitution from fixed calling to mobile voice calls and SMS. This was accelerated by the take up of capped mobile plans that had been heavily promoted by competitors.

 

Substitution of data local calls continued to occur due to the migration of dial-up Internet customers to broadband. Generally, call volumes continued to fall with a reduction in calls made by 12.2%, reflecting the impact of customers migrating to other products and a reduction of average number of calls per customer.

 

Prices also fell due to ongoing discounting and the impact of some subscription based pricing plans which offer free local calls as part of the package.

 

The introduction of capped plans in the mobile market impacted the volume of fixed to mobile activity as customers continue to slowly move their usage from PSTN products to mobiles.

 

International direct revenue declined by 8.5% to $184 million primarily as a result of continued competitive pressure on price and lower volumes. Factors include the competitive pressures from calling cards, increased use of emails, fixed to mobile substitution and the growth of Voice over IP.

 

Telstra has been the main beneficiary of Optus’ decision to stop reselling Telstra telephony services outside of the Optus DSLAM footprint.

 

 

Mobile revenue

Table 54 – Telstra mobile revenue – 2006 – 2007

Service	2006	2007	Annual change
	$ million
Access fees and call charges1	2,684	2,682	-0.1%
International roaming	266	327	22.9%
Mobile messagebank	198	231	16.7%
Mobile data
·         Short Message Service (SMS) 2	494	641	29.8%
·         Other mobile data1, 3	238	458	92.4%
Total mobile data1	732	1,099	50.1%
Total mobile services revenue – retail	3,880	4,339	11.8%
Mobile services revenue – mobiles interconnection	4,503	4,932	9.5%
Mobile services revenue – wholesale	51	36	41.7%
Total mobile services revenue	4,539	4,983	9.8%
Mobile handset sales	467	718	53.7%
Total mobile revenue*	5,006	5,701	13.9%

(Source: Telstra annual reports)

Notes:

¹Telstra’s comparatives for June 06 have been restated to reflect a reallocation of data revenues incorrectly classified as access and charges in the prior year.

²Includes SMS and multimedia messaging services (MMS).

³Includes $284 million of revenue (June 2006: $91 million) relating to wireless broadband services (EV-DO & HSDPA) and data packs ($5 to $179).

 

Strong growth was experienced in data products including SMS, Blackberry, and wireless broadband (EV-DO and HSDPA) along with increased content including mobile broadband data packs, browser packs and Foxtel by Mobile. Mobile revenues also been impacted by the growth in capped price plans.

 

Mobile data rose to 22.3% of mobile ARPU due to the increased data content offerings, including FOXTEL by mobile, BigPond music downloads, videos and games. Wireless email also contributed to the increase in non SMS data revenues primarily driven by an increase in BlackBerry SIOs and usage.

 

Revenue from handset sales increased by 53.7% to $718 million primarily due to growth in the number of 3GSM mobile handsets sold.

 

 

Internet and IP solutions revenue

Table 55 – Telstra Internet & IP solutions revenue – 2006 – 2007

Service	2006	2007	Annual change
	$ million
Narrowband	220	144	34.5%
Retail broadband1	730	1,213	66.2%
Wholesale broadband	469	568	21.1%
Other	18	20	11.1%
Total Internet revenue	1,437	1,945	35.4%

(Source: Telstra annual reports)

Note: ¹Prior year figures have been restated to include the gross up of mobile broadband revenues relating to EV-DO/HSDPA and data pack usage.

 

Wholesale broadband revenue increased by 21.1% to $568 million for fiscal 2007, driven by a continuing strong market demand for high bandwidth services stimulated by retail competition. Wholesale DSL Internet grade has grew by 21.2% to $508 million driven by SIO growth of 16.6% to 1.4 million, combined with delayed ULL build activity and a stable average revenue per user. Spectrum sharing services also contributed to revenue growth as more wholesale customers moved towards this product as opposed to ULL build.

 

Other revenue, which is made up of media content and BigPond web hosting services, increased by 11.1% over the year.

 

BigPond web hosting services primarily relates to the hosting of fully functional personal or business websites for customers.

 

Media content includes revenue from movies, games and music and whilst this business was still small in dollar terms it started to show positive growth trends. Movies revenue in particular increased by 38.7% for fiscal 2007 due to growth in SIOs assisted by increased marketing support and major changes to websites and processes.

 

Games revenue grew significantly by 213% due to the launch of Gameshop in June 2006 where customers can purchase and download games online.

 

 

IP, data access and ISDN revenue

Table 56 – Telstra specialised data revenue – 2006 – 2007

Service	2006	2007	Annual change
	$ million
Internet direct	143	157	9.8%
Specialised data:
·         Frame Relay	302	258	-14.6%
·         ATM	90	74	-17.8%
·         Digital Data Services	198	163	-17.7%
·         Leased lines	229	234	2.2%
·         International private lines	30	29	-3.3%
·         Other specialised data	35	38	8.6%
Total specialised data	884	796	-10.0%
IP access	342	443	29.5%
Wholesale Internet & data	231	215	7.4%
Total IP & data access revenue	1,584	1,627	2.7%

(Source: Telstra annual reports)

 

For the 12 months to June 2007, Telstra’s IP and data access revenue increased by 2.7% to $1,627 million driven mainly by IP access, Internet direct and wholesale Internet and data.

 

IP access revenue increased by 29.5% to $443 million; this revenue consists of hyperconnect, symmetrical HDSL, IP WAN, IPMAN/Ethernet, IP remote and global IP.

 

IP access grew due to newer technology attracting a migration of small business and enterprise customers from mature products in specialised data. Greater bandwidth requirements of health customers and the mining industry in regional locations also contributed.

 

IPMAN/Ethernet increased revenue in the IP access category increased by $46 million while IP WAN has increased by $29 million. IPMAN/Ethernet products experienced an increase in SIOs by 42.4% underpinned by the government sector’s demand for wideband Internet protocol.

 

IP WAN growth can be attributed to increased SIOs due to the migration from ATM and frame relay as the demand for broader bandwidth to support IP based services such as VoIP and video continues to grow. Symmetrical HDSL increased by 55.5% or $29 million due to greater availability of this product and higher average bandwidth purchased.

 

Internet direct increased by 9.8% to $157 million due mainly to Telstra Virtual ISP where a commercial deal signed increased data usage.

 

Specialised data declined by 10.0% to $796 million in revenue due to the maturing nature of the products in this category with most customers moving to IP access products which provide better business solutions.

 

Digital Data Services (DDS) declined by 17.7% to $163 million due to it being a maturing product with the majority of customers now opting for symmetrical HDSL and other solutions. Digital data access also declined as wholesale customers were leaving this product and building their own networks.

 

Wholesale Internet and data increased by 7.4% to $231 million mainly due to wholesale leased transmission increasing by $20 million. This is driven by an increase in end user bandwidth demand driven by corporate networks, Internet usage, ISPs growing DSL network coverage and mobile providers requiring additional backhaul to support bandwidth requirements for their 3GSM networks.

 

Table 57 – Telstra ISDN revenue – 2006 – 2007

Service	2006	2007	Annual change
	$ million
Access	417	419	0.5%
Data calls	118	90	-23.7%
Voice calls	271	240	-11.4%
Total calls	389	330	-15.2%
Total ISDN revenue	806	749	-7.1%

(Source: Telstra annual reports)

 

ISDN data calls revenue decreased by 23.7% to $90 million as local and national long-distance calls decreased by $20 million and $8 million respectively. This result was due to lower minutes of use as a result of customer migration to alternative products such as ADSL, BDSL and symmetrical HDSL, which offer higher bandwidths at reduced prices.

 

ISDN voice calls comprising local voice, national voice and international voice calls made on the ISDN network, declined by 11.4% to $240 million, mainly due to a decline in local and national calls by $20 million and $10 million respectively.

 

 

Telstra business services and applications revenue

Table 58 – Telstra business services and applications revenue – 2006 – 2007

Service	2006	2007	Annual change
	$ million
Managed network services	316	265	16.1%
IT services	624	585	-6.3%
Business applications	112	135	20.5%
Other	3	68	n/m
Total business service & applications revenue	1,055	1,053	-0.2%

(Source: Telstra annual reports)

 

For fiscal 2007, business services and applications revenue declined by 0.2% to $1,053 million mainly due to lower managed network services and IT services revenue, offset by business applications and other revenues.

 

Business applications revenue grew by 20.5% to $135 million for fiscal 2007 due to contact solutions and IP telephony. Within contact solutions, new revenues relating to web contact centres and Telstra locator contributed to growth.

 

IP telephony revenue grew due to the newly launched IP telephony call manager solution and customers transitioning from traditional systems to converged voice and data platforms.

 

 

International operations

Key results for Telstra’s offshore international operations for the 12 months to June 2007, compared with the corresponding 12 months:

 

Table 59 – Telstra offshore controlled entities revenue – 2006 – 2007

Entity	2006	2007	Annual change
	$ million
CSL New World	830	1,000	20.5%
TelstraClear	620	573	-7.6%
Other offshore controlled entities	295	348	18.0%
Total offshore	1,745	1,921	10.1%

(Source: Telstra annual reports)

 

 

Sensis

Key results for the Telstra’s Sensis division for the 12 months to June 2007, compared with the corresponding 12 months:

·         Yellow revenue grew by 2.6% to $1,203 million, driven by strong online usage and new initiatives such as Home@Yellow. The Yellow print result was impacted industry by economic weakness in the Sydney metropolitan market.

·         White Pages revenue grew by 9.6% to $331 million. This was driven by continued strong advertiser support in both metro and non metro directories due to new product initiatives such as coloured listings.

·         Classifieds revenue declined by 12.0% to $125 million, largely as a result of competitive factors in the print market, which are causing declines in both circulation and the number of advertisers.

·         Strong growth in online classifieds products did not offset the decline in print products.

·         Voice revenue increased by 14.4% to $119 million due to increased call volumes within its 1234 service. New initiatives launched during 2007 regarding 12455 and 12456 services contributed to this increase in revenue.

 

Table 60 – Sensis financial summary – 2006 – 2007

Sector	2006	2007	Annual change
	$ million
Total income	1,827	1,974	8.0%
Total expenses	917	1,161	26.6%
EBITDA	1,001	943	-5.8%
EBIT	910	813	-10.7%
CAPEX	100	226	126.0%
EBITDA margin	54.8%	47.9%	-6.9%

(Source: Telstra Financial Results, year ended 30 June 2006)

Note: Amounts included for Sensis represent the contribution included in Telstra’s consolidated result.

 

Table 61 – Sensis revenue by operating division – 2006 – 2007

Sector	2006	2007	Annual change
	$ million
Yellow revenue	1,172	1,203	2.6%
White Pages revenue	302	331	9.6%
Classified revenue	142	125	-12.0%
Emerging business	95	127	33.7%
SouFun revenue	-	49	n/m
Total advertising & directories	1,711	1,835	7.2%
Voice	104	119	14.4%
Other	11	14	27.3%
Other income	1	6	500.0%
Total Sensis external income	1,827	1,974	8.0%

(Source: Telstra Financial Results, year ended 30 June 2006)

Note: Amounts included for Sensis represent the contribution included in Telstra’s consolidated result

 

For more information on Sensis, see separate report: Telstra – Sensis Pty Ltd.

 

 

Capital expenditure

Cash capital expenditure (including investments) for the year ended 30 June 2007 increased by 39.0% to $5,982 million.

 

Cash operating capital expenditure (excluding investments) increased by 32.8% to $5,652 million.

 

Higher capital expenditure was driven primarily by the IP enablement of its network, IT transformation, as well as the roll out of the Telstra Next IP and Next G networks.

 

Operating capital expenditure for the year to June 2008 is expected to be in the range of $4.6 billion to $4.9 billion.

 

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SYNOPSIS
After my trip to China I travelled on to the USA, where I visited New York, Washington and Boston. I was involved in some interesting debates regarding developments in relation to Alcatel/Lucent, Sprint, Time Warner and Google. As well as that I had plenty of opportunities to look at some of the more strategic developments that are going on in the USA …. so plenty to talk about.
HALLOWEEN IN NEW YORK
Doing business in the USA remains one of the most exciting things one can be involved in. One never comes back empty-handed from such trips – the new ideas, marketing activities and sheer commercial energy that flow out of this country are incredible. I always need to make notes so as not to forget anything.

Interestingly, despite the feelings of fear and suspicion that are increasingly being spread via TV, newspapers and the like, I found New York to be a much friendlier city that it used to be – it’s almost as if 9/11 has opened up a soft spot in this normally tough city.

On arrival at JFK the courtesy and friendliness of the custom staff was greatly improved; police cars drive around with signs indicating their commitment to courtesy; and taxis exhibit pledges about the rights of passengers, signed by the mayor.

Looking back over a period of 25 years of travelling to the USA, I find all of this a great improvement.

As it happened I arrived on Halloween and had my first ever Halloween experience in the USA.

My favourite hotel is the funky Paramount Hotel, just off Times Square. On this occasion it was full of spider webs, carved out pumpkins, with the staff dressed in vampire and skeleton outfits – a great Halloween reception. On the street, the same scene – with many costumed New Yorkers, all having great fun. I joined the thousands of onlookers at the parade that night.

Jogging through Central Part is another great way to get a glimpse of what is behind the normally reserved behaviour of these city slickers. The people with dogs (these make up roughly half of the morning walkers) are especially interesting to watch.

To the surprise of many the US economy continues to boom, despite the financial problems and the billions spent in Iraq. For the first time in my life I found New York relatively cheap, in some ways even cheaper than Beijing.
NEW YORK VS BEIJING
Having flown in from China I couldn’t help comparing the two cities.

As a people, New Yorkers are certainly my favourite. I often find Chinese city dwellers fairly indifferent, and sometimes rather rude.

I am not claiming that this is related to cultural difference. I think it has more to do with China’s history – in particular over the last 50 years, especially the ‘cultural revolution’.

However, I distinctly remember that on my first trip to New York in the 1980s it was pretty scary to walk in Times Square in the evening, and taxi drivers and others were also very rude. There certainly was, at that time, an ‘uncaring’ atmosphere in that city also.

I am sure that with the current exposure of China to the rest of the world, and as the period of the Cultural Revolution fades away, the people of Beijing will also change. I believe no other generation of people has experienced such rapid and profound change as the Chinese have, and this, of course, does take its toll.

Coming from Beijing, New York now seems old and a little tired. In 1980 I thought New York looked modern and the European cities looked aged. This time I had the same feeling about modern Beijing compared with an ageing New York.

Of course, it’s all about perspective.

In Beijing the infrastructure (cities, airports, airplanes, railroads, highways, telecoms, and so on) is mostly new and built with a 25- to 50-year vision. There is, for example, plenty of space around their skyscrapers. Such planning never happened in New York, and also a great deal of the housing and infrastructure maintenance there has been very minimal over the last 30 years, which makes the city look rather shabby in comparison with the newer Chinese cities.

As I mentioned in my China Travelogue (Travelogue China – November 2007), China’s long-term vision and infrastructure planning could easily set them apart from the short-term approach of the western economies.

However, a major negative in Beijing is its awful pollution. It is constant and all-pervasive. I have never ever experienced anything like that in New York.

In my China Travelogue I complained about the airplane delays in Beijing. I think JFK in New York beats them all – the delays there are so bad that they are now considering limiting the number of flights.

AMERICAN DENIAL
Of course, in my meetings in the USA I mentioned my recent trip to China and the impressions I brought with me. The people I spoke to were interested in my reports of the progress in China, but some of them also mentioned that this is an uncomfortable topic in the USA.

Many Americans find it very hard to believe that their country may not be the best in the world. They believe that it would be impossible for another country to outperform the USA. They also believe that it would be impossible for any other country, in particular China, to seriously compete with the USA.

It will be interesting to see whether, as some people over there predicted, America can pull off another economic miracle and remain the global leader. I am not saying that this is impossible, but I believe the chances are slim. The country would certainly need to look very seriously at its ageing infrastructure.

WASHINGTON IN FALL
Travelling from the hustle and bustle of New York to a comparatively sedate Washington was like taking a breath of fresh air. I spent a glorious weekend there with my friend and colleague, Gary Arlen. He has lived in Washington for 30 years and is a proud citizen of that great city.

Its monuments are reminders of how this impressive country was formed, and some of the words of its founding fathers are at odds with what is currently happening there. Franklin Roosevelt spoke about precious nature, and how we need to protect it. And, of course, he was also responsible for the famous saying: ….the only thing we have to fear is fear itself.

Given the current state of affairs in the world, Abraham Lincoln’s Gettysburg Address is also worth reading again.

It was sad to see many places completely blocked off from the public and the enormous presence of police, as well as what I thought to be the over-the-top security measures at the airport. In that respect the terrorist has certainly won. And, although largely suppressed, the many injured and maimed people now returning from Iraq are also beginning to have an impact on the America psyche.

We survived the many attacks of the Palestinian terrorists, the Baider Mainhoff Group, the Roten Armee and the Italian neo fascist group Nuclei Armati Rivoluzionari, between 1968 and 1980 without the draconian laws that are now spreading doom, gloom and fear. I miss the American spirit that was embodied in the many heroic Washington monuments – I believe those American heroes deserve better from us.

Passing by all those national and international institutions I also realised the influence that events in Washington have on all of us around the world.

THE BOSTON PATRIOTS
It was fortunate that on the night I arrived in Boston the local NFL team won their very important mid-season game against the Indianapolis Colts. Before the game both teams were unbeaten. The win made everyone in Boston very happy and created the right environment for my business meetings there ?

And the glorious weather presented Massachusetts in the most spectacular autumn colours, a real feast for the eyes.

However when I left a few days later Canadian snow had started to reach the city, so it was a good time to move on!
TELECOMMUNICATIONS NEWS AND UPDATES
TELECOMS NOT UNSCATHED
The fallout of 9/11 has also affected the telecoms industry and there is currently a debate raging about the pros and cons of the telcos siding with the government to the extent of allowing them to tap their phone lines.

Under the American Constitution telephone companies are not allowed to do this, and civil libertarian groups are preparing a court case against AT&T and Verizon.

On the other hand, an editorial in the New York Times indicated that these telcos deserve a medal for their cooperation with the government.

It will be interesting to see who (if anyone) will be blamed for this breach of the Constitution – the telcos or the government.
THE WEB BOOM
As mentioned above, the US economy is growing at a healthy pace. The same applies to the ICT industry. Silicon Valley is booming as well, but this has been setting off some alarm bells, as everybody still remembers the dot.com boom/bust, which was very much driven by Silicon Valley. However financial analysts all agree that it is unlikely that the current boom will end in another spectacular bust.

The current scale of the growth is far more sustainable and doesn’t necessitate the massive amount of venture capital that the dot.comers needed (and were cheerfully given). It is estimated that the current boom requires less than $30 billion of investments this year, while at the peak in 2000 dot.comers consumed $95 billion in one year.

The big money is changing hands between the new startups (Facebook, YouTube, MySpace, Skype, etc) and companies such as Google, Yahoo, News Corp, Microsoft, etc; making the present boom less vulnerable to the smaller punters. Nevertheless, if anything were to go wrong with one of these players – Google in particular – it would have enormous consequences for the whole industry and would totally destroy the positive sentiment that has been returning to the investment market.

However, under the radar of these headline-grabbing developments there are literally thousands of companies entering the Internet economy market with many local services in different countries – as well as players aiming for the numerous niche markets that are now opening up through better broadband infrastructure. This certainly makes the current developments far more sustainable in the long term.
COMPANY ANALYSES
While travelling through the USA I wrote several analyses around the various developments.
The problems Sprint is having with WiMAX. See Sprint’s flawed business plan for WiMAX.
The losses of Alcatel/Lucent. See Global – Analysis – The Industry Moving into 2008
The new Google mobile phone initiative. See Global – Digital Media – Internet Media Companies
Structural separation at Times Warner. See Will Time Warner lead the charge towards structural separation?
Mobile operators will face open competition. See Global – Mobile – Equipment – Mobile Handsets

See also:
USA – Mobile Market – Analysis, Statistics & Forecasts
USA – Mobile Market – Major Operators
USA – Broadband Market – Wireless Broadband
BROADBAND STILL LAGGING BEHIND
President Bush’s promise from 2004 to get broadband in every corner of the country by 2007 is not eventuating. With broadband penetration at 22%, the US has fallen to 15th place on the OECD scorecard, down from 12th place last year. It has fared no better in terms of broadband speeds, with its average maximum download speed of 8Mb/s falling well short of the nearly 100Mb/s achieved by Japan. Similarly, average US broadband pricing is nothing to boast about.

Embarrassed by the relatively slow development of broadband in the USA, federal subsidies have now been made available to State Governments to ensure that affordable broadband will be made available. The FCC has been ordered to map the country so that it becomes clear where the gaps are. The telcos and cable companies have been very reluctant to assist the FCC in this process and regulations are now in place to obtain the necessary data.

With the new subsidies, Kentucky has been the most successful so far with 95% of the state now connected to broadband. Over the last year penetration there has increased from 20% to 44%. The state works together with others under the national not-for-profit organisation ‘Connected Nation’, with West Virginia and Tennessee also active participants in the programme. So successful has been the Kentucky initiative that presidential-hopeful Senator Hillary Clinton has modelled her broadband policy, Connect America, on it.

Consumer organisations have also urged the FCC to use the $7 billion Universal Services Fund to improve broadband throughout the country; so far the regulator has been reluctant to use the fund for such purposes. During my discussions in the USA I heard from several people that they believed that the FCC has become increasingly politicised, with its Republican chairman being more interested in his political career rather than in ensuring nation-wide broadband of a good quality and an affordable price. The USA clearly has a long road ahead to improve its broadband record.

See also: USA – Broadband Market – Cable modem & DSL – Analysis, Statistics & Forecasts.
FCC REPRIMANDS CABLE OPERATORS
My greatest concern regarding telecoms reforms in the USA is that the market is dominated by a handful of monopolies and, while it is true that there is good competition between them, I don’t see this structure as a sustainable model for the future.

Also the USA will need to address the issue of open networks and the structural separation between infrastructure and services. In my Time Warner analysis (see Will Time Warner lead the charge towards structural separation?) I indicated that the cable companies will eventually retreat from the infrastructure market as it makes sense for them to start using the two telcos’ FttH networks for delivery of their content. This will give these two monopolists far too much power and will undermine the US Internet economy.

In order to be seen to be doing something in relation to competition the FCC ordered the cable companies to end their exclusivity deals with apartment buildings and condominiums. While this does give Verizon and AT&T some new opportunities it is, however, not expected to have an enormous impact in the broadband market.
MOBILE
GOOGLE THROWING A LIFELINE TO MOBILE CONTENT
One could never say that there is insufficient interest in mobile content. For the last ten years thousands (yes indeed, thousands!) of small and large companies have tried to crack this nut. However, in 99% of all cases it was the mobile operators’ vertically-integrated business model that prevented these companies from even reaching a trial stage.

However, with the new initiatives from Apple and Google (see Global – Digital Media – Internet Media Companies) we see a renewed interest in this market. CBS Mobile is looking at exploring new avenues to develop services for the small screen, and companies such as Disney and NBC are also looking again at the market.

It will be interesting to see if the mobile industry can deliver. One of my arguments has been that the mobile technologies are not well-suited for mass market mobile data applications. The upcoming wireless broadband spectrum auction will shed some light on that.

While I am convinced that Google doesn’t want to become a telco, it will do everything in its power to force open this market. Without open broadband networks the future for Google will be very bleak indeed. So, in the absence of any serious attempt from the telcos to move towards open networks, Google will put its money where its mouth is, bid in the 700Mhz spectrum auction and get a wireless broadband network in operation, if that is what is needed to open the market up.

At that stage we will also see whether the mobile operators can compete in the emerging personal wireless broadband market.

MOBILE INCENTIVE
There is currently a proposal before the Education Department in New York that could see high-performing students receiving free mobile calling minutes as a reward for their efforts. This certainly is a controversial issue, as the official policy is to ban mobile phones from schools. If the award system is adopted the mobile minutes can’t be taken up during school hours.

The New York education system has recently seen other controversial proposals, such as the handing out of cash bonuses to high-achieving students and their teachers.

This is a reflection of the need to put more and better educated students through the system. Again comparing this to China, year after year more than a million new graduates in engineering alone are delivered to the marketplace in that country. I am not saying that the New York initiatives are fuelled by this – education should be one of the top priorities in every country in the developed world.
DIGITAL MEDIA
WILL STRIKE FORCE USERS TO THE NET?
One of the hottest media topics in the country was the ongoing Mexican standoff between the Hollywood producers and the writers. This latter group wants a better deal on their rights regarding scripts used for the digital media. While the business models for these productions are unclear, the writers don’t want to fall into the same trap as they did a few decades ago. At that time they unwittingly signed long-term contracts for the use of their intellectual products for video, which included a ‘dud’ deal for the use of their materials on DVDs.

This clearly shows that digital media have reached a critical point in the USA.

The writers were indirectly supported when Google’s share price crashed through the $700 mark during that week, making it one of the highest valued companies on earth. All the signs indicate that these media will be the future and the writers, in my opinion, have a good case to argue.

The first shows that went off the air were the late night comedy programs, and this resulted in some interesting questions about whether these ‘comedians’ can do their own jokes without their scriptwriters.

If the strike continues for a long time it will also be interesting to see what this will do for broadcasting in general. Will this further establish the Internet as a serious alternative media outlet? The strike might trigger people to look for alternative entertainment on the Net.
WEB CAMPAIGNS
As I expected, convergence is well and truly accepted in the USA. I have mentioned the triple play offerings from the telcos and the cable companies, but interesting partnerships are working in this converging marketplace also.

As an example (there are too many to cover all of them) Turner Classic Movies is presenting the movie choice of 30 celebrities. Hearst magazines will ask its readers to program their own film festival, utilising these movies and the services of DVD distributor Netflix and Philips Electronics North America.

Users will be directed to six web sites, each of which will list ten movies. On these sites Netflix will provide trailers. They can be watched on embedded players which will demonstrate the look of Amblight Philips TV sets (these sets cast a glow on the wall around the screen enhancing the colour experience).

A range of interactive services and competitions are provided by Netflix and users can get a Philips set, free on a two-week trial.

The web campaign has a two million dollar promotion campaign attached to it.

CONTENT FINGERPRINTS
A new company called Attributor has developed software that can identify ‘fingerprinted’ material on the web. Publishers can put these fingerprints in their content and the software program allows them to check if significant parts of their content appear, legally or illegally, elsewhere on the Net.

The software program can also run continuously and alert the publisher to possible breaches of the copyright laws.

SLINGBOX
The Slingbox is also getting a lot of attention in the States. Forget about the PVR, the Slingbox (retailing at $180 around Times Square) allows you to transmit whatever is on your TV at home to a laptop or mobile/wireless device. This enables the user to move to another room and, for example, use the laptop to continue to watch the TV.

Travellers at hotels can still watch their TV programs, no matter where they are. There are no international barriers, so if I had had Slingbox while I was in the States I could have watched the Australian ABC news in my hotel in New York.

ONLINE PRIVACY
Chat rooms are now becoming so sophisticated that advertisements can be inserted instantaneously, based on a conversation that is taking place. If, for example, you are chatting with a person about a recent trip it might insert travel advertisements; if you discuss your health, it comes up with medical ads, and so on. The FCC has now indicated that it wants to investigate this practice of ‘customer tracking’ as it is becoming an intrusion into people’s private lives. The FCC wants to know how much control people need or want. It also wants to ensure a customer permission regime.

While these tracking services are currently still anonymous, Internet technology already exists to profile individuals, including private details, and it will only be a matter of time before serious commercial misuse is reported. Some of the leading Internet companies are already warning their customers and offering them opt-outs from these tracking services.
INNOVATIVE NEW VIDEO CONTENT
In many cities, railway systems and public venues such as hotels, convention centres and shopping centres in China (I saw this last year in Japan also) you see plasma screens linked to interactive telecoms networks. These closed circuit networks can provide essential information, security information, traffic and travel information and so on.

Of course, in between there is plenty of room for advertising and over the last few years the ads have already become far more entertaining. However, China has gone that one step futher. In the subway system in Shanghai (and soon also in Beijing) the webisodes or mobisodes (short sequences of soap opera content) are transmitted over these internal networks over periods of up to 40 weeks. It will be interesting to see the
Chinese people’s reaction to this. The ‘suboperas’ as they are called in Shanghai are sponsored by Starbucks and Pepsi.

I picked up the above information in China, but when I was in New York I came across another interesting new content development.

An indie (as in non-mainstream) filmmaker is producing web-based sitcoms. These are quite different from the webisodes mentioned above. To date three multi-act episodes of around 30 minutes each have been developed and so far these shows have been watched one million times on YouTube and Blip.TV (search for Groommates). Production cost per episode is around $400!

A very interesting development here is that content and service providers are building up a customer base around their particular website, theme, interest, etc and, as such, they create a ‘fan club’. With that in place interesting business models can be developed, either through e-payments, subscriptions and/or advertising.

WHAT’S ON THE WEB TONIGHT?
Increasingly the TV stations are putting their stamp on the new digital media. They have seen companies such as YouTube, Joost and others encroaching on their territory but now they are striking back with their own web services.

Hundreds of TV programs are now available from their websites:
•ABC.com
•CBS.com
•CWTC.com
•NBC.com
•Fox.com

Already we are seeing some interesting developments in this area, as they are beginning to offer these services through their TV set-top boxes, and that does not require the use of a PC. The current web-based developments are all PC-based and, as a general rule, that is not where people want to watch TV.

Very similar to the TiVO phenomenon (the Digital or Personal Video Recorder), the media companies will bypass these development and leave them behind, as they have a far larger market power to incorporate new developments within their own environment. NBC has developed an interesting service, Hulu, which comes with a widescreen video player and allows for media sharing without the copyright hassles that a service like YouTube brings with it.

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The emergence of the next generation of Internet technology and applications has led to the coining of the term Web 2.0, to indicate that the Internet now has more capabilities than ever before. The Internet Media companies such as Google, News Corp and Yahoo are just some of the leaders taking advantage of this with the introduction of new services and applications. This revival of the Internet has also led in part to the re-emergence of the Internet economy, and more specifically e-commerce. The increase in broadband connections is another factor that has led to this revival.

Revenue from the large range of content and services available from the Internet is rapidly increasing globally; travel, gambling, adult content, music and health services are particularly popular and social networking services are flourishing. By 2010 it is estimated that over $2 billion will be spent on social network advertising in the US alone. The Internet economy is increasingly relying on the underlying Internet infrastructure for its success, and this has also opened up a range of new support functions for ISPs and BSPs, with some already beginning to diversify their operations.

New video applications have also emerged as the Internet media companies seek to exploit the added speed and capacity of broadband infrastructure. This will result in a whole range of applications continuing to enter the market over the next decade. As can already be observed, the killer application on these networks is video based communication, nearly half of which is produced by users themselves. Commercial video entertainment will eventually account for only a quarter of these services. Sites that started as social networks, such as Facebook, are also expanding into video based services in order to compete. As commercial websites try and enter this space, there is no sign of this growth abating.

Web 2.0 technologies have shifted the consumer’s web experience to interactive and collaborative applications which a growing number of people can access and contribute to. Online payment gateways such as PayPal have facilitated consumer use of e-commerce, facilitating services coming to market. The success of social networking and sites based on UGC clearly shows that the ‘consumer-led’ era has begun and this heralds the end of those with vested interests being able to control what they present to their users. In future consumers will be not only be able to actively participate; they will also be in a position to challenge the way things have been done in the past and expose failures and misconduct.

A key to success in this new era of digital media revolves around advertising and the ability to attract new revenues. We are now seeing the emergence of new business models as the industry gains confidence and begin to change their more traditional models. Driving this confidence is the phenomenal growth in online advertising revenues. It is estimated that over $25 billion dollars will be spent worldwide on online advertising this year.

E-health is also rapidly shaping up as one of the key killer apps on the truly high-speed broadband networks. Around the western world we are facing a massive dilemma in relation to healthcare. New technologies are increasing life expectations and improving our lifestyle. The cost of this however is enormous, and we simply can no longer afford to finance these huge advances through the public health systems. In countries with proper broadband infrastructure we see e-health shaping up as a way that will allow us to enjoy these advances in medical technology and medical services, at a more affordable cost.

The Internet has joined the road and rail networks, the postal system and the global telephone network as a vital communications system in developed countries. The principle known as ‘Network Neutrality’ allows Internet users to access any web content or applications they choose, without restriction or limitation. This is taken for granted by the billions of people who access the Internet worldwide. However a concerning precedent is taking place in the US, where carriers would like to be able to charge for tiered network service – and it will have global implications if it succeeds. However despite the importance of the issue, it may be some time yet before the US government determines the country’s net neutrality path.

For detailed information, table of contents and pricing see:

http://www.budde.com.au/publications/annual/global-market/global-market.html

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UtiliTel (see separate report) is a cooperative business model which includes all leading electricity utilities in Australia and is aimed at exploring opportunities in broadband utilities markets such as BPL and smart grids. Over 50 fibre optic backbones have been installed for telecoms purposes, mainly in regional Australia. Medium voltage BPL is tested as an alternative last mile operation and these activities are coordinated under the UtiliTel banner.

There are and have been several BPL pilots and most utilities are involved in BPL and smart grids:

·         Energy Australia had a technical trial in Newcastle and was the first to launch a smart grid pilot;

·         Aurora Energy successfully tested BPL between 2004 and 2007;

·         Country Energy has been testing BPL since 2004 and will launch a commercial trial in Queanbeyan in 2008.

BPL speeds offered in these projects are many times higher than those provided by Telstra’s ADSL service.

A large number of vendors have accepted the so-called DS2 standard (developed in Spain) – this secures operability and low-cost user equipment. The 200Mb/s equipment is currently being offered by multiple vendors. By the end of 2006 it is expected that a BPL modem for users will cost around $80 (very optimistic!).

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