Despite all the doomsayers – in particular some sections of the financial analyst community – claiming that the transformation of Telstra would be bad for investors, the company is proving them wrong.
It adopted an aggressive approach to winning back customers, and the net result is positive.
Of course, if you start participating in a competitive market you have to come up with good prices. In the past Telstra tried to sell itself to the market as a premium player – customers were expected to pay more for the privilege of being on the Telstra network. That, of course, didn’t happen.
On the positive side, previous management had the foresight to aggressively build out the company’s mobile network. It is this investment that is now paying off.
The real risk of an aggressive campaign was that it would significantly affect the profitability of the company. However, that was factored in by the management at the launch of ‘Project New’ and what the 2011 results are showing is that the impact on profitability has been not as severe as it might have been, and that therefore the results were better than anticipated, thanks to equally aggressive cost-cutting. The company was always going to have to face a rebalancing, as the profit levels that it was used to would never be sustainable in a more competitive situation. At a certain point in time Telstra would have to show that it could also compete outside a monopolistic environment, and these results show that it can do that.
In particular the second half year has been very positive and this will give the company confidence to continue with this strategy, Project New still has 2 years to rum.
These results are a major boost for the CEO. Up until now the analysts have been sitting on the fence. They accepted that Telstra had made the decision to start its transformation, but they wanted to see whether David Thodey, with his more inclusive management style, would be able to deliver. The results are certainly giving the market more confidence that Telstra is on the right track and his style of management can deliver good results.
Indications were that Telstra had already been the major beneficiary of Vodafone’s woes, but even taking that into account the mobile business has performed exceptionally well. Its market share increased by just over 3%, while Optus’s dropped by 1% and Vodafone’s by 2.5%. Another plus for the company was that PSTN revenues did not fall as far as they had in the previous year.
These developments augur well for next year. With the transformation on the right track the company can continue to move along its chosen path. For the foreseeable future cost management will remain the most important element, since new revenues from NBN-based activities will not start to reach a moderate level until 2013.
While Telstra has delivered ARPU levels above expectations the trend remains negative, so in the days ahead all eyes will still be on the margins in this business.
The positive developments will also strengthen Telstra’s resolve to continue to follow its chosen path in relation to the NBN. They have indicated they want to push forwards as quickly as possible, with or without final ACCC approval. It is most unlikely that the Federal Opposition’s plan to sell the NBN Co assets to Telstra will be an attractive option for the company. It clearly perceives its future to be in the higher margin services business rather than the utility-based infrastructure business.
Regarding Sensis ….. we realise that this sounds like a broken record but, as we have pointed out many times over the years, Telstra has failed to implement the changes needed for this business to move into the digital future. So far each new strategy has been just one more bandage applied over the last; it is sad to see that this division continues its decline.
A reinvigorated Telstra means that the industry will have to respond more aggressively to Telstra’s success. The focus should be totally on competition. True, there are regulatory issues, but rather than relying on lengthy processes here the industry would do better to look for solutions by talking to each other. Time is of the essence here – for both Telstra and the rest of the industry – with companies racing to get into the best position to compete in the new NBN environment. This should be a catalyst – for both sides – for a behavioural change towards more of a can-do approach.
We are in a new era now and there is a real opportunity to move forward significantly faster. Trust will need to be built up and risks will need to be taken in this respect. Collaborating and cooperating, will increasingly become the message for the future; the sooner the industry can get its act together here, the better.
And when all else fails there is a very well-respected ACCC that will step in, but preferably that should become a means of last resort.
Some key facts and figures:
- $3.23 billion profit with a 17.5% drop in net profit for the year to June
- second-half profit of $2.04 billion for the six months to June 30, up fractionally from $2.03 billion in the same period last year.
- total mobile revenue at Telstra grew by 10.7% to $8.1 billion, driven by customer growth and steady average revenues per customer.
- mobile ARPU down by 1.8% to $49.70
- 15% increase in mobile subscribers to 12.2 million, market share increased from 39.6% to 43%
- mobile broadband numbers up by 55% to 2.5 million
- fixed line voice revenues declined by 7.9% to $5.3 billion, ARPU down by 4.4% to $52.55, subscribers down by 3.4% to 7.5 million
- retail fixed broadband revenues increased by 1.4% to $1.6 billion (2.4 million subscribers), ARPU down by 1.5% to $56.04
- IP access revenues grew by 16.2% to $970 million
- network applications and services revenue grew 10.7% to $1.14 billion this segment – which include cloud computing – is earmarked for significant growth
- Combined T-Hub and T-Box penetration has now exceeded 15% penetration of broadband users.
- The Telstra T-Touch tablet, an in-house Huawei branded tablet, that was released in 2010 was withdrawn fromsalesin October 2011 as the unit was not strongly selling and instead the Apple iPad2 would be sold in stores along with other name brand tablets.
Table 3 – Financial and operational headline statistics – Telstra results 2011
|Telstra results 2011
||Annual change -/+
|Free cash flow
|Fixed access lines
|Retail mobile customers
(Source: Telstra annual results 2011)
Sensis – another missed opportunity – 2011
When launching its new business strategy in early 2011 aimed at trying to save its declining business, Sensis didn’t come up with a game changing solution instead it send out a more of the same message. In BuddeComm’s opinion this was yet another missed opportunity to look at more serious change.
Simply making the directory offering more digital is not going to save Sensis. This includes the addition of the Yelp service in mid 2011 – a popular site in theUSproviding user-written reviews for everything from restaurants, to sops, to products and services. As more businesses move online, and more and more people get easy access to the internet – largely driven by the smartphone – it is hard to understand why companies would still want to advertise in the Yellow Pages.
There is certainly a group of customers who are left behind on the information highway and who may find the bundled offering and the new lead generating service attractive, but that group is dwindling. However, those who are familiar with the internet and who have incorporated it into their daily life are unlikely to use Sensis to find the business they are looking for. Again, there will always be a certain niche market for such a service, but that is what it is – a niche market – and that is not the Yellow Pages business model.
The kind of service provided by Sensis is available free – or at least at much lower costs – on the internet and companies like Google have largely replaced the old directories model.
At the risk of sounding like a broken record, the solution BuddeComm has been advocating for close to a decade is to combine the Telstra content businesses and turn them into a true digital media business. If they were to be combined these companies should be able to come up with innovative new business models that will not just stop the rot but will enable them to explore new business opportunities.
In the last five years Sensis has lost half the value of its business. This will simply continue, and the smaller the company becomes the more difficult it will be to transform itself into a completely new business.
The reality of a ‘linear’ business model (from printing to online) is that those who have tried to do that in the past have experienced a decline in revenues: music, newspapers, books, video. The same will apply to directories; much more is needed to build a truly digital business.
It looks as though the current strategy is to milk and defend its present business model for as long as possible and hope that those who are left behind on the information highway, and those involved in certain niche markets that rely on the Yellow Pages, will continue to pay the expensive advertising costs that are linked to this medium.
This, in itself, is not a bad strategy but it does indicate that the train is slowly moving towards the terminal.
Finally Telstra bundles its media assets
Over the last decade BuddeComm have made dozens of comments and produced numerous analyses relating to Sensis and Telstra’s other media assets. As an example just one such a comment, from Trading post good for sensis not for telstra, (see the BuddeBlog) is selected.
During all that time BuddeComm argued that Sensis should be separated from Telstra and that, combined with Foxtel and broadband media, it should be positioned as an independent internet media company.
It puzzles us that it took the company so long to take the first step, in 2011. The company has now announced that Sensis, Big Pond, Trading Post, IPTV and Telstra’s 50% holding in Foxtel, as well as its other content rights, would be brought together in the new digital media division as part of a strategy to integrate all Telstra’s content so that it can be delivered over any of its platforms.
This is happening a decade too late. Its competitors in the digital media have now already effectively established themselves and the question is whether at this late stage the new set-up will be able to turn the tide.
On the positive side, we do not have a good national champion in social media, internet media, etc. The broadcasters and newspapers are doing something but they are nowhere near a viable alternative. They are still mainly concentrating on protecting their incumbent businesses, which makes it impossible for them to take an aggressive stand in this market. With the NBN around the corner new ‘local’ opportunities are arising and if Telstra is now really serious about this there is an opportunity to move forward. In our opinion, however, a full integration of these assets is essential, followed by a full separation from Telstra.