BuddeBlog

Best financial performer

Again a very solid set of financial results from the national incumbent telco. Sol Trujillo’s strategies are certainly working in favour of Telstra. The company remains one of the most, if not the most profitable incumbent telcos in the developed market. It has been able to very cleverly use the flawed Australian self-regulatory system to maintain its dominance in the market. This, linked with astute financial management, is delivering results that many other telcos can only dream of.

A company in transition

The company has successfully created chaos in the market, buying time to begin a process of transformation that will allow it to better position itself in the emerging digital economy. This new environment will generate a completely new range of business opportunities, but, like all other incumbents, Telstra, with its legacy of old system telecoms networks, was not well-positioned to participate in this new environment.

While the transformation may not be achieved within the projected three to five years it is absolutely critical to Telstra. Even if it were to take several more years to complete (and this is the more likely scenario) it will still be a massive achievement.

Despite its perhaps rather unrealistic target BuddeComm supported this aggressive approach to the transformation, as it would be easy for it to become derailed if there were not a sense of urgency attached to the process. While other telcos are going through similar transitions, Telstra is certainly among the leaders in getting the job done.

It is not only an enormous technological undertaking - it also involves a complete change of culture. Staff is confronted with a massively disruptive learning curve;  middle management, in particular, is on a very difficult course.  The people element of the transition is the most difficult to manage - many of these middle managers are near retirement age and may not be keen to embrace the new world.

But now, three years into the process, there is no turning back and significant implementations have already taken place. Slowly but surely Telstra is preparing itself for the digital economy. The company certainly has become more competitive, and more customer-focused.

Telstra on its way to FttH

Sol Trujillo has also stated that he sees a need for massive growth in telecoms capacity to underpin the digital economy and in that respect he clearly hinting at an FttH future. It is important to bear this in mind when analysing the antics that are taking place around the national Broadband Network.

With that vision established the company is putting an infrastructure strategy in place that has FttH as an end goal. Totally independent of any National Broadband Network (NBN), very significant fibre investments are already being made under the company’s normal maintenance program. In the three years since the discussion began regarding an NBN the amount of fibre in Telstra’s network will have very significantly increased and it would not be too difficult for the company to fairly quickly switch on a ‘half-way house’, known as FttN. BuddeComm estimates that by 2009 Telstra will be able to deliver broadband - at least for metropolitan Australia - at speeds higher than those prescribed by the Minister in his NBN plans, and this all without any subsidies.

By now it certainly will have most of that network in place but there are indications that in some regional centres, also, a great deal of work has been done to that end.

How much profit will be allowed?

Within the current regulatory framework there is nothing to stop Telstra from continuing its market dominance in moving forward with fibre networks. However the regulatory status is not under the control of Telstra and can be changed quickly if the government chooses to do so. So the company is obviously nervous about this and it is pulling out all plugs to try and retain its control for as long as possible.

Market dominance allows Telstra to make very substantial returns on its investments (ROI), which, of course, is good for Telstra’s management, and for its shareholders.

But the digital economy is too important to the nation for it to be based solely on the delivery of the highest possible investment returns.

And this is where Telstra’s strategy comes unstuck. In order to use the infrastructure for e-health, tele-education, smart grids and other nation-building activities it must be based on returns in line with other utility services, such as electricity, gas and water. An NBN that most people cannot afford to use, or that is not economically viable for the delivery of government services, would be contrary to the national interest.

While Telstra has an absolute right to fight for its cause, telcos in other countries have accepted that there is also a national interest case, and that in one way or another some sort of compromise needs to be made so as to address both the national interest and the profitability of the telco.

To overcome this dilemma the incumbents need to be able to go to their shareholders and explain their reasons for being prepared to forgo profits in order to serve the national interest. But it is unrealistic to expect any commercial organisation to voluntarily forgo profits in this way - it is up to the government to set the rules. Only then can Telstra go to its shareholders and explain that unless a compromise is reached there could be legal action (regulations) and that this could be worse.

Based on recurring messages from the government in relation to this situation it seems highly unlikely that Telstra will be able to maintain the same level of market dominance moving forward and the decisions that will be made by the government will certainly have an effect on the company’s financial results for maybe one or two years.

Telstra has the mobile lead

Telstra’s Next G network is certainly one of the global mobile success stories. Not only has it achieved an incredibly rapid rollout, the way that it has serviced the market has also been very successful. Telstra has certainly been able to turn the tables and is now clearly the market leader, which is not a bad feat at all for an incumbent.

The market has also allowed Telstra to charge a premium price for its service - like, for instance, the premium Hutchison was able to charge when it was the first company to launch a 3G service. However the impact from Telstra in the newly emerging mobile broadband market is greater than the effect Hutchison had when 3G was only just emerging.

Telstra also caught Optus on the back foot. Optus relies on mobile for most of its revenue and Telstra is now in a position to seriously undermine that company’s position in the market.  Optus belatedly launched its own mobile broadband rollout, but it did this before it could effectively compete with Telstra (it will probably be at least another year before it is in that position).

Rosy future

So from all aspects the future for Telstra remains very bright indeed. While its dominance in the fixed market can, at least to a certain extent, be reined in, at the same time the company will always remain the dominant player in that market. It is a fallacy to think that an NBN can be built without Telstra, or that Telstra can be bypassed.

The company is extremely well-positioned to deliver the infrastructure for the digital economy, and its transformation process and focus on fibre networks are clear indications that the company is on the right track. Unlike some of its international counterparts Telstra has all of the right strategies in place to move successfully into the future.

This would make Telstra the ideal partner for e-health, tele-education, e-government, smart grid and other services that will be developed in a digital economy.

True, with an open network policy Telstra will encounter more competition and this will force the company to accept a lower ROI on its infrastructure investments;  however, although Telstra may receive a slightly smaller slice of the pie in future, the overall size of that pie is increasing significantly and this bodes very well for the company’s future.

We see further changes taking place over time. Once an open network is established BuddeComm expects a change in Telstra’s attitude towards wholesale. It will be in the telco’s interest to fill its next-generation fibre-based networks with as much traffic as possible and a more liberal and wholesale-friendly approach will be developed to facilitate this. If this move proves to be successful for the company we might gradually see a broader shift from retail to wholesale services. This is where BuddeComm believes the company’ s ultimate future will be.

Paul Budde

See also:

• Telstra Corporation Limited - Company Overview and Operating Statistics
• Telstra Corporation Limited - Corporate Strategies Analysis - 2007-2008
• Telstra Corporation Limited - Financial Statistics
• Australia - FttH & FttN Market Overview
• Australia - FttH Models, Overview, Costs, Forecasts
• Australia - FttH Operators and Retailers
• Australia - National Broadband Plan - Analysis mid 2008
• Australia - National Broadband Plan Analysis RFP

This entry was posted on Wednesday, August 13th, 2008 at 10:01 am and is filed under BuddeBlog. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.