Australia's ILEC Pursues Profits Without Growth

Australia's Telstra has invested in mobile telephony while neglecting the data market. The end result could be structural separation as the ILEC has admitted that it has no plan to deploy rural broadband access.

by Paul Budde of Paul Budde Communication and australia.internet.com [August 30, 2002]

Financially, Telstra is one of the strongest ILECs in the world, as confirmed by its current profits. These strong profits, however, have more to do with cost-cutting than with revenue growth.

In the absence of any real competition, Telstra's overall share in the fixed voice market is growing by 1 percent per annum—to around 75 percent in 2003. By its clever use of delaying tactics, Telstra certainly won the battle in the traditional telco market—and, now that it is pretty much a monopoly once more, the company is free to increase its fixed voice charges again, against international trends.

However, despite all these victories, the overall stagnation in revenue growth is an indication that all is not well on the business side of things.

The Australian data market growing by 20 percent, but Telstra sees negative growth. The company has been unable to tap into the current growth on the demand side (mobile, Internet, e-commerce, broadband).

Key reasons:

• Telstra bet on the hyped-up mobile sector, rather than on broadband. Mobile will peak in 2003/2004 and stop growing in 2004.
• Telstra refuses to utilise broadband for its corporate data services—a move that would inevitably result in a major price reduction. The company is not only losing market share in a rapidly growing market (20 percent in 2002 for the total Australian data market)—it is also seeing a real decline in revenue. This will produce a further decline in market share for Telstra in 2003, in the fastest growing segment of the market.

The mobile market continues to be 95 percent voice-driven, and revenues from new SMS services may only just compensate over the next few years for the decline in voice revenues.

Data revenue (total Australian market) is overtaking mobile revenue in 2002 ($7.8 billion vs. $7.5 billion). Telstra's market shares are 36 percent and 48 percent respectively.

Telstra's excellent broadband initiatives in 2002 are a belated reaction to the company's problems in the data market. The full financial effects of these late measure won't be seen until, at the earliest, 2004/2005.

Monopoly rents increasing
Telstra's financial position in years to come will be further bolstered by the lack of competition. Competition in the traditional telco markets has been successfully eliminated by Telstra and profits in traditional voice services in particular are making a recovery. Rebalancing will secure for Telstra new monopoly revenues worth several hundred million dollars.

Also, the lack of effective competition will prevent erosion of mobile revenues—several price increases have been introduced in this sector over the last twelve months and many more will follow over the next few years.

Telstra Country Wide
Telstra's Country Wide (mobile division) is the jewel in its crown, and it is going from strength to strength. If this division were to be separated from the retail arm it would certainly be capable of spearheading regional Australia into the information highway age.

Privatization and its effect on infrastructure
National infrastructure is a natural monopoly and the government will urgently need to address this issue before the full privatization of Telstra.

Both Optus and AAPT have indicated they will not invest further in nationwide infrastructure projects.

Two-thirds of consumers and 50 percent of businesses don't want full privatization.

A regional infrastructure fund of at least $5 billion will need to be created from the proceeds of the sale in order to guarantee nationwide deployment of broadband.

Also, Telstra has stated that the government must disclose its plan for broadband deployment in regional Australia, as it will be financially impossible for Telstra to do this on its own.

Structural separation
The government has accepted the failure of its regulatory policies and has foreshadowed the virtual separation of Telstra. The industry is now awaiting results. The outcome could take another year to implement.

Over time, the structural separation of Telstra will be inevitable. This will not necessarily involve regulatory intervention. The growth market of the future is broadband/data, in which Telstra holds only a third of the retail market. The company's wholesale activities will become far more significant and it will have to provide a structural separation solution to its wholesale customers if it is to operate successfully in this market.

Telstra Offshore
Telstra's overseas adventures remain shaky, with none of the three key investments (TelstraClear, CSL, and Reach) likely to return a reasonable return on investment (ROI) for years to come.

There is little or no synergy between the three key investments and none of them are operating in particularly vigorous markets. The outcome of Telstra's decade-long offshore activities, with their continually shifting goals, appears not to be the result of a well-planned strategy based on a specific vision of the company's core competencies.

Buying into these markets is relatively easy if you are as rich as Telstra. However, after the purchase, billions of dollars are often required to make these new assets work and that money is generally not forthcoming.

To date, very few—if any—of the world's ILECs have been able to show a good ROI on overseas investments.

The statistical data in this analysis is from other reports by Paul Budde Communication

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