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Tracing Telstra's future
Ry Crozier
Telstra is already reinventing itself with a budget running into the billions, but faces a new series of threats that could undermine its future growth prospects.
As it moves further into an NBN world, the telco faces increased pressure to maintain market share and margin it has traditionally dominated by owning and operating the local fixed-line network.
It – like others – is likely to compete with high speed and quota-heavy mobile plans that – for many internet users – could prove an attractive alternative to a fixed-line service.
But the government is unlikely to take that kind of competition to the NBN lying down, and as such there is growing regulatory uncertainty over how mobile will be treated in future as an NBN competitor.
Telstra faces a range of other challenges: to its brand attributes, to its breadth of products, the loyalty of its subscriber base, and to its ability to decide who does and does not have a right to use its mobile network.
iTnews analyses the threats and opportunities that are shaping Telstra’s future.
Losing the USO
If the Productivity Commission has its way – and some sway – with the government, the universal service obligation (USO) in its current form could be axed.
Responsibility for delivering minimum standard voice and data services would fall mostly on NBN Co and mobile operators, and government would take responsibility for funding services to the most remote places.
The USO is currently a contractual responsibility for Telstra that requires it to make “standard telephone services and payphones accessible to all people in Australia on an equitable basis, wherever they reside or carry on business".
Axing it would relieve Telstra of its USO responsibilities and costs, but also the $297 million it gets a year and is contracted to get until 2032, which is drawn from an industry levy. Unwinding that contract could incur penalties on the government’s part.
Throughout the review process, Telstra has indicated it is “open to a change to USO arrangementsâ€ÂÂÂÂÂ, as long as “acceptable terms [are] reached between Telstra and the governmentâ€ÂÂÂÂÂ.
Telstra has done relatively well in renegotiations with the government around the NBN, and industry observers believe the long-term USO contract leaves Telstra well-placed to renegotiate it.
“Telstra’s in a very strong position,†Professor Reg Coutts, who is principal of Coutts Communications, said. “It’s intrinsic of the political and commercial power that they have.â€ÂÂÂÂÂ
“They’re very happy to renegotiate so long as they don’t go backwards,†telecommunications economist John de Ridder said.
“I think they feel they’ve got a very good deal locked in, so they’re happy to adapt so long as they’re not left out of pocket as a result. With this government they’re probably safe enough but you never know.â€ÂÂÂÂÂ
De Ridder believes Telstra could also be happy to be relieved of USO duties.
“I think Telstra always felt that it had been dudded over the USO funding, that it was carrying all of the costs and the money it was getting from the others [telcos via an industry levy] wasn’t nearly enough to cover its costs,†he said.
“[in addition], I think Telstra is trying to focus on being a different company these days. It doesn’t see itself anymore as being a local access network company.
“It would love to think NBN is now the fixed network infrastructure and that it didn’t have any more of a role to play [in that space]. I still think that’s where it wants to be.â€ÂÂÂÂÂ
Fending off domestic roaming
Telstra is currently batting away attempts led by Vodafone to force it to open up the regional portion of its mobile network to rivals.
Domestic roaming would enable mobile users to roam on the Telstra network when out of range of their own carrier’s network.
Telstra argues – among other things - that such an arrangement would disincentivise future regional investment, since it would limit the financial rewards from that spend. Vodafone argues that Telstra built its regional dominance in part on public money, and therefore the spoils should be shared.
The Australian Competition and Consumer Commission (ACCC) tentatively decided in May that it would not pursue domestic roaming.
Vodafone is now challenging in court the process used to come to that tentative decision. Both Telstra and Optus have joined proceedings, which has hearings set down for September.
A win here might not be enough to force the ACCC to change its mind, or its decision. It could force the ACCC to refine its inquiry processes – court outcomes are hard to predict – but for the moment the value built up in Telstra’s mobile network remains safe.
“A win for Vodafone doesn’t really mean a reversal of the process,†Coutts said. “It could be a bit of a pyrrhic victory.â€ÂÂÂÂÂ
The TPG threat
Also threatening Telstra’s traditional mobile dominance is the arrival of a newcomer.
Australia’s fourth mobile network is being built by TPG, boasting 80 percent population coverage at a cost of around $2 billion. Construction is set to begin next year.
Opinion is divided on what this will mean for Telstra.
In Telstra’s favour is that TPG can break even simply by bringing its (and iiNet’s) mobile virtual network operator (MVNO) customers on-net. That would hurt Vodafone and Optus, who provide MVNO services to TPG and iiNet respectively.
The question then is how aggressive TPG will be in pursuing further market share.
Coutts doesn’t see TPG as a big threat to Telstra; de Ridder, however, believes “TPG is a worryâ€ÂÂÂÂÂ.
“Telstra should be worried - but not as much as they used to have to be,†he said.
De Ridder speculated that TPG is now of a size where it no longer needs to play the role of maverick newcomer.
“They’re almost like an incumbent now, so there’s no need for them to be too aggressive on price because they don’t need to be,†he said.
“They’ve got their market share, now it’s about trying to get value out of it. They should be more mature now; I don’t think Telstra has to worry about them being as aggressive as they were before.â€ÂÂÂÂÂ
Recent research by UBS’ Evidence Lab in Australia found that Telstra customers were least likely to churn to TPG, mostly over concerns about its limited geographical coverage.
The research found only 13 percent of Telstra customers would likely switch to a 'theoretical $25 / unlimited (with caveats)’ mobile product offered by TPG. By comparison, 23-26 percent of Optus and Vodafone customers would be tempted.
However, UBS said investors were “worried about the price/ARPU [average revenue per user] impacts that TPG might have (i.e. TPG will force an industry price cascade, where Vodafone responds first, then Optus/Telstra respond in turn)".
Telstra also had a “resurgent†Optus and Vodafone to add to its worries. Both Telstra’s rivals have seen gains in their net promoter scores (NPS) – a measure of customer satisfaction – outpace that of Telstra.
The only buyer for NBN Co?
It’s widely assumed that the government will try to sell the NBN once the project is complete - especially given long-term predictions of the rate of return that the asset might generate.
The problem is, who is in a position, and on top of that willing, to buy it?
Having offloaded its copper and HFC networks to NBN Co, would Telstra even want to buy them back?
“I’m hesitant to say yes,†Reg Coutts said.
“I don’t think Telstra’s interested,†John de Ridder concurs. “There’s no advantage anymore in having a local access network for residential. It’s just a pain. No one wants it.â€ÂÂÂÂÂ
However, telecommunications analyst Paul Budde believes Telstra - or perhaps an investment fund - will emerge as the potential buyer. He assumes both will only want the NBN at "a bargain price".
Of course, there is always a buyer at the right price: for the government, it’s whether the right price can be achieved without splitting up the NBN, or writing down part of the asset’s value.
Telecommunications entrepreneur Bevan Slattery implored the government in April to “write down $20 - $30 billion of the NBN investment and call it a social infrastructure investment.†Slattery was backed by New Street Research telco analyst Ian Martin, who expects half the government’s investment to be written off.
Coutts also believes this is likely a valid path to sale. “The only way the government can potentially make the NBN saleable unfortunately is to write off some of the capital,†he said.
Whether that would make the NBN asset more attractive to Telstra remains to be seen. Many see mobile technology as a threat to the NBN’s future, and de Ridder believes Telstra is firmly of that view.
“Telstra’s future is 5G,†de Ridder said.
NBN Co, for its part, is doing its best to look saleable. It is consistently talking up the upgradeability and future paths for the various technologies that make up its network, and is also looking to business and even the internet of things (IoT) to demonstrate it has revenue-earning potential.
The NBN 'big dog'
By owning the access network, Telstra has traditionally enjoyed a sizable share of market in the residential fixed-line space.
Without that network asset, the company is still managing to keep that dominance in an NBN world, and analysts believe it is likely to maintain its dominant position, at least in the short term.
In its most recent results, Telstra said it “continued to lead the market†with 792,000 of the total 1.6 million active NBN connections. Its 49.5 percent market share is higher than in September last year, showing it is gaining – rather than losing – ground in an NBN world.
Coutts believed Telstra could increase its market share via acquisition, as the battle for the last 15-20 percent of NBN users not served by the big ISPs became increasingly congested.
“If anything, there will be some rationalisation of the current NBN resellers,†he said.
“There are too many of them at the smaller end, so the question is what happens to them. If we assume some consolidation, I think Telstra’s still in a very good position.
“The dilemma the industry’s got is Telstra’s so much the dominant player in the game that they have many more options open to them than their competitors, so I’m pretty confident that they can maintain their dominant position and in fact shed some loss making activities [in the process].â€ÂÂÂÂÂ
Growing the war chest
Accepting the arrival of the NBN has afforded Telstra a considerable war chest to invest into its mobile network and elsewhere.
There’s the $11 billion agreements with the government comprising $5 billion in infrastructure payments, $4 billion in disconnection payments and $2 billion in Commonwealth agreements.
The infrastructure portion includes long-term leases for ducts, conduits and so on. Telstra has reportedly engaged JPMorgan and Macquarie to explore the sale of this long-term lease revenue, which would bring forward revenues that otherwise would be spread out until 2045.
Telstra has also done well securing additional NBN works. It won $390 million of planning and design work related to the multi-technology mix; $150 million to pilot fibre-to-the-node (FTTN) technology, and has a four-year deal to fix faults in its own copper network, which was worth $80 million in its first year alone.
These kinds of funds are undoubtedly helpful as Telstra looks to the future to reshape its business and replace the billions of revenue it will no longer have from its wholesale copper business.
On that front, it is already pushing speeds on its 4G network to 1Gbps and moving down the 5G path; it has strengthened its cloud and enterprise businesses; and funded an expansion into new areas such as health, where it has picked up work such as to manage a $178 million national cancer screening register.
“For Telstra, it’s no longer about pipes but services,†de Ridder said. “What can they do to make themselves indispensable to certain markets.â€ÂÂÂÂÂ
First mover with 5G
Telstra – like its Australian rivals – has already started technology trials to prepare for the arrival of 5G networks, predicted to be around 2019/2020.
However, unlike the previous 3G and 4G networks, the 5G rollout is going to be highly targeted around specific use cases.
“I don’t think you will see a blanket 5G coverage from day one,†Telstra’s CTO Hakan Eriksson told Mobile World Live in mid-July. “It will be rolled out where [we] need it.â€ÂÂÂÂÂ
Eriksson said “if history has anything to do with predictions for the future, [Telstra] will be very early with 5Gâ€ÂÂÂÂÂ.
“It’s interesting to note that Telstra is about 1 percent of [equipment vendor] Ericsson’s topline but 95 percent of all the ‘world firsts’ Ericsson does in mobile is with Telstra,†he said. “Telstra is always early.â€ÂÂÂÂÂ
That said, Eriksson sees plenty of life left in the 4G network. Even being early with 5G, many Telstra customers may not see or need to use it.
“I think there’s drama [around] 4G and 5G,†he said.
“At the end of the day it’s what the consumer gets that’s the interesting thing. If they get 1Gbps over 4G or 5G it doesn’t really matter. You can [still] do a lot with 4G.â€ÂÂÂÂÂ
5G’s challenge, according to Telstra CEO Andy Penn, is that outside of low-latency IoT applications, no one’s really sure what it will be good for.
“What is really interesting about planning and building a 5G network is that the full range of opportunities will not be clear when the networks are launched,†he said.
“They will evolve with the market and with technology advances. We have no real idea what types of things the network will enable in the future. In that way 5G, like the future, is inventing itself.â€ÂÂÂÂÂ
Part of this is because 5G’s economics aren’t well understood. It is assumed that 5G will bring telecommunications equipment closer to the edge and increase the density of network sites.
“As you go down the 5G route you’re going to have to deploy more and more fibre to serve more and more sites,†de Ridder said. “The network becomes very dense. But Telstra knows all this.â€ÂÂÂÂÂ
De Ridder is confident that Telstra’s track record on mobile will mean it gets 5G right.
“I remember when Next G was launched,†he said. “Back in those days 3G was something that you put into metro areas.
“I had a dinner one night with [Telstra’s former public policy chief] Phil Burgess and he told me a few stories like how staff in Telstra’s retail outlets had no idea when they opened boxes on the morning [of the Next G launch] that they were actually launching a national, continent-wide 3G network. It was a complete surprise to their own staff let alone the rest of the world.
“To get that thing done in time, [Telstra’s then CEO] Sol Trujillo was on the phone every Monday morning to the head of Ericsson in Sweden to make sure things were on schedule.
“They stole 3-4 years over Optus and Vodafone because of what they did. Optus was the leading mobile player before the launch of Next G, and Telstra took that lead off them and has stayed ahead.â€ÂÂÂÂÂ
Premium veneer
Telstra’s success in mobile has in no small part contributed to its image as the premium telecommunications provider in the Australian market.
But that veneer faded somewhat through 2016 as Telstra’s networks suffered a series of damaging outages.
The company hopes to restore some of it with a $3 billion, three-year investment.
It also provided its users with two free days of data usage. They were, in succession, the busiest days ever recorded on the Next G network, and should have restored some user confidence in just how much load Telstra’s network can handle.
Mark Blackwell, a senior manager at EY, said “the network maxed out at 100-110 TB per hour on the 14th of February and 140-150 TB per hour on the 3rd of Aprilâ€ÂÂÂÂÂ.
“They are impressive numbers, no doubt,†he said.
Maintaining its premium veneer is important for Telstra to be able to retain its ability to charge a premium for access to the Next G network.
Coutts believes Telstra would keep its premium positioning “for a fair while yetâ€ÂÂÂÂÂ. “By fair while I mean for the next five years. It’s a bit hard to predict beyond that,†he said.
Telstra would also be aided in that regard by the reach of its network. “For people in remote areas or regional centres Telstra’s often the only player in town.â€ÂÂÂÂÂ
