It's Crunch Time For The Big Telcos
The Age
Friday September 1, 2006
New services, rather than speed, are the core issue for Telstra and Optus, writes David Kennedy.
THE proverbial pet shop galah knows that operators need to generate more revenues from services and solutions. But not everyone understands how quickly this needs to happen if a crunch is to be avoided.Telstra's cut to the price of entry-level broadband in February 2004 boosted new connections. The number of quarterly broadband connections has risen each quarter since. Because the installed base has expanded, the percentage growth rate has declined. The quarterly growth rate peaked at nearly 26 per cent in the June 2004 quarter. By the March 2006 quarter it was down to about 13 per cent. If it keeps falling at that rate, connection growth will hit zero around the beginning of 2008. That's not far away.But will connection growth keep falling? The decline in growth reflects the fact that operators have not continued to stimulate the market with better value packages. Operators and internet service providers need to act soon to entice new customers into the market, or see revenue growth dry up.Great hopes are being pinned on faster ADSL2+ broadband. But the evidence suggests that faster access won't generate substantial new revenues by itself. If there was pent-up demand for speed, we would expect to see higher prices for the fast services, such as HFC and ADSL2+, already available. In fact, the correlation between broadband prices and speed is weak. This makes sense - the services the public value most, such as online banking, information searching and general browsing, aren't bandwidth hungry. It's nice to have fast connections for big downloads, but you don't really need them.So will we hit a wall in 2008? It depends on how operators respond. First, they could cut broadband prices to trigger another spurt of connection growth. This is risky. Average revenue per user (ARPU) is already headed downwards. If the gains of growing scale don't outweigh price cuts, the industry will be worse off. The only option then would be to accelerate cost reductions. This would have to be accompanied by consolidation of smaller operators to generate further scale and profitability.The second way to boost broadband revenue is to raise ARPU by selling new services. Music and video clips are driving more broadband traffic, but revenue gains haven't flowed through yet. VoIP - voice over internet protocol - has been embraced by alternative network providers and ISPs, but leaves the leading operators worse off by eroding landline users. Internet television is reliant on new infrastructure investment, and will face tough competition from an entrenched and aggressive pay TV industry. For Telstra and to a lesser extent Optus, their Achilles heels are their exposure to landline telephone networks and mobile. Telstra benefits from a large share of telephone revenue, while Optus is reliant on mobile revenue. Both are threatened by VoIP. These incumbents will need to exploit scale economies to remain price-competitive. They also understand the need to generate revenues from services and solutions. Telstra has some strong assets in BigPond and Sensis; Optus needs to be careful not to be left behind.Alternative providers such as Primus and iiNet must manage a difficult shift from customer acquisition to retention. Voice will be an important weapon if they can engineer VoIP solutions that can attack telephone networks. This won't be easy. Global experience shows how hard it is for small operators to deploy differentiated strategies that set them apart from incumbents. If they fail, they will be overwhelmed by Telstra's scale.David Kennedy is the research director of consulting firm OVUM.
© 2006 The Age