Telecoms & Broadband Business Newsletter - December 2012

Editorial - Margin pressure on telcos continues into 2013

As we predicted, the years 2011 and 2012 have been very challenging for the 2^nd tier players. After Telstra’s decision to start competing in order to increase their market share the gloves were off.

There was certainly a great deal of game-playing under the previous Telstra management, but at the same time the company mostly stayed away from aggressive competition because it believed the products and services it was offering were of premium quality.

With the new management all that has changed and Telstra has become the most aggressive competitor; and, with a $1 billion budget set aside for this, it has created havoc among the competition during 2011 and 2012.

The sheer marketing power of the company is often no match for the other players.

While the greatest impact has been on the mobile market the fixed broadband providers have also felt the force of the campaign, and natural growth is drying up in a saturating market. This is further hampered by the regulatory advantages that Telstra still possesses in relation to its broadband wholesale prices. There are alternatives (such as naked DSL) that provide much more flexibility to the retailers, but wholesale, particularly in regional areas, remains a problem area; and it is there that Telstra has created the most havoc by adding a large number of new DSLAMs to regional telephone exchanges.

With Telstra’s success the company became more confident that it can indeed compete with lower margins and that it does not need to rely on its monopolistic position in the market. The increase in industry consolidation during the first half of 2012 was a clear indication of the competitive nature of the market. By mid-2012 Telstra indicated it was loosening the reins changing its strategy - to increasing margins rather than just increasing penetration - and this is giving the industry some breathing space.

All of this happened at the same time as the GFC, which made consumers more cautious about their spending and led to a slight decline in overall revenues in the consumer market.

Natural subscriber growth in the fixed broadband market has now been reduced to a trickle and the pressure on margins will lead to lower ARPUs. On the positive side there is an ongoing move towards higher speed broadband packages, which also brings in new revenues for the industry.

In general the traditional telco industry is now operating in a utility market, where size and volume matters but where, in the end, there is only room for a handful of players. So consolidation will continue.

Triple-play models – with good IPTV offerings (fetchtv) – are producing some promising growth during 2012, but new developments around smartTV are making the long-term viability of the current IPTV models uncertain; and all of this growth is still happening slowly, from a very low level.

Most of the 2^nd tier industry has put its weight behind fetchtv. There are questions about Telstra’s commitment to its T-Box service, which has hardly seen any growth in over a year – but, here again, any growth that does occur will be from a very low basis and will therefore not have a significant impact on the bottom line of players. It will be several years before that happens, so it is not a miracle cure; and by that time business models will have changed, based on the industry transformation developments led by the NBN.

Nevertheless the companies will have to find new products to sell to their customers in order to stay in the race. They lack the level of innovation provided by the OTT (over the top) players in the market, who are also eating into traditional communications services. SMS is perhaps one of the greatest casualties for the industry, but VoIP and Skype services are also gaining more and more traction.

Specialisation is another strategy that can be pursued, but the reality at the moment is that most players offer very similar products. Customers have also become accustomed to price competition, so they will expect lower prices and will keep hunting for them. There is little loyalty when it comes to price, and churn will therefore increase during the next few years.

The competition will have to move in new directions so as not to be caught in the spiralling-down effect of the commoditisation of the current telecoms market, which is still largely based on access and call charges. The problem here is that the NBN will offer a much better basis for new value-added services, new product and service packages, and for innovation, and the transitional period will be a very dangerous one. Not all the current competitors will be able to survive on their own – consolidation is essential in the commodity market.

Sophistication can also been found in customer service, one of the weakest and most under-utilised parts of their businesses. New customer management software has been, and is being, developed, which allows the companies to better target their customers and create lifelong customer relationships. This is starting to replace the need for some of the large-scale advertising campaigns, which have been a rather blunt and expensive tool to increase customer numbers. Telcos are in an ideal position to be the middlemen between the customers and the content and service providers; however they can only be successful here if they lift their game in the areas of customer management and customer care.

This is a key area where the companies can compete in a way other than just on price, and those who are the most sophisticated in harnessing these tools will be the winners.

This also applies to the telcos operating in the mobile market. While Telstra has seen a significant increase in penetration the long-term competition will come from outside the telco industry.  Apple has shown interest in opening up the mobile call market by providing a chip that will allow customers to roam to different mobile networks, with cloud applications guiding customers to the best prices and so on. Such a move would again sidestep the mobile operators, in much the same way as the company sidestepped the operators’ mobile content portals when it launched the iPhone in 2007.

Will the telcos be ready this time?

2012 has been a tough year for competition and, while the extreme pressure is off, 2013 will be more of the same, perhaps increasingly driven by OTT services from outside the traditional players.  Customers will be the winners here as some of the products and prices on offer in Australia are below international benchmarks.

But at the same time it is critical to ensure that this all takes place on a level playing field, and that Telstra does not possess any unfair anti-competitive advantages.

Paul Budde