Telecoms & Broadband Business Newsletter - September 2014

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Last updated: 10 Sep 2014 Update History

Report Status: Archived

Report Pages: 15

Analyst: Paul Budde

Publication Overview

Published since 1983, Australia’s first telecommunications and new media Newsletter covers national and international business strategies and government policies in relation to fixed and wireless broadband and other smart infrastructure, the digital economy, digital and mobile media, smart grids, e-health and e-education.

Executive Summary

Editorial - Wholesale aggregators

Since the early 1990s we have been reporting on the competitive developments in the retail segment of the telecoms market. At that time deregulation brought more opportunities for new companies to enter the market. The key development then was ‘telecoms resale’. The problem was that there were very few options available to the newcomers other than to resell the services from Telstra; but new entrepreneurs very quickly figured out that it was not too difficult to buy services from Telstra, sell them at a discount and still have an interesting margin for themselves.

Within a very short period some 1,000 resellers entered the market in Australia. Hot on the heels of this development Telstra started to put the brakes on this wild growth by lowering the margins available to these players, and this led to a collapse of this market.

The majority of players left the market.  And Telstra made it very difficult for those who had grown large enough to stay in the market to operate effectively. I remember, for example, that they introduced a paper-based system that was required to transfer customers from Telstra to the competitive provider – this could lead to months of delays – and many more tricks played to make life as difficult as possible for these resellers.

It was not until 2008 that, after more than a decade, the ACCC finally introduced a better wholesale regime for the tier 2 players, concentrated around DSL-based broadband services.

In the meantime Telstra’s dominance in the market had a very negative effect on any serious competition in the market. However it needs to be said that at the same time very little innovation was brought to the market by the newcomers. It was, as we have reported before, a ‘me-too’ market. Frustratingly, after 20 years this is still the main form of competition in the telecoms market.

Interestingly, however, some resale activities have not only survived but thrived. These are basically locally operating companies with very high levels of customer service – the so-called ‘local heroes’ – and furthermore they have been able to establish themselves in vertical markets.

While until recently this market covered both mobile and fixed services, with the collapse of ISPOne it is back to mainly fixed services only. Mobile wholesale is largely restricted to mobile packages below $50 a month and there is simply not enough margin for resellers to operate in this market. You would need operations that can handle hundreds of thousands of such customers in order to be able to build a viable resale business around mobile services; and of course some companies, such as amaysim, are doing this. Furthermore this is the market for players beyond the incumbents, such as TPG, iiNet, etc.

The more financially interesting market for resellers is the fixed telecoms market and in particular with combined voice and data bundles. On the one hand, we have the tier 2 operators here, with their own DSLAMs, and they offer very strong competition to Telstra. But, in most of the so-called ‘zone 1’ exchanges, where there are multiple DSLAM operators in an exchange, Telstra’s direct market share is often less than a quarter. There is therefore on the other hand a strong incentive for Telstra to foster resale customers as, on a per-customer basis, it earns more money from them than it does from the tier 2 operators.

These resale retailers are concentrated around a number of companies known as wholesale aggregators, which is only a small segment of the overall wholesale market.

These resellers cannot compete with the tier 1 and tier 2 operators on price alone, so they have to do more in order to run their business. This is where the ‘full service’ wholesale aggregators come in. They provide their retailers with a full range of services such as the basic supply (minutes, capacity, access) and also with billing, bill production, management and customer reporting systems, end-user tech help desk (white-labelled) and end-user customer care (white-labelled) services. The value-adds that these retail service providers bring to the market break down the barriers to entry.

The specialised players in the ‘full services’ market are: Inabox, ISPhone B2B, Partner Telecom and iTelecom Wholesale.

Inabox is the largest player in this market and it has established its own IP-based retail telecoms management platform from which it can support its retail customers with applications such as hosted voice, cloud computing, unified communications and customised applications. Many of these services are linked into global networks that offer a range of opportunities for cost savings in international voice and data access.

The ‘in a box’ concept provides its retail customers with a telecoms network and a telecoms platform as a service to them (known in the industry as NaaS and PaaS products) – retailers don’t have to worry about any aspects of the technology and they can concentrate on sales and customer service.

Obviously this service platform is not aimed at the consumer market and the successful resellers are therefore those ‘local heroes’ operating in the SME market. These business customers have and still are notoriously badly serviced by the tier 1 and tier 2 operators, and SMEs in general appreciate the value-added services that are offered to them by ‘value-added retailers’. These customers lack the internal expertise to sort out their increasingly complex telecoms needs and depend on trustworthy partners in the telecoms space to assist them.

The ‘in a box’ concept is also attractive to large consumer brands that have an interest in building a telecoms relationship with their customers. We have seen banks, energy and oil companies and large retail chains entering this market. While these companies might buy capacity directly from the tier 1 operators, if it comes to the delivery of their telecoms services to their customers  they still need to have a platform from which they can provide these services, and the ‘in a box ‘ service is an ideal solution for them.

At the same time both the wholesale aggregators and their retail customers are extremely aware of their ultimate dependence on the whims of Telstra’s attitude towards them. With the click of a button they can change the margins. The resale market is littered with far more failures than success stories and the more independent of the incumbent these companies can become – through offering value-added products and solutions – the more likely they will be to successfully maintain a profitable business.

On a pure utilities basis, the tier 1 and tier 2 players could be 10% cheaper than the resellers however, with their added value-added services these resellers are often able to offer a minimum of a 20% cost reduction to SMEs. This, of course, necessitates a more complex sales cycle and the need for quality resellers to get that message out into the market.

With technology now available to the wholesale aggregators to enable these resellers to offer those value-added services, the future looks indeed very bright for this industry segment in the market.

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