Last week the Ovum consulting group hosted a conference looking at the telecommunication industry’s future at its 2020 Telecoms Summit in Sydney. The event portrayed a sector that, while immensely profitable, is struggling to adapt to a new era as its golden age of revenues comes to an end.
For the Australian industry, superficially things are good with all three major telcos seeing improved margins in recent years. Globally however, traditionally profitable voice and text revenue services have plateaued in the western world and most of the industry’s growth is expected to happen in emerging markets.
On closer examination, things are not quite so good in the Australian market with Telstra extending its dominance, the local giant has seen income rise at 6 per cent and profits up 14 per cent. Optus on the other has had a 5 per cent revenue decline while the Vodafone Hutchison Australia joint venture had a 9 per cent fall, although VHA’s losses fell from £440 million to £130 million last year.
Certainly Telstra is doing extremely well out of the current market with Dan Lloyd, VHA’s Director of Strategy and Corporate Affairs, pointing out that Telstra’s dominance in the local marketplace is off the scale by many international measures.
“I arrived back in Australia in February after ten years of working in forty different countries across the world for the Vodafone Group,” Lloyd said. “The only words I could use for the state of the market structure and competition in Australia is ‘deeply disturbing’.”
Lloyd detailed how Telstra’s benchmarks on key indicators like market revenue share, profits and return on investment are remarkable by international standards, all of which illustrates the company’s dominant position in the domestic market.
While Optus and Vodafone are at least partly responsible for Telstra’s current market dominance having made serious strategic and tactical mistakes over the last decade, regulators haven’t been blameless either.
Chief executive officer of listed telco Inabox Group, Damian Kay, says that Australian regulators also deserve a serve, for effectively killing competition with poor decisions around the NBN, consumer protection and issues like data retention that have increased the barriers of entry into the Australian marketplace. And made it harder for small businesses to compete.
A push into new markets
Despite having a stranglehold on the domestic market Telstra is still affected by the global trend of stalling growth from voice and text revenues while lower margin data services provide the bulk of new business. This is forcing the company to look at new revenue streams in fields such as professional services and content delivery.
The push into content, which Telstra has been playing with for over a decade, is evident in its ‘triple play’ announcement earlier this week where the company is bundling Foxtel entertainment channels with its internet and phone services.
Along with the triple play of content and entertainment, Telstra also sees some opportunities in the professional services field with the company outlining its home IT assistance services. Jennifer Douglas, Director of Fixed voice and platinum for Telstra, describes the company’s home support product as extending the company’s reach into the household.
Telstra though has played in that space before without much success; ten years ago they bought small business support service Invizage and corporate integrator Kaz Computing to bolster their professional services. Both operations were eventually sold to Kaz founder Peter Kazacos for a fraction of what Telstra had originally paid for them.
Strategically, professional services don’t make much sense for Telstra as it's a sector that’s shrinking domestically – Ibis Research reports the IT support industry is shrinking at 2 per cent per year and has been for nearly a decade. The business is also notoriously difficult to scale and run at a profit with an intimate customer centric focus at odds with the bureaucratic cultures of large telcos.
Salvation from the cloud
The great white hope for the telco industry is the Internet of Things (IoT) and the machine to machine (M2M) technologies; the promise being that putting SIM cards into every car, kettle and shipping container will be another lucrative revenue stream.
The problem with the M2M vision is annual revenues per user (ARPU) for connected devices are a fraction of those from voice and messaging over the last twenty years and telcos will need more than that to maintain their revenues, let alone grow.
A similar predicament lies for telcos with cloud services, another low margin business that competes with global giants like Amazon and Google along with the myriad of specialist companies. Telstra have shown their ambitions in the marketplace with today’s announcement they are teaming with VMWare in providing the virtualisation company’s shared products to Australian businesses.
For the telcos, this major change is something that’s been experienced by many other industries. That a comparatively protected industry like telecommunications companies are subject to these disruptions illustrates just how no sector is safe from being upended.
Despite the industry’s struggles to adapt, most of the executives present were optimistic about the sector’s future as Damien Kay summed up; “I think it’s a really exciting time. I think it’s really positive. I love this industry and I’m very passionate about it.”