Telstra's hot copper

While discussion within the telecommunications sector is going to be dominated by the proposed national broadband network, of more immediate consequence for the telcos, particularly Telstra, is how they position themselves in anticipation of an NBN environment.

The latest Goldman Sachs strategy outlook for the communications, media and entertainment sectors forecasts intensifying competition in fixed-line services as service providers seek scale ahead of the NBN.

At face value, that would be bad news for Telstra. It is already faced with acceleration in the shift from fixed-line services to wireless, with declining numbers of access lines in service and an apparent plateauing of growth in fixed-line broadband (see The cap doesn't fit Telstra, January 18). The Goldman analysts are forecasting further decline in fixed-line subscribers and say fixed-line broadband has reached the point of saturation.

If the sector responds as expected to the prospect of the NBN, however, the settings in the fixed-line market will change. Competition aimed at maximising the customer bases that will ultimately be migrated across to the NBN will force prices down, particularly for fixed-line broadband.

In 2004, under pressure from the Australian Competition and Consumer Commission, Telstra slashed the prices of its fixed-line broadband products and ignited the sector – the number of users doubled in a year. Consumers do respond to price, indeed the explosive growth in wireless broadband can be attributed to the intensity of the competition between the wireless networks that drove prices down.

More recently, Optus' bold decision to go early and go hard with its pricing of the iPhone, with big handset subsidies, has reignited its own growth and helped the overall sector.

Part of the explanation for the explosive growth in wireless (apart from the appeal of mobility and increasingly smart and compelling devices) is simple pricing. The Goldman analysts have noted previously that wireless broadband pricing is now lower than fixed-line broadband pricing.

A full-scale price war in fixed-line services ahead of the NBN rollout could therefore re-start growth in the segment, albeit at a cost to Telstra's margins. Under David Thodey, and with its IT issues apparently behind it, Telstra has been showing more aggression on price and more creativity in terms of new fixed-line products.

It will defend its volumes and has the same, indeed far larger, incentive of maximising its fixed-line customer and its negotiating position with NBNCo as its competitors as its own copper networks is made redundant and it becomes a reseller of NBN capacity.

For NBNCo, the bigger the overall fixed-line customer base the better, so an intensification of competition in the segment that arrested its decline would be a positive. If that competition really drove prices down, however, that wouldn't be good news for NBNCo and the economics of its brand new and expensive fibre-to-the-premises network.

The NBN is primarily a consumer network – the most expensive parts of it will be the connections to individual homes – so cheap broadband ahead of its rollout could create consumer resistance to pricing of its network that made sense of its build cost. It could help drive even more growth in the post-NBN take-up and usage of wireless broadband, which is a major threat to the economics of the NBN.

This year won't just be a year of transition and pre-emptive manoeuvring in the fixed-line space ahead of the NBN. The wireless sector will also be looking forward.

The networks know that in the immediate future, competition to grab a disproportionate share of the growth in wireless broadband being generated by the rapid penetration of smart phones will only intensify and that the combination of competition and wireless broadband usage is going to drive traffic growth.

That will strain networks that are already under pressure, despite significant capital investment by Optus and Vodafone Hutchison. Telstra, with its Next G homework, retains a substantial advantage in network capacity and quality and is about to double its theoretical network speed from 21 Mbps to 42Mbps.

With Telstra showing a new found willingness to reduce its previously premium pricing to more competitive levels, and Vodafone Hutchison still preoccupied with its merger integration, the competitive dynamics are quite interesting and complex – but more competition and sharper pricing appears inevitable. Telstra and Optus will be particularly anxious to maximise the customer bases they have on their proprietary wireless networks in a post-NBN environment.

The wireless operators will also be looking further ahead, to the next generation of wireless technology -- long term evolution (LTE), or 4G -- and the spectrum auction, probably next year, that will enable them to deploy it. There will be a substantial cost for the spectrum and probably an even bigger cost for upgrading their networks again to be ready for a 2013 or 2014 launch.

The combination of more intense competition in fixed-line services and more competition and an even bigger prospective capital investment in wireless may help explain why SingTel is reportedly considering a partial sell-down of its Optus business.

The negotiations between Telstra and NBNCo and NBNCo's own progress in developing its plans for its network and its interaction with retailers will be of critical significance to the long-term structure and economics of the sector.

The coincidence of the decisive phase of preliminary works for the NBN, the cross-over in the growth rates of wireless and fixed-line broadband, the demands that the surging volumes of wireless traffic will impose on the networks and their preparations for LTE services, however, means that the sector's settings are far more complex, volatile and inter-connected than they have ever been.