Telstra's path to telco domination

A happy combination of market and government forces has ensured Telstra's domination of Australia's telecommunications is going to continue well into the future. The telco's decision this week to refarm the 900MHz to improve its regional-rural offering, looks set to tighten its hold on the local mobile scene. But is that a good outcome for consumers?

The company's mobile broadband roadmap includes adding additional network frequencies, deploying the next breed of 4G technologies and trialling ‘heterogeneous networks' which use private wireless systems to supplement the cellular tower network.

Driving Telstra's plan is the explosion in mobile data use. Telstra expects 60 per cent of customers to own smartphones in 2013 and the Australian Communications Media Authority reported data traffic growth of 52 per cent in 2012. When the modern breed of smartphones took off in 2007 telcos around the world were caught off guard as data hungry iPhones and Android devices taxed cell phone networks that had been designed to deal with voice traffic.

Of the three Australian mobile phone networks, Telstra was the best equipped to deal with the data explosion having made an early bet in 2006 with their Next G network running on the data friendly 3.5G standard.

The other two networks suffered badly with Vodafone's networking collapsing under the data load – resulting in the #vodafail campaign – which saw the number three provider's customers flee to Telstra while Optus struggled to maintain market share.

For Optus and Vodafone the only good news in face of Telstra's dominance has been selling services through Mobile Virtual Mobile Operators (MVMOs) like Amaysim and Virgin Mobile. Even this business though is struggling with declining margins as reported earlier this week by Technology Spectator.

Now Telstra promises to further disrupt the MVMO business by reselling 3G services through providers like Kogan and Australia Post while retaining high margin 4G customers.

NBN, Telstra : frenemies for life

4G mobile services lie at the core of Telstra's future business as they pass the Universal Service Obligation and legacy landline business with their declining, low margin customer base to NBN Co.

The National Broadband Network (NBN) is Telstra's greatest ‘fremeny' – both friend and enemy – as not only does NBN Co take responsibility for connecting low value USO customers but also relieves the former monopoly of the costs of maintaining an increasingly costly copper network.

At the same time Telstra's mobile services can compete with the NBN. It's no coincidence that Telstra has rolled out 4G in regional CBD centres to scoop up data hungry high value customers in towns where Optus, Vodafone and NBN Co are at least two years behind.

When the NBN is deployed, Telstra can further enhance their premium offering by piggy backing on the fixed network with the still developing heterogeneous mobile technologies that allow smartphones to switch from the cellular network to Wi-Fi seamlessly.

An election of a Liberal government this year also promises to be good news for Telstra as existing cash flows will be maintained as the NBN goes into hiatus while cost benefit studies are carried out.

Were an Abbott government to go ahead with Malcolm Turnbull's plan for a ‘hybrid' national broadband network using the Foxtel cable TV system Telstra will effectively get two dips into the NBN pot with access fees for both the HFC cable in the short term and the telephone infrastructure when the fibre is eventually rolled out.

In that scenario, it's unlikely the Coalition's plan would be cheaper than Labor's over the lifetime of the national broadband project.

Regardless of who wins the Federal election or the progress of the NBN, Telstra stands to win due to its dominance of the existing fixed line infrastructure and the mobile market.

Mobile data is by far the most profitable games though with substantially better margins than reselling fibre bandwidth and it's hard to see how Telstra's lead in this field is going to be upset in the next decade.

Investors are aware of this, on the eve of Kevin Rudd's announcement of a NBN in April 2009 Telstra shares closed at $2.36. Yesterday they closed at $4.57, a gain of 93 per cent and more than double the ASX 200's performance over that period.

A happy combination of the NBN and timely investment in their mobile network has paid off for Telstra. The company has cemented its dominance of the Australian telecommunications industry and the promises of deregulation in the late 1990s have evaporated.

Given the importance of communications in the 21st century, the question of whether this is good for Australian consumers or the national economy remains to be seen.