As we approach the end of 2011 the transition to an NBN powered communications future looks close to realisation. David Havyatt considers the task for telcos and ISPs to compete in the new world order.
Optus chief executive Paul O'Sullivan gave a speech recently to celebrate 20 years of competition [pdf] (or at least since they were awarded carrier licences – at that stage as AUSSAT and MOBILCOM). The speech touched on the effect of the NBN on competition, but other events mean it is apposite to consider the impact on all telcos and ISPs.
Telstra and Optus
The big two of the industry have initially responded by cutting deals with NBN Co to close parts of their network and migrate customers.
Telstra has also started a "land grab" of market share before the migration begins. However, Telstra and its Foxtel partners still have an unfinished piece of business in reaching an agreement to allow Telstra to also shut down its hybrid-fibre coaxial (HFC) network. The prospect of seeing both HFC networks retired, and replaced by a single fibre network that may be underground is an often overlooked benefit of the NBN.
In Good to Great, Jim Collins analysed the distinguishing features of companies that made "the leap from good results to great results and sustained those results for at least fifteen years".
One study is of Kimberly-Clark and its unlikely CEO Darwin Smith.
Smith concluded that the company's traditional core business – coated paper – was doomed to mediocrity; its economics were bad and competition weak. Smith sold the mills and moved the company into the highly competitive consumer paper-products industry.
He reasoned that world-class competition like Procter & Gamble would force it to achieve greatness or perish.
The advent of the NBN is creating just such a moment for Telstra. In common with other incumbents, Telstra has always underperformed as a retail organisation. It relies on its relationship to the network.
Fortunately for Telstra's competitors, the current incumbent seems reluctant to move rapidly to full transparency in its internal dealings. Telstra's competitors think this is a problem and are still lobbying for greater separation. In reality it is a benefit.
The cumbersome Telstra marketing machine will be slower than it should be in adjusting to a separated future. For now its strategy seems to be entirely based on maximising its position going in by increasing share.
Optus has spent the last twenty years defining itself as "not Telstra". As the NBN comes into play that language is no longer relevant. Telstra and Optus will look much the same, mobile operators selling fixed line services on NBN infrastructure.
Twenty years on the "challenger brand" no longer sits comfortably with them. That title really belongs to a new breed, and that breed is challenging both Telstra and Optus.
Michael Malone, CEO of iiNet, has repeated his objective of targeting Optus' fixed line business.
In fixed line the telcos that started as ISPs, and only entered voice through "naked DSL", like iiNet, are better positioned for fixed line competition over the NBN.
Optus is facing the kind of squeeze from above and below that mirrors the one Qantas put on Virgin. Virgin had to respond to that by a major rebranding and repositioning above where they had been.
Optus probably needs to do the same.
The aggregators and entrants
iiNet and TPG have been pursuing a strategy of getting bigger, fast, by acquisition. In this they are mirroring the Telstra land grab. Both are convinced of the logic of "industry consolidation".
But the idea of consolidation isn't new, nor growth in this sector by acquisition. AAPT mostly grew through acquisition, first of CorpTel, then connect.com and others. Commander similarly was a telco built by acquisition.
The latter is no more, and the former is nowhere near what it once was. Acquisition creates integration issues of technology, systems and people. To date the new acquirers have been coping well but the challenges tend to grow, not diminish.
The strange thing about the telco market has been that through every set of consolidation the industry continues to morph. Taking out a mid-sized operator just creates an opportunity for a smaller operator to grow, or another new entrant to arrive.
Building on the example of Tesco in the UK, a number of analysts have speculated on the possibility of people with strong retail, service-oriented brands to extend these into telco given the 'infrastructure-light' model that is the NBN.
These thoughts underestimate the amount of infrastructure required to convert the NBN access product into a working onternet access or voice product. However, the consolidation of the market makes entry easier.
Prices and the NBN
In his speech, Paul O'Sullivan outlined the three benefits that accrue from competition; reduced prices, improved service and greater innovation.
I've previously noted that claims that prices have declined because of competition are overstated. Prices have declined since 1980 and declines since 1997 could be better explained as a consequence of an "experience effect" than the effect of competition.
In a report for Optus, Ovum stated that ACCC data shows price declines in mobiles had been greater than those in fixed line. Ovum attributed this to a greater level of competition.
However, it can equally be attributed to the fact that cumulative production in mobiles is growing at a faster rate than fixed line; there are stronger experience effects and consequences of scale. The earlier column also explained why and how the price trend can be expected to continue with the NBN.
Innovation and Service
The bigger question is whether telcos can innovate and differentiate in an NBN world. One strand of thought (promoted by database vendors) is that telcos need to leverage their customer relationships and offer other e-services.
This ignores the simple fact that telcos already struggle to use the technology to support their core telco business.
It is in all the other things you need to make the NBN into a service that will be where innovation will flourish. That's both in how you build a quality user experience for broadband on the network side, including encouraging content distribution networks, and simplifying the experience on the customer premises side.
The latter is what iiNet has been doing with BoB, and Telstra with T-Box and T-Hub. However, it doesn't have to be bespoke hardware; it can be anything to make the customer experience easier. That would include support on how to wisely reconfigure the internal communications structure.
But most important will be the integration between fixed and mobile. Making a device seamlessly roam from a mobile network onto a home network is non-trivial, and ultimately requires access to the core infrastructure of the mobile network.
That's the advantage that Optus and Telstra have going in; and it is unlikely to be functionality they plan to wholesale. Vodafone seems to be planning to participate directly as well, leaving the question of whether the rest of the market will still be marginalised.