Telstra's edge compute network to comprise 650 repurposed exchanges

Telstra will set up 650 of its 1500 telephone exchanges as edge compute locations, honing a plan it first unveiled a year ago.

The edge compute deployment is one of a number of infrastructural changes being pursued under a huge restructure of the telco announced Thursday.

Telstra is set to split into three subsidiaries. Its existing ‘InfraCo’ business will split into fixed and mobile tower subsidiaries, while a new subsidiary - nominally called ‘ServeCo’ - will house its active network equipment, products and services.

The InfraCo-Fixed subsidiary is further broken down into five more “co’s”, covering exchanges, data centres, fibre, ducts and subsea cables.

Already, parts of ‘Exchange Co’ and ‘Data Centre Co’ have been “monetised” - last year, the telco spun 36 exchanges into a property trust that it sold 49 percent of, while this year it sold its Clayton data centre complex in Victoria.

More sell-offs could occur under the company’s restructure, although the telco noted it would ringfence its most important assets and functions under ‘ServeCo’.

“By defining the asset perimeter this way, and keeping active elements of our network, such as the mobile radio access network equipment, spectrum, and fibre electronics within ServeCo, we are able to preserve the strategic differentiation we have built through decades of investment and innovation, making us Australia's leading telco,” chief financial officer Vicki Brady told Telstra’s annual investor day.

Brady said that ExchangeCo covered a portfolio of 1500 exchanges with external tenants, “of which 650 are suitable for growth to support distributed emerging technology solutions”.

Edge computing conversions have been on the roadmap since this time last year when the telco revealed it had scouted out “over 500” exchanges for conversion.

Telstra InfraCo chief executive Brendon Riley confirmed that the 650 exchanges would be converted to edge computing sites or otherwise act as regional data centres.

“The [1500] exchanges can be broadly broken down into two categories: those to be rationalised as the NBN rollout completes, and a second category of exchanges that will continue to support commercial arrangements, as well as be a target for new use cases, such as edge compute and data centre services,” Riley said.

“There will be significant safety, lifecycle maintenance, security, and community matters to be managed across the exchange portfolio.”

For Telstra’s regular data centres, Riley said the telco would focus on improving power utilisation efficiency (PUE) to bring them up to “industry standards”.

He said that more information on the telco’s exchanges and similar infrastructure would be provided at its half-year results announcement in February next year.

Tower utilisation

Another “co” - called TowerCo - will host the majority of Telstra’s mobile towers that it owns and paid for outright. 

This “co” is intended to be sold off; rival Optus is also in-market trying to pull off the same deal for its own tower assets.

“TowerCo's business model is the provision and management of passive equipment, including towers, large poles, rooftop towers, and power to huts to support active assets managed by tenants,” Riley said.

“TowerCo's focus is to drive operational efficiency, safety and reliability of the tower portfolio. “

Riley believed the reach of Telstra’s tower infrastructure would make it attractive to investors.

“With strong demand from investors and compelling valuations for high quality infrastructure assets, the time is right to review our options for unlocking value,” he said.

“We've already demonstrated our ability to successfully monetise infrastructure assets, particularly our exchanges and data centres. 

“Now, we take a further step forward through announcing an intention to monetise InfraCo Towers.”

He also said efforts were underway to add tenants to towers where feasible, given that multi-tenanted towers share some costs, meaning ‘ServeCo’ could reduce its own cost-to-serve.

“The average tenancy ratio on existing towers today is 1.34. This is below industry average and this is due to two main factors,” Riley said.

Riley said that some existing towers were built only for ServeCo’s - Telstra’s - use, “meaning they cannot be physically hardened for additional tenants”.

Secondly, with 3G, 4G and now 5G services still in operation, Riley noted there simply wasn’t enough space on some towers to host antennas other than those belonging to Telstra.

“That's said, the plan is to increase tenancy ratios on the existing portfolio and look to build new towers with multi-tenancy wherever possible,” he said.

“Our current plans are to build new towers with an average tenancy ratio of 1.5 to 1.6. 

“This will bring our tenancy ratios closer to global industry averages over time, noting that tenancy ratios are specific to each geography.

“We're also simplifying our processes and pricing to make it easier for the industry to access our available portfolio and participate in joint tower builds. 

“This is already unearthing some exciting new opportunities.”

Riley said it was not just new tower builds that would ultimately support multi-tenancy.

“On the tenancy ratios, the good news is we already have a set of towers that have space, and we're obviously talking to the industry about that and making that information more accessible so we can drive increased tenancy there,” he said.

“The second is, we can look to harden some of the towers that we have. Not all of the towers we can do that [for], but we can harden some of the towers to provide more access.

“The third is we'd build new towers ... with sharing in mind.”

Riley said that ‘ServeCo’ was keen to share towers, as were other parts of the cellular industry.

“When we look at tower sharing models around the world, and maybe something that hasn't been focused on quite as much in the comments today is the operating efficiency side,” he said.

“Typically, if one tenant is on a tower, and then another tenant comes along and is added to the tower, then there is a benefit back to the original tenant in terms of reduced charges and operating efficiencies. 

“We've really looked to build that in.”

Intercompany agreements

‘ServeCo’ will still need to maintain relationships with various other subsidiaries of Telstra, and this will occur via a series of “intercompany agreements” that are close to finalised.

“We have created a set of intercompany agreements between Telstra InfraCo and Telstra ServeCo that underpin their ongoing relationship and support strong and sustainable earnings for both,” Brady said.

“These agreements ensure that both organisations benefit from the strength and capabilities of the other. 

“They're also designed to maximise overall value for Telstra shareholders.”

Brady said the intercompany agreements had been negotiated according to a set of key principles.

“The first principle is business continuity. InfraCo will provide all passive infrastructure services to Telstra ServeCo at today's high level of quality, and Telstra ServeCo will support InfraCo on managing and optimising its operations,” Brady said.

“The second principle is differentiation for Telstra ServeCo. The third principle is maintaining a strategic relationship. Telstra ServeCo will receive pricing and terms consistent with its status as a strategic partner and anchor customer of InfraCo and we'll commit to long term contracts providing certainty to InfraCo. 

“The fourth principle is market competitiveness, ensuring both entities are competitive in the market with respect to supply and demand for passive infrastructure. 

“The final principle is that Telstra InfraCo operates as a fully operational standalone business with its own dedicated leadership team focused on delivering long term value for customers and Telstra Group shareholders. 

“We are confident we can have strong infrastructure businesses and maintain Telstra's strategic differentiation.”

Telstra CEO Andrew Penn said the intercompany agreements had largely already been determined.

“We've done an enormous amount of work on the intercompany agreements,” Penn said.

“The principles that we're talking about are the principles that we have used to inform that work.”

Riley added that the agreements are “at [a] very high 90th percentile stage of completion”.

“We expect to have Towers completely finalised in the very, very immediate term, [and] the others not long after,” he said.

“The one that we've probably got a little bit more work to do is around the undersea cables.”