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Published 14 February 2013 00:09, Updated 27 February 2013 10:16
Australian consumers may not love Telstra, but they like it more than they used to. Announcing half-yearly results for the country’s largest telecommunications company last week, chief executive David Thodey trumpeted a 10 per cent reduction in complaints, fewer departures of mobile phone customers and less time taken to resolve complaints.
“We have this ambition to change the way everybody talks about Telstra,” Thodey said. “Customer advocates buy more products, recommend Telstra to their friends and family and stay with us longer.”
Telstra it is making changes it hopes will guarantee its profitability – and survival - in a future where selling access to communications infrastructure will becomes less important. And while the company is no Apple - as any user of the T-Hub, the company’s clunky iPad-like device, knows - it is trying to become one from which consumers choose to buy higher-value items, such as information or business infrastructure services, as well as those services tied to its fixed and mobile networks.
That is a far cry from the haughty utility that once informed customers what services they would get. The world has changed and Telstra, under Thodey, is changing, too.
“They’re trying to turn themselves into a brand that has positive associations,” says JPMorgan senior analyst Paul Brunker.
Last week’s result, in which the company reported an 8.8 per cent increase in after-tax profit to $1.5 billion as revenue grew just 1 per cent to $12.4 billion, was a confirmation that the group is moving in the right direction. It signed up 607,000 new mobile customers over the six-month period as the churn rate, the proportion of customers it lost, fell to 10.3 per cent from 13.2 per cent a year earlier. The company now has 14.4 million mobile customers, making it far and away the dominant provider in this country. Revenue from the ‘network applications and services’ business, which includes the provision of cloud-based services, rose 10.6 per cent.
The figures are vindicate the love from investors that has pushed Telstra’s share price up 35 per cent over the past 12 months. But questions remain. How much further can the company go? Has it done all it can? For now it has, Brunker says.
“It’s difficult to see how the next leg up would come about because it is ultimately difficult for Telstra to show much earnings growth,” he says. Everything’s going well on the underlying business. Churn is world-class already. They’re gaining share rapidly, given how slowly the market is growing, and margins are at high levels from an international standpoint.
“It’s difficult to see how much more can go right there.”
Telstra has to keep changing. Whether it can complete the next move, into a proper digital economy company, matters not just for the company. The transformation of the business that started in 1901 inside the Postmaster-General’s Department, and whose capital spending just decades ago accounted for as much as 6 per cent of all of Australia’s fixed capital formation, is a poster-child for former state telecommunications monopolies the world over, says independent telecoms analyst Paul Budde.
“Australia is a case study,” says Budde. “I would dare to say Telstra is now one of the leaders in the change. Now many, many organisations are looking at Telstra, asking how are they doing that.”
Based on the progress it has made from a traditional telco utility, Budde says Telstra’s recent earnings figures are “amazing”. Last week’s update does little, however, to show how far the company has gone towards another crucial transformation.
“It still is how you go over the next decade, how you navigate the company from telecommunications to one playing a new role in the digital economy?” he says. “Are you only being an infrastructure provider or are you able to go over that and create a value-added area?”
Telstra and other former monopolies are still too focussed on infrastructure when they should be thinking about how they can transform their models and value add by making money from services that ride on it, Budde says.
In an era when infrastructure is a level playing field between companies – especially with the national broadband network (NBN) providing infrastructure and Telstra giving up its monopoly access to household connections – this is a change the company has yet to fully accept, he says.
In addition, the services offerings of companies such as Google and Facebook for consumers, or IBM and Cisco for businesses, are giving customers ways to bypass traditional telephone networks.
“I’m worried that we don’t see any sign that companies such as Telstra are moving into a different model,” Budde says. “They still stick to the same business models. That’s a big risk going forward for Telstra.”
Not everyone pictures a future where Telstra offers only services with no infrastructure element. While the company will continue to bundle services with the access to infrastructure it sells, Telstra will never divorce itself entirely from that infrastructure side, other analysts say.
“The bulk will always come from a connectivity offering,” says CIMB Australia analyst Fraser McLeish. “That’ll always be the basic of their service. Within that, they’ve got to differentiate themselves by adding services to that.”
Even with the NBN taking over the infrastructure that will underpin home- and office-based services such as broadband – and compensating Telstra as it gives up its lock on that network, as it did to the tune of $176 million during the period – the big telco will keep playing an infrastructure game.
Telstra’s mobile network, the most extensive in the country, is one of the reasons it has over double the subscriber base of rival Vodafone. Thodey has been in the top job since 2009 and the company’s transformation is very much his project, but when it comes to the mobile network – which grew 4.6 per cent to $4.6 billion in revenue during the period – he is benefiting from a gamble made by his much-maligned predecessor Sol Trujillo, says research firm Gartner’s research vice-president Geoff Johnson.
“This is the benefit of Sol Trujillo’s aggressive wireless strategy,” says Johnson, a former Telstra engineer.
The HSDPA and HSDPA+ technology Trujillo chose out of several contenders - and which Thodey has continued investing in - has proven well-suited for the emergence of 3G and 4G voice and data services, the devices for which were only beginning to come in production when Trujillo settled on the protocol and infrastructure. These also make Telstra’s network the one of choice for the next round of tablet-like devices. The company now has 1.5 million 4G devices on its network and Thodey last week said 4G network will cover 66 per cent of the population by June 2013.
“Sol Trujillo was bagged for many things. There was one thing he did clearly get right,” Johnson says.
Johnson agrees that Telstra faces challenges in making money from infrastructure. An example of the disruptive technology to come in the next two to three years - just one of many - is web real-time communications, which will give users the ability to use web browsers to communicate in a video session or phone call , without downloading any extra software.
This technology will challenge software providers like Skype, but will also have an effect on the service providers like Telstra, and Thodey will have to come up with an answer, Johnson says.
“He has to work out ‘Where do we make money out of this?’,” Johnson says. “That’s what Thodey’s team is looking at all the time.”
One way Telstra is already looking to protect its future is by investing in companies that produce so-called ‘over-the-top’ (OTT) applications and software - those that consumers receive over the internet but are not provided directly by their internet service provider.
Investments that Telstra’s venture capital arm has made, such as in California-based video streaming service Ooyala, in addition to Sydney-based restaurant booking service Dimmi and cloud-based contact centre provider IPscape, show it has to look all over the world for these OTT services.
“Telstra has for many years had ambitions to be part of the OTT environment,” says Telsyte research director Foad Fadaghi.
“The challenge has been that it hasn’t been that successful. One major reason is that OTT applications have, by their definition, been global applications. They’ve been products developed for global markets rather than a local market.”
One strength the company has that it can build on is a fast network, which allows it to partner with high-quality applications, such as a best-of-breed security app, and supply and manage that service for business customers.
JP Morgan’s Brunker says Telstra is in a glass half-full or half-empty situation, depending on how you choose to look at the company.
With an eye on the empty half, Budde says Telstra could one day lose its advantage in mobiles. If the country’s mobile network infrastructure underwent an NBN-type consolidation, that extensive advantage could disappear.
Other analysts say there is no prospect of that happening any time soon, but other, more basic risks could appear, such as a loss of income from land line call revenue.
“There is a risk when it comes to traditional call revenues, as people move to OTT applications that provide messaging or even voice call over mobile networks,” Fadaghi says.
“The concept of charging for phone calls or SMS in the future is going to disappear, when people potentially use apps rather than the voice network that Telstra provides.”
This is the biggest risk for Telstra. Most analysts say even a change of government at the September election would do little to change the planned rollout of the NBN in any significant way. “The reality is that the NBN is there and Telstra will play the role it is playing now,” Budde says.
Credit Suisse analyst Bradley Clibborn agrees. “Telstra is well positioned with the NBN deal regardless of the election outcome,” he writes in a research note.
Thodey is right to focus on relationships with customers, as he has done under the Project New he started in 2010. In the new world of communications, Telstra needs customers to love it. If they do, the affection investors have shown over the past year will keep growing, too.