analysis Telstra’s aggressive moves to wind back competition in Australia’s mobile sector, coupled with the rapid decline of Vodafone and the stagnation of Optus, has re-opened a conversation about whether the telco should be forced to offer wholesale access to its Next G mobile network – including the new 4G components of it.
As I write these words this morning, a tall and gangly telecommunications executive is looming over a packed audience at Melbourne’s Exhibition Centre, his soft-spoken words crooning them into a sense of security about the company they have invested their hard-earned savings in, and his ready smile putting them at ease. His topics are the usual ones for this industry; the National Broadband Network, the need to boost customer service, average revenue per user, margins and so on.
But most of all, Telstra chief executive David Thodey is telling the Telstra AGM in Melbourne this morning about his company’s plans in mobile.
With its fixed copper network so tied up in regulatory loops and the Government forcibly upgrading it to fibre courtesy of the National Broadband Network policy and its other assets not reflecting as strongly its core strengths as a network builder and maintainer, over the past five years Telstra has largely turned its focus to its Next G mobile network as its growth engine and the platform on which so much of its future will be built.
This fact is apparent if you read Thodey’s speech this morning (available online in full as PDF). At times it seems like the CEO can’t stop talking about mobile. In the past three years Telstra has won 1.6 million new mobile customers in Australia, he says. Mobility and social media are “exploding”, and mobile broadband is now more popular than fixed broadband. “We are more connected as a nation than ever before,” Thodey enthuses, describing the trend as a “connectivity revolution”. As shots of Telstra’s new mobile app suite flashes up on the screen behind him, Thodey exhorts the audience to download them and try them out.
But wait, there’s more. Thodey takes the audience in detail through his company’s plans to invest $1.2 billion this year in the rollout of the next generation of 4G mobile infrastructure – a part of Telstra’s business which is “so exciting”. “The potential is enormous,” he adds. “We already have the largest 4G network capability in the country, with more than 500,000 4G customers. Our plan is to expand the coverage of 4G from 40% to 66% of the population by the end of the financial year.”
It’s a compelling vision which Thodey outlines. I remember the enthusiasm of then-Telstra CEO Sol Trujillo when he first announced the deployment of Telstra’s Next G network back in 2005 (it was launched a scant few months later after a rapid-fire deployment by Ericsson), and as a technology reporter I’ve reported on the development of the network every step of the way.
Although it was Hutchison with its ‘3’ brand (now part of Vodafone) which first introduced the 3G generation of mobile networks to Australia, and thus made mobile browsing and smartphones like the iPhone possible locally, it was really Telstra’s Next G network which took that concept to the mainstream.
If Telstra had not spent billions on Next G over the years, at a time when Optus and Vodafone were lagging behind in adopting the new technology and Hutchison was rapidly running out of capital to keep it afloat, Australia would not be the smartphone-loving, tablet-loving, mobile early adopter nation that it is today. There’s a reason why companies like Apple, Samsung and HTC love to launch their devices in Australia rapidly after they launch in the US. Because we lap them up; and we lap up the high mobile speeds which allow them to access data on the go.
And there is no doubt that Telstra is now reaping the success from its first-mover advantage. At a time when Vodafone is losing hundreds of thousands of customers a year due to its ailing network and historically bad customer service, and Optus’ mobile customer growth has stagnated, Telstra is adding on, as Thodey noted, hundreds of thousands of new mobile customers every quarter; while keeping its mobile prices at a premium level. It’s cash grab time when it comes to mobile, for Telstra – aye, and it’s customer acquisition heaven.
But now Telstra has a new problem; indications are starting to firm up that it may become a victim of its mobile success.
Buried deep in some of the company’s investor documentation released this week, as highlighted by the Financial Review, was the company’s startlingly frank admission that it feared it might be forced to open up its flagship mobile network – its prize asset, the crown jewels – to competitive wholesale access.
In a segment labelled ‘Government and regulatory intervention’, Telstra wrote: “Mandated access to Telstra networks: a key part of our strategy involves deploying nexl generation networks and services, including our Telstra Next G network which incorporates 4G LTE technology. Regulatory change may require us to allow competitor access to our next- generation networks and services which could materially adversely affect our investment returns, earnings and financial performance.
It’s not hard to see why Telstra fears this kind of regulatory intervention in its business; after all, this is precisely what happened to its fixed telecommunications networks. During Trujillo’s time especially, the company was forced by rivals such as iiNet, Internode and Optus, through a series of decisions by the Australian Competition and Consumer Commission, to increasingly open its copper network to competitive access.
This created the worst of all situations, if you’re a Telstra executive: The company was forced to actively support its rivals to diminish its market share. Not precisely the fate Telstra would wish on its mobile network – the one it is currently spending $1.2 billion upgrading to take 4G speeds right around Australia.
And there are indications that, flush from their regulatory success in spurring the imminent separation of Telstra’s wholesale and retail divisions courtesy of the National Broadband Network strategy (much of the basic thinking for which originated in the minds of executives working for Optus), Telstra’s rivals may be seeking access to Next G. Indeed, in an opinionated article published in July, Vodafone’s new Australian chief executive Bill Morrow basically laid his company’s cards on the table, saying:
“The changing nature of the telecommunications market does not require a change in policy frameworks, but it will require a change in regulatory focus. Traditionally, regulators have treated ‘fixed’ and ‘mobile’ as separate markets. Regulatory assessments have not acknowledged that Telstra’s dominance in fixed telephony has significant impacts on the mobile industry. In a converging world this siloed approach is no longer tenable.
We need an urgent reassessment of the regulatory approach to the telecommunications industry. Without careful attention, this disproportionate market dominance could continue after the migration to the NBN. For consumers to benefit from the opportunities of a converged telecommunications market, the Government must continue to take action to overcome key market failures and redress the serious imbalances in the Australian competitive landscape.”
What are these ‘imbalances’ that Morrow speaks of? Why, the fact that Telstra can afford to spend billions on its mobile network, of course, while Vodafone cannot, and Optus can only just limp over the line if the bean-counters at its parent Singapore Telecommunications let it off the leash to take the fight to Telstra occasionally (as it is now doing in 4G). At last guess, Telstra was spending over twice as much as Optus on its mobile network on a yearly basis, which may give you some indication as to why its network is so superior.
Telstra has made some gestures towards opening up competition in the mobile space over the past year; allowing tiny firms such as iTelecom to use its infrastructure. And no doubt if you asked its Wholesale division, the company would tell you all about how open its infrastructure is for competitive use.
However, we still don’t see major fixed-line broadband players such as iiNet or TPG reselling Telstra 3G mobile services (those companies are still tied to Optus), and Optus itself has very little access to Telstra’s 3G network; as does Vodafone. In addition, it appears that Telstra is limiting what tiny wholesale customers it has to reselling 3G speeds; keeping the 4G premium layer to itself. And when you consider that more than 500,000 Telstra customers are already using its 4G network, that’s already a significant chunk of the market.
It’s not hard to make parallels between this situation and the industry dynamic that existed in the early years of last decade, when companies such as iiNet and Internode started getting serious about using the ACCC’s power to force Telstra to open up its copper network. First came basic wholesale access, then came the ability to install DSLAMs in exchanges for faster ADSL speeds, and finally iiNet, Internode, TPG and others just started wholesale exporting Telstra customers to their networks in large slabs, as the ACCC basically forced Telstra to cut its market share down to acceptable levels.
All it will take for a similar situation to start developing in the mobile sector is for Vodafone’s fate – already hanging by a thread – to take a significant turn for the worst, leading to a situation where it may not be able to continue investing in its mobile network at a pace that allows it to compete with Telstra and Optus. Hell, who are we kidding? Despite the protestations of its CEO, Bill Morrow, that 4G speeds are on the way for Vodafone customers in 2013, the launch of the iPhone 5 in Australia, where Vodafone was the only company at the party not to have a 4G network to support it, illustrates starkly that Vodafone can no longer keep up. The company’s decision to opt-out of securing the next decade’s worth of wireless spectrum assets merely confirms this.
If Vodafone truly does fall in any major way, the Government and the ACCC will be faced with a situation where Australia’s mobile sector is virtually a duopoly, with the customer base carved up between just two players, and only one of those players – Telstra – raking in new customers. The other, Optus, would also benefit from the failure of Vodafone in this market, but not in any way as strongly as Telstra would.
In this eventuality, the logical step for regulators and legislators is to follow the lessons of the past and chain Telstra’s executives to the negotiating table, likely forcing the company to open up its 3G and 4G mobile networks on more equitable terms that would allow rivals without their own infrastructure, namely iiNet and TPG, to properly enter the mobile market. Maybe Vodafone could even limp on as a Telstra reseller … if the company’s current rate of customer decline doesn’t slow down, that may just be the most appropriate fate for it, in the 5-10 year timeframe. Personally, I suspect that the company’s masters in the UK and Hong Kong would actually prefer that; certainly Vodafone has shown an appetite for entering the retail fixed broadband market only if it could do so through someone else’s infrastructure – in that case, the NBN.
Just how likely is this scenario? To be honest, I’m not sure. But Telstra, Optus and Vodafone are clearly aware of the possibility, and I have no doubt the ACCC and the Government are as well. Right now, the status quo is continuing to rule Australia’s mobile sector. But dramatic change is looking more likely, every time Telstra reveals that it has gained more mobile market share, and every time Vodafone reveals it has lost more.
Image credits: Telstra