Telecom in the new era

Telecom CEO Simon Moutter grapples with finding a new direction for the company following structural separation

It’s the cash cow of every incumbent telco around the world, and it’s declining – but slowly.

Almost a quarter of Telecom New Zealand’s revenue comes from landline calling. According to its annual report, Telecom earned $1,049 million from fixed access and calling – the Public Switched Telephone Network (PSTN) – in the financial year ending June 30, 2012.

The reduction in this revenue is identified in the annual report as “one of the key risks facing Telecom” but something called “Vision 2013 strategy” will grow revenues in broadband, mobile and ICT (Gen-i) to combat the fall.

Buy After Structural Separation from the Amazon Kindle store for more indepth information from this article and transcripts from the leading industry players.

The annual report was written before Simon Moutter joined the company as CEO in August. It’s his second tour of duty at the company, as he served on Theresa Gattung’s executive team and was acting CEO during the months between Gattung’s departure and Paul Reynold’s appointment in 2007.

Moutter is working on his own strategy, which is due to be released next year. But in an interview with Computerworld in November he provided some insight into the shape of the new Telecom.

“Telcos are mostly going to sell gigabytes in the future. The revenue that funds all our massive infrastructure, whether it be fixed or mobile, is going to come from selling gigabytes as opposed to minutes and messages.”

The way to differentiate plans will be by the amount of data that is sold, according to Moutter.

“Data is the saleable item and will be bought in parcels and volumes, and it’s good for the market to have alternatives that are cheap and low volume and medium and high. Some fast, some slow. Unless you create a diverse range of offers that meet every market, you end up with an unhealthy market.”

Moutter says there is no point in uncapped plans. “That would be like selling electricity with unlimited electricity for $50 a month; how the hell would that be efficient? That would be insane.”

But don’t telcos sell more than just a pipe? They sell services, such as voice calling and content. Telecom has already one failed experiment in the area of content delivery – a digital service in partnership with TVNZ and TiVo. Would it contemplate another when launching its residential fibre plans?

“At the moment the field is open in New Zealand, and all of us will have to make a choice about the role we play in that. But in a world where none of us own the access line, we’re all effectively resellers of access,” Moutter says.

In other words, content makes sense for telcos when they own the network and are competing against another network. It makes less sense when all service providers are retailers, and the infrastructure owners – Chorus and the Local Fibre Companies Northpower, Enable Networks and Ultra Fast Fibre – are prevented by law from becoming RSPs.

Content issues aside, how will Telecom deliver a voice service as part of its residential fibre plans?

“I’d be very negative about trying to continue to offer a PSTN equivalent. We’ve got fibre so of course we should be working toward software-based voice,” Moutter says.

“Now whether that’s on fibre or is better done on the mobile in a fibred home, or what the sequencing of that looks like, I’m not wedded to. I know in my own home I’d just take a naked fibre broadband service and I’d happily make my voice calls on my mobile today.”

“We’re talking about 2017 before fibre is out there, so over that period of time a lot is going to change. If that revenue for voice has shifted to mobile that’s fine.”

Which sounds like Moutter could be positioning Telecom to be a big, fat, dumb pipe – albeit one that carefully parcels out bandwidth.

Telecommunications Users Association of New Zealand CEO Paul Brislen says telcos aren’t good at competing with over-the-top players such as Facebook, Apple and Google.

“They’re just too big; they’re focused on network, on sales, on acquisition, on churn, ARPU (average revenue per user). Nobody is thinking ‘hey, let’s whip up a quick app and chuck it out and see what happens’,” he says.

“My ideal telco in 10 years’ time will be one that provides me with a connection to the internet and then gets out of the way.”

But a big, fat, dumb pipe parcelling out bandwidth isn’t going to be enough to keep the 7,000 or so current staff at Telecom in gainful employment. Telecom’s head count far exceeds rival Vodafone’s 3,200 staff (and that’s counting staff from its recent acquisition of TelstraClear). So how will Moutter trim it?

Moutter says he can’t make any decisions on head count yet and that it will depend on how fast the company can tidy up its systems and IT stack which he says is “complex from having seven years of regulatory pressure upon it”.

“In the lingo of telcos, OSS and BSS [Operating Support Systems and Business Support Systems – how a telco provisions and charges for services] we have hundreds of IT platforms, all joined together and a string of various ages, and it makes service delivery improvement, product development – every component – very challenging.”

“We end up having to put veneers on the front and have a lot of people in the process to make sure that when the system can’t cope we have people who make up for it.”

He says if the company decides to become a “simplistic data pipes business” then “shrinkage” would be necessary in order to be efficient.

Moutter says its ICT division Gen-i is also labour intensive, although he appears committed to retaining it. In his first tour of duty at Telecom he was responsible for its creation [from the purchase of Gen-i and Computerland].

Gen-i had 14 per cent of the New Zealand IT services market in the last financial year, and according to Telecom’s annual report, this makes it the domestic market leader.

It’s had a few setbacks lately, however – it didn’t bid for the ACC contract, and it’s had to concede large chunks of a Ministry of Justice contract. But this doesn’t appear to faze Moutter:

“You can’t win every bid so its normal to have some movement, customers make different decisions about how they want to partner or commoditise, to insource or outsource,” he says.

Gen-i’s competitors – Revera, Datacom and IBM – have all made recent investments (in the tens of millions of dollars) in datacentres and have been rewarded with a place on the government’s Infrastructure-as-a-Service supply panel. Will Telecom make similar investments?

“We’ve just announced we’re building three brand new datacentres,” he says.

These are in Auckland, Wellington and Christchurch are will be built with the next two years.

Where Moutter is reluctant to invest is in local loop unbundling. In two years Telecom will be able, under the terms of structural separation, to put its own equipment in exchanges.

“It’s not where I’d prefer to go. We’ve got a government which has made the bold, ambitious move to drive fibre to the home. I’m much more interested in what we can do to make that real for New Zealanders. That’s actually today quite a hard sell, but as service providers we should be inspired by that possibility.”

He says he will buy ‘inputs’ from anyone.

“I’m 100 percent clear what my future looks like. I buy access inputs to deliver services to end customers. I don’t see myself as needing to be involved in that [unbundling] if I’ve got multiple providers who will sell me access inputs, whether they are fibre or plain old copper. Depending on the need, then I’ll buy them from anyone.”

* This article, together with Chorus: a year on from the demerger, marks the first anniversary of the structural separation of Telecom on December 1, 2011.

An extended version of this article is available as a Kindle eBook, After structural separation, for $2.99 at amazon.com. It includes interview transcripts with the following leading industry players Telecom CEO Simon Moutter, Chorus CEO Mark Ratcliffe, Telecommunications Commissioner Stephen Gale, Vodafone chief strategy officer Zac Summers, Labour ICT spokesperson Clare Curran, CallPlus CEO Mark Callander, Telecommunications Users Association CEO Paul Brislen, and and InternetNZ CEO Vikram Kumar.