The case of the disappearing revenues

Telco chiefs give their views on financial challenges at Summit

At the Telecommunications and ICT Summit during the CEO Series, as each panellist completed their speech they left the stage, leaving the final speaker Kordia's Geoff Hunt to remark that he felt as if he were in an Agatha Christie novel: what was up with the disappearing chief executives?

It was of course a light-hearted remark, but it felt strangely apt; their physical departure a kind of metaphor for their declining revenues.

The stage was set earlier in the day by Telecommunications Commissioner Ross Patterson who began his speech with the following observation:

"The transition from the PSTN to an IP-based network brings about a paradigm shift in market structure and dynamics, the value chain alters, revenue sources change and business models are adapting. A number of issues arise. The greatest level of investment is required at the network layer to address broadband speed, the speed is regarded by consumers as a commodity and revenue does not match investment," he told the audience.

The telcos are being forced to invest in an infrastructure that is unlikely to provide the same revenues as the copper network. And to compound matters it appears that the riches that are to be gained in a fibre network may be taken by those companies that haven't paid a cent towards it - Google and Apple are the global examples most often cited.

TelstraClear CEO Allan Freeth was typically forthright in airing his concerns about the impact the government's Ultra Fast Broadband initiative is likely to have on the existing players in the telco space.

"Telecommunications is an industry that needs a lot of capital. Therefore businesses operating in this industry need scale and volume to create enough wealth and value to sustain themselves and to make more capital investment, and then to provide a fair and adequate return to their investors.

"Fragmentation of the industry and the consequential diminuation of profit pools means that telcos and related businesses do not generate enough value to be self-sustaining. In that situation telcos do not have enough strength to be the load bearing wall of the house, that role, as a consequence must fall to government.

"I would contend right here, right now that we're renovating an architecture with not enough thought of consequences intended or unintended in the medium to long term," he warned.

"The dilemma of over the top providers such as TradeMe, eBay and Google making the money while the telecommunications industry incurs the cost is still unresolved. Telcos' core business is going backwards," he said. There are a number in the industry that contend it won't be long before the core business of telecommunications - voice - is free. In fact a recent study showed the decline to be faster than the core business of the postal industry."

Freeth says TelstraClear invests around $100 million a year in New Zealand telecommunications, the most recent being a $10 million upgrade of the HFC cable in Christchurch and Wellington. This will provide subscribers with downstream speeds of 100Mbps and upload speeds of 10Mbps. The company intends to offer some users the chance to trial fast speed modems. "That's the telco equivalent of allowing you to take a Formula 1 car around the Monte Carlo circuit," he says.

Freeth was followed by Vodafone CEO Russell Stanners who made the rather headline grabbing suggestion that the taxpayer's contribution to the UFB should increase from $1.5 billion to $5 billion (see story from Computerworld online below).

Stanners pointed out that it is not only the fixed line revenues that are suffering. Mobile is also wrestling with a similar conundrum of high customer expectations in the face of declining revenues. He told the audience that a Vodafone Group company in Europe has found that while just 20 percent of its revenue is generated from mobile data, it consumes 65 percent of the network's capacity.

In his speech Telecom CEO Paul Reynolds talked about the lessons of XT, highlighting the amount of media coverage the outages received, but claiming that the independent review showed that the network had been specified to a high level and pointing out that New Zealand may soon have three 3G networks.

He says Telecom has 25,000 kilometres of fibre in the ground already and that it would be "bonkers" to duplicate assets. He says that structurally separating Telecom is complex. "Its not like cutting scissors through the network, the issues are huge", and that it has only been attempted in two countries - Singapore and Mongolia (the latter, according to Reynolds, unsuccessfully).

The UFB will create a "seismic shift" in New Zealand telecommunications, and it was considered so important by Telecom that three of its top executive team are engaged in working towards a solution. Reynolds was clear the company's preference is to work with the government, but if that didn't occur it would compete although this would not be desirable. "The last thing New Zealand Inc needs is for our largest private investor to end up competing with the government."

Reynolds says the UFB process is costing Telecom's shareholders. "Anything from 24 percent to 33 percent of the value of our company is lost to our shareholders because of the uncertainty."

Surviving the demise of the technology your company has built a robust business case on is clearly challenging the CEOs of the country's top three telcos. However,the last panellist, Kordia's CEO Geoff Hunt,provided some insight into how his company was managing the switch to a new technology platform. The State Owned Enterprise was previously the transmission arm of TVNZ and responsible for providing the analogue television service. It has aggressively sought out new revenues in preparation for the switch over from analogue to digital television, which has included the acquisition of ISP Orcon, the purchase of WiMAX spectrum (incidentally, Hunt says Kordia is looking to partner on a national WiMax rollout), and the possibility of building a trans-Tasman cable.

Hunt says the business will survive the switchover to digital and the subsequent loss of revenue from analogue transmission — if it occurs in 2015 it will be a "bump" in Kordia's revenues, if it occurs in 2013 it will be "pothole".