After a turbulent decade it is coming to terms with its new technological, regulatory and business environment. The Telstra of the next decade is taking shape.
Telstra’s acquisition of small South Australia regional telco Adam Internet last week, though minor in itself, gives an indication of the way Telstra is headed, and the way David Thodey and senior management are thinking. The deal was small – the industry talk is that it was in the region of $50 to $60 million – and will add less than 100,000 customers to the millions Telstra already has. But it has significance beyond its size.
Analyst group Ovum was initially surprised at the Adam Internet acquisition. “Telstra has not acquired ISPs before, and Adam appears to be an uninviting target. It will add little scale to Telstra’s operations,” said Ovum’s analysis of the sale, which was not attributed to any Ovum analyst.
“Instead, we think this move is driven by a wider strategy to attack price sensitive segments such as low-end broadband and prepaid mobile. Telstra has performed poorly in many such segments for many years, missing out on significant revenue opportunities. This is a problem because the mobile market is saturating and customer retention is becoming more important. Greater effort is required to eke out more connections and keep them, and customer segmentation is the key to doing this.”
Telstra has wanted to improve its performance in price-sensitive segments for some time, says Ovum, but has made limited progress. “It has proven more successful in attracting high-end customers through network investment and device subsidies. Of course, the trick is to operate profitably in price-sensitive segments while expanding revenue.”
Ovum believes that Adam’s expertise in low-cost operation and online customer service was the main motivating factor for the deal, rather than scale. “It appears it wishes to buy in the expertise to attack these price sensitive segments in a profitable way. The fact they are keeping founder and CEO Greg Hicks as a consultant is consistent with this.”
Telstra says Adam will continue to operate at arm’s length, and under its own brand. The Adam brand and customer service model will be expanded nationally. This suggests that Telstra has decided that a separate brand is the best way to proceed. The use of sub-brands to address price sensitive customers is common amongst telco operators in advanced markets, says Ovum, and is common in industries such as airlines.
“So it is no surprise to see Telstra going down this route. In fact, it was probably only Vodafone’s recent weakness that delayed the inevitable. The only surprise is that is chose acquisition as the route.”
Last week Telstra also took over the youth Boost Mobile brand after Optus decided it didn’t fit with its strategy. Ovum’s analysis is consistent with the Boost deal. Boost is targeted at active youth interested in sport and extreme activities. Wholesale mobile virtual network operators – resellers like Boost – are a common way for telcos to capture a share of wholesale revenue in segments unreceptive to their standard marketing message.
Telstra recently held its AGM (annual general meeting). Thodey and Chairman Catherine Livingstone both made the point at the AGM that Telstra’s future is based on coexistence with the NBN, based on the deal hammered out earlier this year that will deliver Telstra a guaranteed $11 billion over the next few years as its copper wires in customer promises are replace with NBN fibre.
“Telstra’s transitional process clearly shows that it shares the vision that has been developed around the NBN,” says leading telco analyst Paul Budde. “But not only that, the company is now emerging as a leader in the industry – putting its new approach into practice, with a focus on the customer, innovation and new business opportunities including healthcare, education, energy, commerce and media.”
The deals with the NBN and the government over its role have moved Telstra into a new era where its regulatory and structural challenges are largely behind it. Telstra’s new reality is reflected in its improved share price, which has rebounded 30% over the last year. The share price in the past has been propped up a little by the fact that it has paid regular and attractive dividends, but at the AGM Livingstone said that future dividends were not guaranteed and would be paid based on the company’s performance.
In other words, just like a normal company. The fact that the market did not react adversely to her comments is an indication of Telstra’s new maturity, and the relative maturity of the environment in which it operates. Telstra is still sorting it out – Telstra Media was a disaster, for example – but all indications are that it is on track.
The big unknown is what might happen if the opposition wins the next election and changes the rules of the game all over again. But whatever changes may occur, they will be no more momentous than what has already happened, and will likely be accommodated with ease by all players.