Attaining Nirvana won't be easy

Stuart Corner
Monday, 10 October 2005 11:00

Opinion and Analysis

An investment bank has upped its estimated value of Telstra based on its estimates of the upside of Telstra migrating to a next generation network, but has it factored in the difficulties of this migration and exploiting the NGN's advantages?

At last, some good news for Telstra's long-suffering shareholders. Investment bank, CS First Boston has upgraded its recommendation on Telstra from 'neutral' to 'buy' and reckons the shares are worth $4.78 each. That's about 70 cents more than they were worth when the bank released its conclusions.

These conclusions are based largely on its assessment of the potential cost savings that could be achieved from Telstra migrating is multiplicity of present day networks to a next generation network (NGN) where every service: fixed and mobile voice, data video etc is carried and switched, as IP packets over a single core network

There's nothing new in this. It's the Nirvana to which all old world telcos like Telstra aspire and it is certainly the way of the future. But the big questions are: can old world telcos like Telstra make the transition successfully, and survive in the new world? When should they make it? And how should the go about it?

What was new in the CSFB study was that the bank had put some figures on the investment required to build Telstra's NGN, the ongoing savings that would result and the jobs that could be shed. Respectively about $5 billion, $1.2 billion per year and 8000.

Looks like a no-brainer doesn't it. The downside is that the revenue in this brave new world won't come from the traditional services but from a whole host of new services made possible by having just one network on which everything is packetised.

Hurdle number one will be not killing off these new services at birth through fear of cannibalisation. Telstra knows all about this. There have been plenty of examples over the years. Things should be different this time. The consequences of failing to evolve are likely to be fatal.

Hurdle number two is timing: the technology is evolving rapidly. Making a massive investment too early could mean investing in early obsolescence. Leave it too late and you'll miss the boat.

In fact Telstra came very close to being one of the first national telcos to make a large scale transition to NGN, back in 2000 when it signed a letter of intent to award Nortel a $180 million contract for softswitches to migrate its telephony services from circuit switched PSTN to packet-based Telstra got cold feet on that one and a couple of years later picked Ericsson technology to do the same job, but on a much smaller scale: simply to meet the need for additional capacity in its fixed network rather than investing more in the old circuit switched technology.

Had Telstra gone ahead with its plans at that time it would have been a real pioneer and would be now have a highly functional NGN and a wealth of experience: or a disaster on its hands.

The most ambitious NGN upgrade announced to date anywhere in the World is BT's 21CN project, for which suppliers were selected just a couple of months ago. Closer to home Telecom New Zealand announced its plans just last month.

TNZ has outsourced not only the management but a deal of the planning of its network to Alcatel under an arrangement which is without parallel anywhere in the world. As a result, in recent years there have been several very detail papers on this network in Alcatel's excellent journal, the Alcatel Telecommunications Review.

In one such article, from about two years ago, written jointly by executives from Alcatel and Telecom NZ, the authors wrote that the migration to an NGN would involve major changes to Telecom NZ's business model and processes, not just its technology. "[A] crucial aspect of the migration to NGN is that it transforms the whole of Telecom's business. It involves not just network assets, but also systems, operational processes, staff skills, and sales and marketing effort...Failure to recognise this as a business transformation will increase the risk that costs are incurred without any benefits being achieved."

The authors also said that NGN would succeed in delivering a lower cost structure only where multiple services could be sold to customers, and would only deliver profitable new revenue streams if new services were launched successfully from the technology platforms that become available.

And for all these multiple services to be offered profitably, ordering, provisioning and billing has to be super-streamlined. Today telcos have hundreds of separate systems for separate services. When every service is reduced to IP packets it should be possible to have just one billing system which looks at each packet: and what service it represents, who sent it and where it is going and gives the sender just one bill every month for all their many and varied services. That's the theory. Achieving it, well that's another story.

Once upon a time a new carrier with no legacy systems to worry about had grand vision of developing an integrated operation support system covering all aspects of its operations. It planned to invest $1 billion over the first ten years of its life. That carrier was Optus. A decade and a half on little remains of that vision and Optus has a plethora of operation support and billing systems, just like every other large carrier.

So, it's all very well to give impressive numbers for what Telstra could achieve by an NGN migration. But these should be tempered with some assessment of the very considerable challenges that must be surmounted. Achieving Nirvana ain't easy. Several lifetimes are normally required.