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Wednesday, 22 March 2006 05:28

The stormy voyage of the Irish Rover


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Optus CEO Paul O'Sullivan, says that Optus is facing 'the perfect storm' in the telecoms market but with sails furled and hatches battened down is on course for good fortune when the storm passes. We're not so sure.

Expatriate Irishman O'Sullivan's view were reported last Monday, 20 March in an interview with the Financial Review. The day before he was featured in the UK's Sunday Times newspaper along with around 30 others of his countrymen and women who head major corporations around the world - a sort of Irish Diaspora of corporate high flyers (it was St Patrick's Day last Friday after all).

Reading the two reports it was hard to believe they were about the head of the same company. According to the FR, "When Paul O'Sullivan replaced Chris Anderson as chief executive of Optus 18 months ago, the company was headed for double-digit earnings growth and record profits. This month Mr O'Sullivan will rule off the first full year decline in earnings since Singapore Telecommunications bought the company in 2001...Industry figures reckon Mr Anderson left at the peak of Optus' growth leaving Mr O'Sullivan to deal with a much tougher operational environment."

According to the Sunday Times, "For his role in transforming Australia's second-largest telecom company, Dubliner O'Sullivan was named one of the top 25 business leaders by the Australian Financial Review last year." (funny, the FR article never mentioned that).

And O'Sullivan's description of Optus, as reported in the Sunday Times might sound to Australian's more like a description of its smaller rival, AAPT: "maverick, bloody irreverent, bloody cheeky".

The man who has presided over fostering that image for AAPT in recent times, recently departed CEO John Stretch, told the FR: "Optus long ago chose to operate as the second incumbent rather than the first challenger...Optus seems happy to be part of an oligopoly."

But back to that 'perfect storm'. There's an unspoken message in this choice of metaphor which O'Sullivan worked for all it was worth. "We have a strategy right now that has us sailing through the storm still chasing first prize...We do see the storm washing through the industry...Optus has the headwinds of [capped mobile plans] washing through our base (I thought waves washed and winds blew)...The additional headwind of mobile termination rates and...." And I'll spare you the rest. There was plenty more.

The unspoken message is that storms subside, calmer weather returns and with a fair wind and sails well set a ship can make good progress. But that's not what's happening in the telecoms industry. Global warming would be a better metaphor. Things are changing for the worse, and for keeps. Survival requires major strategic shifts.

That's the message we've been hearing out of Telstra ever since Sol Trujillo came on board last July, and it was a very similar message that Telecom NZ CFO Marko Bogoievski delivered to analysts in Sydney earlier this week.

Optus is a rather different beast: it does not have a legacy network with lots of local exchanges; it does not have the same percentage of high margin revenues from legacy voice services as former incumbents; and it very heavily depend on mobiles services. These account for over 70 percent of earnings. And, capped plans aside, three recently released reports suggest Optus is going to find this market very tough.

First, one from KPMG Australia entitled 'Jumping on the MVNO bandwagon: How niche can you get?' It contends that the market is ripe for a new generation of mobile virtual network operator, one that is able to leverage its existing markets, products and customers.

"Incumbent operators now accept that there are niches which they are not able to tap, and that her are real financial strategic, operational and customer benefits to be had in setting up new wholesale revenue streams...This is particularly relevant in the 3G arena where the are two competing network infrastructures...By encouraging smaller businesses whose speciality is not building networks but creating innovative multimedia experiences in their niches, 3G infrastructure owners can only stand to benefit from attracting niche MVNOs to their networks."

And what is Optus doing? It has just bought its largest MVNO, Virgin Mobile and intends to integrate this with a much smaller - and very niche - wholly-owned MVNO SIMplus, which sells prepaid services through ethnic retailers, predominantly in the Chinese community, and online, which was previously allowed to operate very much at arms length....more

It's hard to see how the advantages this niche operator enjoyed through its narrow focus will be sustained as part of a much larger business like Virgin, which is hardly a niche operator and one which I suspect under the ownership of SingTel is likely to lose the 'cheeky irreverence' that characterises it and other Virgin businesses, notably Virgin Blue.

Then this week comes another report from KPMG, the results of a global survey of mobile phone users. It's message, to put it bluntly, is that if operators think they can make a motza out of a whole swag of new content services delivered to mobiles, they are dreaming. The demand is there for sure but, conditioned by the Internet, people expect the content to be free. So advertising and sponsorship must be the source of revenue.

The third report, from new Australian research company, Market Clarity, observes that with the market now saturated (Market Clarity says there are more cellphone services in Australia than people over the age of six) growth can only come from adding value and securing revenue for that added value.

Market Clarity CEO, Shara Evans, said this is already proving a difficult task, with consumers slow to adopt high-return services such as mobile data and 3G offerings. "3G services show by far the highest average revenue per user in the mobile market. But so far, with about 750,000 3G services in operation at December 2005, the 3G space has yet to experience serious competition....As carriers try to convince users to convert from 2G to 3G services, we expect bundle competition in the 3G market to follow similar patterns to those already seen in the 2G market.

Today, Evans said, 3G services enjoy average revenue per user of over $80 per month, but in a more competitive market this is likely to decline towards the industry-wide average of just over $57 per month.

In other words, Optus, don't expect that perfect storm to blow itself out anytime soon. Or, as it was St Patrick's Day: the profit and growth rates of the past might prove as elusive as that pot of leprechaun gold at the end of the rainbow.


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