Thursday, May 31, 2018

What Ails Telstra Will Ail Many Others

One should not pin too much meaning on a single quarter’s results, but Telstra has had a rough time over the last couple of years, losing half its equity value since 2015.

The most-recent quarter had Telstra getting a downgrade on its bond rating, mobile average revenue per user dipped nearly three percent in six months, and ability to cover its dividend is seen as in doubt.

It is not that Telstra is failing to gain accounts; it is doing so. But the revenue contributed by new accounts does not compensate for lower ARPU across the board. According to an analysis by Citi, incremental mobile service revenue, for example, almost stopped growing in 2015.

The big driver of change was postpaid revenue, which fell off a cliff in 2015.

In some ways, Telstra made a choice similar to those made by U.S. telco Rochester Telephone back in 1995, when the firm divested its telco monopoly in exchange for freedom to enter unregulated businesses, especially long distance.

At the time, long distance was viewed as a high-growth, higher-margin business. Of course, both the local telephone business and then usage of long-distance services, along with long distance ARPU, reached a peak between 2000 and 2002.

Some might suggest that, as rational as was Telstra’s decision to abandon its fixed network business to focus on mobile (a higher-growth business), Telstra is caught, as was Rochester Tel, by changes in end user demand.

Australia’s mobile market is competitive and near saturation. And that saturation means internal growth does not exist, while profit margins are dropping because of the intense competition.

There are many differences of opinion about former incumbents. Many who compete against them feat their remaining power. But it also is hard to ignore the maturation of the business; the near-zero growth rates; the shift of value elsewhere in the internet ecosystem and the consequent damage to account volume, gross revenues and profit margins; the amount of competition and the uncertainty of alternative growth models.

Some will argue firms such as Verizon, AT&T, NTT and Telstra still remain big and dangerous competitors, if no longer monopolists. Over the longer term, some will argue, the big tier-one telcos face existential challenges in a world where connectivity prices keep dropping towards zero.

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