Fixed-line Fortunes Flailing, Telstra Finally Bites The 'bucket Plan' Bullet
The Age
Saturday June 24, 2006
TELSTRA'S decision to plunge into the market for capped fixed-line call packages was inevitable. That doesn't lessen its significance.
This week Telstra announced a number of fixed-line plans. The common theme was either unlimited and untimed local and STD calls, or a cut-price bundle of local and STD calls with fixed monthly charges. Even without the recent Optus launch of "bucket" plans for its fixed-line services, the move was predictable. But that doesn't make it less significant. The fixed-line network, or public switched telephone network (PSTN), has provided, and still provides, Telstra's "rivers of gold" - the high-volume, high-margin revenues that underpin its profitability. Telstra has held back from offering the kind of products it launched on Thursday precisely because it didn't want to sacrifice the margin generated by the PSTN.But in the end its hand has been forced. The PSTN stopped growing two years ago as a result of the combination of its own "rebalancing" of the relationship between line rentals and call costs, and the initial cannibalisation of PSTN call volumes by wireless substitution.This year Telstra expects the PSTN revenue base to shrink by about 8 per cent. In the first half alone, the loss of revenue amounted to more than $300 million. With margins of at least 60? in the dollar, that's a lot of profit that simply evaporated.Most analysts expect the decline in the PSTN to continue for at least the next four or five years, at a similar rate. But the current experience may only be a taste of a lot worse to come. The reasons for the accelerating implosion of the PSTN revenues are varied, but ultimately have to do with the emergence of cheaper and/or more convenient alternatives.The most obvious alternative, and the one that has had the most impact, is wireless telephony. That impact became more marked as overcapacity in the wireless sector drove down call costs and led to the introduction of the "bucket", or capped plans. Those made wireless a cost-competitive alternative to fixed-line telephony, with the bonus that it is portable.The pressure from wireless substitution isn't going to ease, with the sector even more competitive today than it was a year ago. The rolling out of 3G services will make wireless even more attractive. Telstra knows that it has held back the tide better than its offshore peers. But it also knows the PSTN dam breached by wireless has developed other leaks.The remarkable, if belated, take-up of broadband has enabled households to do away with dedicated second lines for dial-up internet. It has also facilitated the growth in the use of email as a substitute for voice calls.Given the explosive growth in broadband connections, that impact will be soaring. Unlike fixed-line telephony, where Telstra has a near monopoly, broadband is highly competitive and Telstra, while the market leader, isn't as dominant.As it loses high-margin fixed-line revenue to wireless and broadband competitors, it claws back only some of that revenue, at much lower margins, from its own offerings in those markets. The roll-out of competitive broadband infrastructure, using unconditioned local loop (ULL) access, will exacerbate the effects. At present, Telstra collects a wholesale margin from its broadband competitors. As more of them install their own equipment in its exchanges, it will lose most of that margin.That helps explain why Telstra was irate about the draft decision the Australian Competition and Consumer Commission made on the cost it will allow Telstra to charge competitors for ULL access. It will make the broadband opportunity for its competitors more profitable and compelling, accelerate the loss of wholesale revenue and intensify the pressure on the PSTN. It will also bring forward the point at which internet telephony, or voice-over-internet protocol (VoIP) telephony, goes mainstream. Telstra knows that as rival infrastructure proliferates, so will VoIP and near-costless calls bundled with broadband services. As yet, for a number of reasons, VoIP hasn't seized the mass market's imagination. It will.Telstra could have tried to milk the PSTN and its margins for a little longer before moving to capped plans, sacrificing revenues and margin - and, because call volumes will presumably be higher than they would otherwise have been, increasing both operating and capital costs. Its decision to move now is an indication of the sense of urgency, as well as a pragmatic acceptance of the inevitable.Capped plans won't stop the decline in the PSTN revenue base but, given that the number of access lines is falling more slowly than call volumes (presumably partly because they are required for broadband) it probably considers it may be able to slow the rate of decline and retain customers who would otherwise be lost.Some revenue and margin is better than none, which was broadly the direction in which Telstra's core PSTN product revenues were heading had it left its traditional pricing structures and signals in place for much longer.-- bartho@theage.com.au
© 2006 The Age
