The announcement of 2,800 job losses at Telstra is an ‘OMG’ moment. This is not just a readjustment of the business or some fine-tuning; it goes far beyond that and clearly indicates underlying issues forcing the company to make such a dramatic move.
For years, it has become clear that Telstra has missed major opportunities that have arisen over the last few decades. When the internet, smartphones, and digital media started to evolve, many telcos, including Telstra, tried to protect their lucrative telephone and data businesses. Rather than embracing new technologies, they attempted to stymie them. A key reason for this was that the emerging new media companies could offer their services at significantly lower prices, and the telcos were reluctant to enter this new era as they didn’t want to reduce their prices. The rest, as they say, is history. From that moment onward, new digital media became the big tech companies, and telcos were relegated to being utility players. The big tech companies are now Telstra’s main competitor in the enterprise market.
Of course, over time the telcos realised they were simply being bypassed and they started to act, be it is too late. Over the decades, we have seen announcements of ‘breakthroughs’ in mobile and broadband that would open up new revenue streams. However, these breakthroughs never materialised. Revenue increases came from more people using mobile phones and broadband, but this is essentially utility-based revenue. Very few, if any, of the hyped-up new revenue streams have emerged. 4G simply replaced 3G, and 5G is simply replacing 4G. We are not paying significantly more for the new technology, nor are we utilising that technology for many new applications. As a result, over the last few years revenue has hardly grown in the telecommunications industry.
Telstra’s cost cuts over the last decade or so are indications of this reality.
What makes this event different, however, is the cuts in the company’s enterprise sector. This sector essentially includes the top 1,000 companies in the country. The way I see it is as follows:
Telstra has been serving this sector for a very long time (over 100 years). For most of that period, they were the sole provider as a monopolist. Even after deregulation, the company remained by far the largest supplier to this sector. Over the decades, the products and services for this sector have been continuously updated, extended, and changed. However, a large legacy element remains in this business. It looks like this will now be addressed in a very drastic way. Rather than upgrading and improving products, they will simply cut them and start creating entirely new products, better suited for the new environment of AI, cloud computing, cybersecurity, increased regulations, and so on.
These new tools are a double-edged sword. On one side, these new tools allow the company to build new products better suited to the new environment their customers operate in. At the same time, these tools can also be used internally to run their own operations better, with more reliable, faster decision-making and less reliance on humans (e.g., reducing human error). In other words, at lower costs.
Returning to my earlier comments, the nature of the business is moving towards being a utility, with lower margins and high levels of price competition as the major differentiator. The corporate market is far more complex, and all the products and services here have to a very large extent been custom-made. This, of course, allows for better margins and therefore higher profits. The company has faced stiff competition from Optus and many players in the ICT and Big Tech markets. The announcements clearly indicate that Telstra is now determined to regain its position and increase its market share in this far more lucrative sector. This is a very tough sector with highly specialised people and products; a market that is developing incredibly rapidly. Telstra will have a tough job regaining and extending its position here.
The fact that its share price dropped is a clear indication that the financial market also understands the challenges Telstra is facing.
Paul Budde