Telstra is finalising its restructuring that we discussed in previous articles here and here.
With the restructuring, it very much looks like the focus will shift towards infrastructure rather than digital services — that battle might have been lost.
While the Telstra restructuring is heralded as a good move, it is important to put this in the broader context of what is happening in the telecoms market. If we analyse this situation, it is easy to see that this is not a “voluntary” restructuring. The telco industry has seen a slow decline over the last few decades, with the digital giants taking over a lot of the revenue from traditional services such as voice calls, data services, messaging and so on.
The National Broadband Network (NBN) is another disaster for the telcos as that company has squeezed margins and is frustrating the market as the next new telco monopoly. Telstra – as other telcos – are suffering from this declining market and Telstra’s structural changes need to be seen in that light. They very urgently need to restructure to try and save their skin.
People like me have been arguing for decades that the telco industry needs to restructure to align itself with the digital developments that are happening all around them. However, they preferred to hang on to their vertical integrated business models, milking whatever they had for as long as possible and basically fighting rear mirror battles. Back in the early ’00s in a TV interview, I argued for structural separation to which former Telstra director Ted Pretty said “so you want us to be in dumb pipes?” My answer to that was, “no, in intelligent pipes”.
Now, 20 years later, we see the digital giants stronger than ever in the telecoms services market. We also see large scale global telecommunications infrastructure developments happening; the number of submarine cable projects that are underway is mind-boggling.
Look at the international telecoms infrastructure activities from Macquarie Bank (now also buying Vocus Communications) and the onslaught that Low Earth Orbiting Satellites (LEOS) are preparing on the market. The market is very rapidly internationalising in the hands of a relative few global operators. After all of that happened, at five minutes to 12, Telstra has now finally decided to start a process of structural separation to try and play a part in the market.
While I applaud Telstra’s belated structural changes, the question remains — is it too little, too late? A key question is with how much independence will each of these units get to address these challenging market conditions. A key problem is that to do so, they need to be able to compete. For example, if ServeCo needs new capacity, they should be free to use any infrastructure supplier, not just InfraCo. The same applies to the other units.
The next step will be a full separation of these units with separate shareholdings — how long will the holding company resist this, how much more damage needs to occur within the declining telco market to move into that direction? I can see Macquarie Infrastructure and Real Assets (MIRA) being interested in buying InfraCo Fixed and/or InfraCo Towers. If this makes sense, will it be allowed to happen? In relation to the NBN, if Macquarie is interested, could they outbid Telstra when the NBN comes onto the market?
Apart from these straightforward commercial developments, there is also the increasingly more important national interest argument for telecoms infrastructure. If telcos keep struggling, what will be the role of the Government in all of this? Will all national telecoms infrastructure be nationalised?
The Telstra restructuring is a key development in a process of market changes. On a national level, this market is declining. On an international level, it is growing and at the same time, telecoms are playing an increasingly more important role in geopolitics.
There will be many more changes happening in the national telecoms industry over the next few years, the Telstra restructuring is only one step in this process.
Paul Budde