It has taken a long time but it is good to see that Telstra has finally recognised that a significant part of its business is infrastructure. The business model of infrastructure is rather different from that of services. Infrastructure will not necessarily achieve high short-term returns but it will deliver long term very steady returns and there are plenty of investors who are interested in such businesses.
I remember a discussion with a former Telstra Director Ted Pretty, somewhere around 2003, who challenge me when I suggested Telstra should maximise the value of its infrastructure. He asked; so ‘you want Telstra to be a pipe company’, to which I replied yes:’ but an intelligent, values added big pipe company’
Not long after that we had a discussion between Telstra and the electricity companies, trying to collaborate with Telstra to interconnect telecommunications infrastructure, but Telstra preferred to overbuild rather than to use somebody else’s infrastructure.
So, what has changed as Telstra now has launched two new infrastructure companies Infra Co Fixed, Infra Co Towers (as separate from their core services activities company: Serve Co).
Telstra is of course under enormous pressure, on the one side many of their traditional services are now provided by digital companies, free of charge. Furthermore, the NBN company is the infrastructure provider for the national broadband network. Telstra can no longer charge for its services what it wants as it is depending on the (high) wholesale charges from NBN Co.
At the same time, the value of the underlaying infrastructure has only increased. All digital companies depend on telecoms infrastructure to deliver their services be it: search, video, advertising, shopping, and all other services. At a time of high geopolitical tension, telecoms infrastructure has become even more critical national infrastructure.
A key reason for the restructuring is to position Telstra for the purchase of the NBN company once it gets privitised. But at the same time, depending on how much freedom the new infrastructure companies will receive from the Telstra Group, they can independently buy or lease infrastructure from others and at the same time sell and lease infrastructure to others in the market. In that way they can truly increase the value of their infrastructure assets. It could be a breakthrough in sharing infrastructure rather than overbuilding infrastructure – both in the fixed and mobile networks. In relation to the latter with 5G, thousands of new towers will have to be erected around the country and it does not make economic sense to have three networks, as well as many private companies, overbuilding all of that infrastructure.
It is a real change from Telstra’s long-standing position that it sees itself as a technology company, its real value is in infrastructure. The lost the technology battle with the digital companies.
But as mentioned, the question will be how much freedom Telstra Group will allow for these new infrastructure companies to operate independently based on what makes financial and economic sense. Will they be able to freely pursue the market opportunities? At the same time, the terms and condition under which it will operate will be of great interest to those companies who want to trade with Telstra (as sellers as well as buyers). For starters there will be skepticism among Telstra’s competitors, so we will need to wait for the details to see if Telstra will indeed be able to offer interesting infrastructure products and services. If they can do so they can indeed increase the value of the organisation through this restructuring.
If that is not really happening than the sole purpose of this restructuring is purely to dress themselves up for the privatisation of the NBN company. In that case we will have to see if that will indeed increase the value of the organisation.