Summary
Should Telstra split into two businesses: network and services respectively? The answer might be found in India.
Countries like India that need to drive costs down so that they can offer services to customers on very low incomes are leading the trend. Soon the rest of the World will be forced to follow.
Telstra should look to the future and not to its monopolistic past.
Telstra should look to the future and not to its monopolistic past.
Analysis
The fundamental issue is: why should Telstra split itself into two businesses: network and services respectively? Surprisingly, the answer might be found in India.
A recent review of the trends of telecoms around the World in the Economist, pointed out that much of the innovation in telecoms is coming from India.
The need to recruit customers from among the 3 billion un-served possible subscribers in the developing world is driving tariffs charged for telecoms services to levels that are uneconomic for traditional telecoms operators in industrial economies.
Efficiency in any industry is driven by efficient investment in infrastructure and by prices that are determined by market competition.
Competition to serve low income subscribers is forcing prices down. To cut costs, many companies in the developing world are outsourcing the management and operation of their networks.
A telecoms company has at its core a network of cables, fibres, trenches and towers that is expensive to reproduce. On this technology platform it offers customer services.
In the days when voice was king and transmission was by circuit switched networks, the ownership of a network gave the operator of the customer services business the opportunity to defend its services operation by anticompetitive denial of access to its network.
This monopolistic attitude was reinforced by monopolistic regulatory regimes that forced new entrant to reproduce existing networks.
Traditional regulation made as much sense as telling new entrants to the road transport sector to “build your own road.” The result is inefficient investment with 5-10 fibre optic cables run alongside each other when each one could carry all the traffic.
A recent study suggests that in Europe alone €123 billion could be saved by sharing infrastructure.
New technologies, in particular the creation of digital platforms for a whole range of services are driving change. Today telecoms, is all about data traffic, using internet protocols. Like the internet, it no longer means that the company you pay will deliver your data or call.
The advantage gained by defending service provision from competition by the exclusive use of infrastructure is simultaneously being destroyed by technical obsolescence and by the need to reduce costs.
Companies that specialise in network management will compete to gain outsourcing contracts. The will compete to ensure the most efficient possible investment takes place. Competition among services providers will ensure ongoing downward pressure on retail prices. It will be only a short time before ownership is outsourced as well.
Countries like India that need to drive costs down so that they can offer services to customers on very low incomes are leading the trend. Soon the rest of the World will be forced to follow.
Provided regulators enforce open access to outsourced networks, they will ensure competition. If cross ownership of networks and services becomes as much of a no-no as cross ownership of highways and trucks, it is to be hoped that they will quickly work themselves out of a job.
Telstra should look to the future and just as BT and Telecom New Zealand have done, prepare for the future as a services company using open access networks managed by specialist network managers.
This author consults with leading institutions through GLG
Analyses are solely the work of the authors and have not been edited or endorsed by GLG.
