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Are the Telcos Crying Wolf?

We recently have heard much complaining from the telecommunications companies concerning the margin squeeze they experience from NBN Co. While they certainly do have a point, it is also essential to look at the other side of the coin.

Why have the telcos allowed this situation to happen in the first place? We have seen an explosion in the telecommunications industry over the last decades. This led to the arrival of internet companies which are currently amongst the largest corporations in the world. This is a clear indication that telecommunications is a very lucrative industry, indeed.

So, what are the telcos complaining about? Why have they not been able to claim their share of this massive growth?

The telecoms industry was right at the forefront of the digital explosion. However, for many decades telcos refused to accept these changes, fighting any form of transformation to protect their business, aimed at protecting their very lucrative voice-based revenue streams, often with margins above 100%.

They made it impossible for new players to enter the market. They didn’t allow them to use the national infrastructure in any effective or efficient way to develop new services. As a result of this behavior, there were in the 1990s more than 25 anti-competitive investigations simultaneously proceeding against Telstra.

While fighting all of those rear-guard battles, the traditional telco industry took its eye off the future and companies such as Google, Apple, Facebook, Amazon, and many others in the internet market had a free rein to develop so-called “over the top”—OTT—business models, in which they used the existing telecoms infrastructure to distribute their own services to end-users. Ever since that time, telcos have complained about the situation.

Several countries had to implement “net neutrality” regulations to ensure that telcos wouldn’t misuse their infrastructure monopoly to stop the introduction of new innovative video-based services and apps such as Skype and WhatsApp.

Despite what could be called “missed opportunities” for telcos, they were able to maintain a strong market position in the basic telecoms market relating to connectivity. The massive increase in OTT services also stimulated a far greater use of the telecoms network. And today, in most cases, telcos remain strong and healthy players in the connectivity market. However, this has become a low-margin utility service. There is little room for them to develop more value-added products with opportunities for premium based revenue models.

The traditional telecoms industry around the globe is under pressure and is suffering from the massive transformation that happened under their eyes. However, in Australia, the situation is perhaps getting worse as the Government has created a separate telecoms wholesale company to prevent the incumbent Telstra to maintain their struggle hold on the market, as it happened in the 1990s as mentioned above.

The plan envisaged by the Australian Labor Government was to develop a super-high-speed broadband network based on fiber to the home infrastructure. The argument was that this would create a very powerful new platform on which all players in the telecoms market had an equal retail chance to build a range of new digital economy products and services. Putting aside if the existing telcos would indeed be able to build and deliver such services, the fact is that this network eventuated.

So the traditional telcos have now a double whammy against them. They missed out on value-added revenue opportunities. They lost this market to internet companies. On top of that, they are now also being squeezed in their traditional market of providing connectivity services.

This is not a pretty picture for the industry, and it will be interesting to see how this will develop over the coming years. I have always argued that the telecoms market is a critical one for nation-building and is a national asset and should not just be looked at from a profit-making perspective.

We now see international nervousness about Chinese companies dominating the telecoms industry. Perhaps it is time to have a holistic look at the telecoms market and—as a nation—make decisions of what we expect from this market and what the industry means for our society and economy. As mentioned before, such an all-encompassing review is well and truly overdue.

By Paul Budde, Managing Director of Paul Budde Communication

Paul is also a contributor of the Paul Budde Communication blog located here.

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