NBN Co loss ranks highly among problems in the telecoms industry

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NBN Co CEO Stephen Rue has been positive about the company's results despite massive losses (Screenshots via YouTube)

NBN Co is facing further problems while the merger between Vodafone and TPG positions them to be a major player in the field, writes Paul Budde.

THERE IS NEVER a dull moment in the telecommunications industry, but having five major announcements within a couple of days is a bit unusual, all linked together:

So, what is happening? The bottom line is that competition in the telecoms market is getting tougher and tougher. Traditional telecoms business models are no longer valid as margins are shrinking and competition from inside and outside the traditional industry – such as Facebook and Google – is creating havoc.

While NBN Co’s CEO Stephen Rue was extremely upbeat about the half-yearly results of his company, the reality is that they suffered massive losses and their ARPU (average revenue per users) is below their breakeven point so there is no quick turnaround for the company’s fortunes.

Now add to this the major problems they are facing beyond the finalisation of the rollout. The company is underperforming, especially in their FttN (fibre to the node) market, where close to 20 per cent of customers are not getting the service they are paying for. Also, while they are jubilant about the fact that they will finish the rollout on schedule by mid-2020, there are many thousands of connections in the “too-hard” basket that need to be resolved later.

So, if you combine a loss-making situation with the extra costs that will be needed to connect the very expensive too-hard cases and the need to fix the problem with under-delivery, it is clear that the company will have a tough time ahead. Let alone that most of their infrastructure will have to be upgraded to a full-fibre network which will cost another 10-15 billion dollars. This is on top of annual maintenance costs which will in itself run in the billions of dollars (far more than what it would have cost to maintain an all-fibre network).

With the rollout completed, it will be interesting to see what the Government will do. The NBN is a major political headache for them and I wouldn’t be surprised if they want to get rid of it soon. Privatisation could trigger the long-predicted write down that is needed to get anybody interested in buying the enterprise.

A solution to the NBN debacle could also lead to a solution for the high wholesale prices that the RSPs (retail service providers) are suffering from. This was made clear again in Telstra’s results. For the last few years, we have seen the company’s fortunes going down as the NBN margins are very thin. The only way for the traditional telcos to survive is through cost-cutting. Therefore, the extra sackings were needed for Telstra. The Vodafone and TPG merger is, in essence, also a cost-cutting exercise.

Of course, it is a pity that we can’t have four strong competitors in the market and I understand the ACCC’s emotional frustration about that. However, market and industry reality dictates that Vodafone and TPG each on their own are not strong enough to provide sustainable long-term competition to Telstra, Optus and NBN Co (along with Google, Facebook and so on).

You must be big in the telecoms market to survive. The merger gives the new entity the size it needs to compete both in the fixed and in the mobile telecoms market. I don’t expect dramatic changes in the market any time soon (for example, no price war). There will, however, be some new products where they will bundle mobile and fixed telecoms products into their services offerings. The combined entity now has the capability to bring such new creations to the market.

However, the key issue with mergers is always its execution and it will be interesting to see if the merged entity is going to provide that strong competition in the market that we need in order to see innovation and affordability of services flourishing.

We are by no way out of the woods here. The focus for 2020 and 2021 will shift to developments around the NBN and especially government policies beyond the finalisation of the rollout.

Paul Budde is an Independent Australia columnist and managing director of Paul Budde Consulting, an independent telecommunications research and consultancy organisation. You can follow Paul on Twitter @PaulBudde.

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