Telstra's massive cost cutting: The underlying issues

Telstra's sudden massive job cuts indicate long-term underlying issues and missed opportunities, writes Paul Budde.

THE ANNOUNCEMENT of 2,800 job losses at Telstra is an "OMG" moment. This is not just a readjustment of the business or some fine-tuning; it goes far beyond that and clearly indicates underlying issues forcing the company to make such a dramatic move.

For years, it has become clear that Telstra has missed major opportunities that have arisen over the last few decades. When the internet, smartphones and digital media started to evolve, many telcos – including Telstra – tried to protect their lucrative telephone and data businesses. Rather than embracing new technologies, they attempted to stymie them.

A key reason for this was that the emerging new media companies could offer their services at significantly lower prices and telcos were reluctant to enter this new era as they didn’t want to reduce their prices. The rest, as they say, is history. From that moment onward, new digital media became the big tech companies and telcos were relegated to being utility players.

Telstra is going on to take the NBN monopoly

In a reversal of events, Telstra, being the former telecoms monopoly, is trying to take on NBN Co, the monopoly that displaced it.

Of course, the telcos didn’t give in easily. Over the decades, we have seen announcements of "breakthroughs" in mobile and broadband that would open up new revenue streams. However, these breakthroughs never materialised. Revenue increases came from more people using mobile phones and broadband but this is, essentially, utility-based revenue.

Very few, if any, of the hyped-up new revenue streams have emerged — 4G simply replaced 3G and 5G is simply replacing 4G. We are not paying significantly more for the new technology, nor are we utilising that technology for many new applications. As a result, over the last few years, revenue has hardly grown in the telecommunications industry.

Telstra’s cost cuts over the last decade or so are indications of this reality.

However, what makes this event different, is the cuts in the company’s enterprise sector. This sector essentially includes the top 1,000 companies in the country. The way I see it is as follows.

Telstra has been serving this sector for a very long time (over 100 years). For most of that period, they were the sole provider — a monopolist. Even after deregulation, the company remained, by far, the largest supplier to this sector. Over decades, the products and services for this sector have been continuously updated, extended and changed.

However, a large legacy element remains in this business. It looks like this will now be addressed in a very drastic way. Rather than upgrading and improving products, Telstra will simply discontinue them and start creating entirely new products, better suited for the new environment of AI, cloud computing, cybersecurity, increased regulations and so on.

Time will tell whether Telstra can become a leading digital company

The proposed restructuring of Telstra is an exciting new challenge for the company. It will now all depend on the direction the execution will take.

These new tools are a double-edged sword. On one side, these tools allow the company to build new products better suited to the new environment in which its customers operate. At the same time, these tools can also be used internally to better run Telstra's own operations, with more reliable, faster decision-making and less reliance on humans — reducing human error. In other words, at lower cost.

Returning to my earlier comments, the nature of the business is moving towards being a utility, with lower margins and high levels of price competition as the major differentiators. The corporate market is far more complex and all the products and services here have been largely custom-made. This, of course, allows for better margins and, therefore, higher profits.

The company has faced stiff competition from Optus, and many other players in the information and communication technology and Big Tech markets. The announcements clearly indicate that Telstra is now determined to regain its position and increase its market share in this far more lucrative sector.

This is a very tough sector with highly specialised people and products — a market that is developing incredibly rapidly. Telstra will have a tough job regaining and extending its position here.

The fact that its share price dropped is a clear indication that the financial market also understands the challenges Telstra is facing.

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