The line is dead - Challenges Facing Global Telcos

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#1
The line is dead

David Ramli
2697 words
16 Aug 2014
The Australian Financial Review
AFNR
English
Copyright 2014. Fairfax Media Management Pty Limited.
Telecoms The internet is changing how we communicate faster than ever before. David Ramli asks the leaders of our telecoms giants how their companies can survive as profits are eaten up by upstart digital disruptors.
It's 7.38am on Friday August 16, 2024 when your Facebook phone pings into life. "Where are you?!?" screams the boss in a green message on WhatsApp. You're going to be late to close an important deal and, when her face fills the screen seconds later to ask in person, it's clear she's far from happy. But she has dispatched a Google cab and by 8am you're in the front seat using Viber calls to finalise sales tactics on the Wi-Fi-connected dash board monitor.
An hour later the deal is done, your boss rather more pleased and a down payment has landed in the company account. The whole thing has happened using communications services that cost virtually nothing.
This is the future as painted by start-ups and leading industry analysts – a future in which humans are making more phone calls, sending more messages and downloading more content than ever before. And yet the big phone companies, such as Telstra, that for more than 100 years have made it happen are reduced to utilities providing little more than a network of "dumb pipes".
A future where disruptors such as Google, Viber, Facebook and WhatsApp use their global scale to provide cutting edge services so cheap that call and texting revenues disappear entirely, and what's left is eaten by these new rivals.
The earnings reported this week can't hide the fact thatTelstra, SingTel-Optus and Vodafone are already in the fight of their lives. On Thursday, Telstra reported a solid $4.3 billion annual profit, and its share price surged to a 12-year high, but this masked the threats that loom large over it.
For Telstra chief executive David Thodey, a stark reminder of such threats came during a week-long tour of Silicon Valley in May. During one event he was told straight out that his business model was as good as "dead". "It wasn't just a 25-year-old," he said later. "They honestly believe that our business model will be outdated in 10 years and that's very challenging. Innovation has to start in our own backyard [and] if we don't do it someone will do it to us."Won't roll over easily
But innovating in the global marketplace is tough. One of the men most likely to succeed Thodey at Telstra, Gordon Ballantyne, heir apparent at SingTel group Allen Lew and Vodafone Australia's new chief executive Inaki Berroeta, all told AFR Weekend they won't be rolling over easily.
To fully appreciate their plight it's important to understand how – and how fast – the traditional telecoms business model is changing all around the world. Telcos are deceptively simple businesses that have made trillions of dollars by building phone, mobile and internet networks we then pay to use. But Gartner research vice-president Gyanee Dewnarain says the wheels are falling off this once-lucrative business model.
"The voice and text messaging revenue that comprises a massive portion of the telcos' revenue started going down a few years ago and it's only accelerating," Dewnarain says from London. "Last year the telcos must have lost about $US25 billion ($26.8 billion) globally in voice revenue, and in the case of SMS it's even worse." By worse she means "almost $US50 billion" was lost to free or virtually free instant messaging (IM) services. "We predict that as early as next year the volume of IM will have overtaken the volume of SMS."
The reason for the crash is two-fold. Where a telco such as Vodafone Australia might charge you 55c to send a picture message, services such as WhatsApp and Viber enable phone calls and messages to be sent free of charge over the internet. Carriers have answered the threat by offering plans for near-unlimited phone calls and texts. And while this might have delayed the switch for some, it also served to shrink the already falling profits from those services.
The second reason is that because internet access is so widespread – thanks to huge infrastructure investments in mobile towers by 'old' telcos such as Telstra – the costs for tech giants like Google to offer new products and services have been slashed. This has helped internet usage boom without a matching rise in the amount of revenue generated at telcos. Where Optus reported a 40 per cent increase in data downloads between 2013 and 2014, the amount of revenue it contributed rose by just 10 per cent – phone call dollars replaced by digital dimes.
Dewnarain also says tech companies don't have the same legacy costs as expansive workforces – WhatsApp had just 55 staff in February. For every $1 in revenue made by a telco worker, the average Amazon employee makes $2.Create own alternatives
And when telcos tried to compete with developers to create their own alternatives, the results were almost universally uninspiring. "They went out saying 'we will compete head-first' but most telcos struggled to do it," she says. "They found customers didn't want the telco-branded services . . . which were typically quite rubbish. Instead they wanted to choose the consumer brands they liked, such as YouTube, Netflix, Hulu and Spotify."
Lew – SingTel's group digital life chief executive, who is seen by many as the -company's future leader – agrees.
"There are some services where I think as a telco we are fighting a losing battle trying to take them on," he says. "Look at [messaging services] WhatsApp, WeChat and Line – they're in the hundreds of millions of customers already, so unfortunately I think [that] ship has left the dock."
The telcos do, however, have one important edge over most other industries threatened by rising tech giants – money. Companies such as Telstra have cash to burn – $7.48 billion as of Thursday – and they plan to use it to keep themselves in the game. To grow revenue, telecommunications companies are choosing to partner with the enemy, move into new business areas, fight head-on or use a combination of the above.
Telstra retail group executive Ballantyne says there will always be a place for at least one telco per territory because someone needs to lay the pipes of the future. "You shouldn't believe everything you hear in Silicon Valley," he laughs. "We've been around for more than 100 years and as a modern Telco we've re-imagined our role every step of the way."
Ballantyne says Telstra wants to help solve some of the challenges of the day, and this means buying and building companies and technologies that will be useful in the digital world. These include eHealth services, cloud computing networks and internet video platforms. On Tuesday Telstra announced it had spent an extra $US270 million buying online video platform start-up Ooyala, whose software lets websites host streamed content.Roaming internet access
In May Telstra launched a $100 million plan to work with retailers to install 2 million Wi-Fi hotspots throughout Australia that will give customers roaming internet access. The hope is that this will make Telstra the partner of choice for both retailers and the Young Turks of technology. And if Telstra doesn't do it, the technology companies will.
Google spent $US500 million in June to buy satellite operator Skybox Imaging, has connected fibre-optic cabling to homes in the US state of Kansas and this week announced it would part-own a new $US300 million submarine cable linking Asia to the US – the latter technology representing the backbone of the internet.
For Vodafone Australia's Berroeta, the key to keeping the smallest of Australia's three big telcos afloat lies in striking the right partnerships with content providers and other companies increasingly operating in the internet. It's a strategy many overseas telcos are pursuing, not least Vodafone's UK mothership, which bundles mobile plans with Netflix movie-on-demand services to encourage customers to stay loyal. And the Spaniard sees plenty of potential here. "I think Australia is very much behind – not just in the mobile world but with content in general."
He offers banking services as one example of where Vodafone could help transform smartphones into the hub of daily life as near field communications (NFC) technology helps transform them into credit cards. NBN Co chief executive Bill Morrow is a transformation specialist and has run telcos in Europe, Asia, the US and Australia. He also backs the partnership path as the best way of countering the threat from over-the-top (OTT) players – so named because their services rely on existing networks.
"I think it's dangerous for companies to get into the kind of [OTT} applications we are familiar with today, so that's a WhatsApp . . . or a Facebook or a Google or anything of that nature," he says. But partnerships are a different kettle of fish. He points to the US where the hugely popular media streaming service Netflix has been forced to sign agreements with traditional internet service providers such as Comcast, Verizon and AT&T to connect with their networks.
One service telcos are keen to offer is a fast lane for their customers. This could see, for example, a Vodafone customer get higher quality movies at faster speeds for a nominal fee. "Think about what Comcast is doing right now in the US: they have gone to Netflix and gone 'alright, rather than me fighting you; me trying to create my own Netflix, how can we link our business models together to where we both prosper in this rapidly changing environment?'," Morrow says.
Telcos want taste of profit
For several years telcos have been looking to banks for the holy grail of internet partnerships. The idea is simple enough – billions of dollars worth of transactions cross their networks every day, from which banks make fat ¬profits, and the telcos want a taste of the action. But negotiations have gone nowhere fast because both the banks and the telcos think they should have the most hand in the relationship. Meanwhile they will likely keep eyeing each other until a cheaper payment option – think Paypal, Amazon or Bitcoins – forces a marriage of convenience.
But not everyone is playing the field in search of the perfect partner. SingTel-Optus, for one, is daring to dream of a future where telcos remain the gatekeepers of modern life. Back in 2024 and football's latest grudge match beckons from a flat-panel television tuned straight to The Optus Channel – an interactive content nirvana of movies, music and television. And whether it's the latest US season of The Bachelorette or yet another gritty Australian drama, it's either licensed to or made by Optus's entertainment wing – every thought of sleep dashed as an endless stream of must-watch TV is cued by ¬computer algorithms that correctly guess your guilty desires.
This is the goal of SingTel's Lew, who is candid about his ambition to use the lessons of current challenges to take the tech giants head on and beat them in the Asia-Pacific region. His plan embraces the danger Morrow warns about, and requires an ambitious mix of pragmatic partnerships and head-on ¬warfare. "The first step is to be the aggre¬gator of somebody else's content," he says. "Once you've got a critical mass, like 100 million or even 50 million [subscribers] across the region, you can talk about creating your own content and bidding competitively for sports rights, which are very expensive.
"You can draw a line in the sand that says 'if you try to charge me more than a certain amount I'm going to produce my own ¬content rather than buy yours' . ¬. . so that ¬content providers can't overcharge you."
Lew's vision even sees booming Netflix cut down to a bit-player in the region by offering targeted, localised content specif¬ically aimed at audiences who have been closely studied. "We respect Netflix and what they've done in the US but coming into this region we will compete head-to-head with them," he says.
"When you come to this part of the world there are 23 million Australians who want a lot of US content but they also want their fair share of Australian content and the Asian market is even more fragmented."'We'll leapfrog them'
And while WhatsApp may have won the battle, Singtel refuses to give them the war. "In the Philippines, Indonesia and ¬Thailand we partner with [messaging services], we learn from them and I think we will eventually leapfrog them . . . with something in the future that will be the next generation of messaging technology," he says. "We've learned our lesson by missing the boat on this generation so we'll try to get ahead."
Gartner's Dewnarain says the best approach is to use the cash currently avail¬able and move into new areas of business to generate more revenue streams. She -identifies possible targets in other digitally disrupted industries, such as utilities and healthcare, where high costs are moving patients, doctors and providers towards remote diagnostics.
"There's an opportunity to become the key partner that can accompany these industries . . . who just don't get technology."
Canada's economy is relatively similar and Dewnarain sees a rising trend in telcos buying into sports rights. Rogers Communications spent $C5.2 billion ($5.1 billion) to buy exclusive broadcast rights for the National [ice] Hockey league. Telstra spent over $300 million to buy the digital streaming rights for the National Rugby League and Australian Football League. It uses Foxtel to aggregate other sports content, giving it an edge over its rivals.
But Dewnarain warns that telcos in every country will all slash their workforces and use technology to help customers become self-sufficient in the drive to cut costs. Big data, which is the crunching of disparate databases to discover eerily accurate ¬customer trends, will play an important role to help anticipate the demands of users.
"You can't put all your eggs in one basket," she says. "You can't say that only healthcare or automotive or the construction industry is going to get you out of this mess or be your saviour and compensate for all the revenues that are declining in core areas, because none of them will be big enough on their own. Telcos must place several bets and become portfolio managers, know when to fail fast and dump their investments and leave the start-up acquisitions to manage themselves."Chasing shrinking pool
However the telcos cut it, most agree they're chasing a shrinking pool of funds and some simply won't survive – a challenge made harder with the NBN set to slash the barriers to entry for tech companies in Australia by bringing high speed broadband to every home and business.
"All of them are showing negative margin growth . . . so from a perspective of consoli¬dation it's already happening, especially in North America and Europe, which is one of the markets that is really in a dire state at the moment," Dewnarain says. "It's not happening as much yet in the Asian region because it's less developed."
Even the bullish Lew from SingTel agrees some telcos will start to die out over the next few years. "I think the [shrinking revenue predictions] are a pessimistic view that assumes the telcos won't wake up [but will] continue to sit like the frog in the water that boils itself to death," he says. "Forward looking telcos such as Telstra, Vodafone and SingTel know that our connectivity business is facing severe challenges and that's why we're moving into adjacent businesses.
"But I absolutely agree that some of these companies won't make it. It's not just about having the idea, the strategy and the plan but the ability to execute and deliver."

Fairfax Media Management Pty Limited

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#2
You send a message thru "watsapp" to a friend overseas thousands of miles it feels as though you are communicating with somebody via wifi but actually you're not because the most powerful wifi signal distance is only less than 100 meters and that's without obstacles like buildings walls etc ... with these obstacles it goes down to less than 50 meters. Instead what's happen is there is a server somewhere with a "forum" like setting and your watsapp is "logon" to that forum and you are sending messages your friend on that server, it's like you try to PM somebody on valuebuddies same concept.

without fiber optic all the wifi in the world will have zero signal essentially be dead you will not be able to access to netflix via wifi the singtel fire demonstrated this, when it happened the internet for half the island went totally dead.

no the line isn't obsolete but it's become more important than ever because people are using apps and things that in turn use or depend on availability of such land lines.

what's happen now is just with liberlization of industry that telcos with businesses like pay subscription tv will not have monopoly anymore and are going to have to get used to competitors that could offer cheaper services, but these competitors also need to have the fiber optic infrastructure to provide these services either they own or rent it like from singtel or starhub so fixed line business will continue to grow.
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#3
A 'dumb' pipe can be a good pipe too.
My Dividend Investing Blog
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#4
New world order... costs conscious consumers means more deflationary pressures... but hang on the world needs inflation

Aug 7 2015 at 6:28 AM Updated 1 hr ago

Is TV dying? US media stocks melt down

Netflix, now boasting 65 million members in over 50 countries, is not the only online on-demand service eating into the television sector. Bloomberg


by John Kehoe


This week may go down in history as the pivotal moment when investors bet the television market could be dying.

The shares of American media and cable company stocks were decimated on Thursday. The media meltdown came as panicky investors fretted that viewers are pulling the plug on traditional and pay television, and opting for cheaper online alternatives like Netflix.

A flood of mediocre earnings updates from media companies this week including the Murdoch family's 21st Century Fox, Walt Disney and Viacom, sent the Dow Jones Industrial Average to touch a six-month low and the NASDAQ to fall as much as 2 per cent during trade on Thursday.

Over two trading days, media multinational Time Warner, which owns CNN, has slumped 14 per cent after recording modest growth in cable subscription revenue of 2 per cent.

Conversely, shares of the on-demand internet streaming media firm, Netflix, rose more than 1 per cent to hover close to a record high.

"Questions about the death of pay TV are now front and centre even if the size and pace of declines are likely being overstated," MoffettNathanson media analyst Michael Nathanson wrote in a research note on Thursday.

The S&P media stock index is on track to record its worst week for seven years – after falling almost 5 per cent on Thursday and plunging about 8 per cent for the week so far.

On Thursday, Viacom plunged 12 per cent after the MTV-owner reported an 11 per cent revenue dive to $US3 billion for the June quarter. Shares of Mad Men creator AMC Networks fell 7 per cent, while 21st Century Fox shares tumbled 7 per cent, as a $US5 billion share buyback failed to entice investors

The rout was sparked after Walt Disney chief executive Bob Iger said on Tuesday night the owner of ESPN had experienced "some subscriber loss". He cast doubt on the sector's readiness for the technological transformation and raised the possibility of "unbundling" lucrative cable channel packages and selling individual channels to consumers. Industry insiders refer to this move as "cord shaving".

The alarming sell off spread from media programming companies to cable TV providers, including Comcast, Charter Communications and Time Warner Cable.

Many of the second quarter profit results were not overly disappointing in isolation. But the moderate cable subscriber growth and doubts about future expansion in the new digital area sent tremors through investors in media and cable companies.

Investors worry that cord cutting by television viewers is threatening to upend the industry.

While acknowledging the challenges facing the sector, Albert Fried and Company director of research for technology, media and telecommunications, Rich Tullo, says the "market is overreacting".

"It's got more to do with technology change creating uncertainty, than it does of the operating earnings performances," Mr Tullo said.

Netflix, now boasting 65 million members in over 50 countries, is not the only online on-demand service eating into the television sector. Amazon, Apple TV, HBO and Sling TV, are all trialling similar online subscription streaming models.

Netflix added a record 3.3 million global streaming members in the June quarter, sending its shares 18 per cent higher in one trading day last month.

The rapid growth of ad-free, subscription on demand options are shifting easy advertising dollars away from traditional content creators and cable TV firms.

Fox executive co-chairman Lachlan Murdoch said this week that the "scale and speed of rapid change" in the media and entertainment sector will be "overwhelming for some" in the industry.

"The imperative is how we respond to it," he said.

Fox chief executive James Murdoch received an open letter this week from one of Wall Street's top media analysts, Sanford C. Bernstein's Todd Juenger, pressuring him to compete more aggressively with streaming video powerhouse Netflix.

21st Century Fox reported a 9.3 percent decline to $US6.2 billion in adjusted revenue for the quarter, due to falling TV advertising sales.

Fox has said it plans to make its programs available to streaming services, rather than setting up its own online streaming service.
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