Tough times for telcos

IBISWorld estimates that this industry contracted at an average annual rate of 1.4% over the five year period to 2008-09. Intense competition within the industry and from network operators has driven down profit with pre-tax margins falling marginally in 2008-09.

Despite M&A activity later in the performance period, enterprise numbers increased over the five years as opportunities developed with wired and wireless network capacity expanding. In 2008-09, industry revenue contracted moderately as Optus completed its ULL network and transfers the remaining “off-net” customers to “on-net”. The industry’s performance will also be hampered by Commander’s slide into voluntary administration.

Growth in demand for telecommunication services is expected to slow as the economic conditions continue to deteriorate. The economy is heading for recession and unemployment and underemployment are on their way up. As the level of employment begins falling and economic activity declines, demand from businesses will weaken.

Recent years have been characterised by an increasing degree of competition in all sectors of the telecommunications industry, including the telecommunications resellers industry. In many instances, the increased competition levels have been to the detriment of the traditional reseller whose ability to compete on price and maintain acceptable margins are dependent on their access to low cost networks.

IBISWorld forecasts that this industry will expand at an average annual rate of 0.4% over the five year period to 2013-14. Industry exits and “out-of-industry” takeovers are expected to continue during the early part of the outlook period as intense internal and external competition puts substantial pressure on resellers’ pricing and bottom lines.

Volatile profits will be the key reason that enterprises will exit the industry. Players with enough resource capacity are expected to move from the resale sphere to facilities based competition. Optus has almost finished its unconditional local loop network and continues to move Telstra resale customers to this network.

Demand for telecommunication services is expected to remain on the whole very strong, although there will be significant variability amongst the different services. Data services will offset falls in wholesale wireline services, although accelerated declines in any service will be softened by an increased use of bundles to attract and keep customers.

For mobile services, growth will be driven by increased mobile virtual network operators, which will also include Crazy John’s, which ended its exclusive arrangement with Telstra on June 30, 2007 and commenced offering its own services using Vodafone capacity from July 1, 2007.

Key success factors for operators in the industry:

• Maintenance of excellent customer relations. Customers in recent years have become increasingly sophisticated. This in turn has seen an increasing reliance on the role of Customer Relationship Management (CRM) in an attempt to provide a superior level of customer care as a point of differentiation.
• Development of a symbiotic relationship with another industry. Developing strategic alliances with strong operators in related telecommunications industries.
• Access to niche markets. For new or small operators, resources should be concentrated in niche markets
• Aggressive marketing/franchising – given the high level of competition. Innovative marketing strategies are essential in the highly competitive environment that characterises the telecommunications resellers industry.
• Access to required utility infrastructure. Interconnection to carrier’s networks is of vital importance.
• Use of production techniques that add value to base product(s). Operators should seek to reduce reliance on traditional low growth, low margin services, by developing and introducing value added services to gain market acceptance and bolster profit margins.
• Level of competition existing in the market. Recent years have seen considerable movement in the number of players within the telecommunications resellers industry.
• Having a good reputation. This is an important means of differentiation.
• Having a loyal customer base. This is essential given the highly competitive nature of the industry and the tendencies towards customer churn.