Industry change on the line for telcos

Australia’s telcos are optimistic about the future as Australia’s hunger for data grows, but the SmartCompany Dun & Bradstreet Industry Growth List reveals many are still grappling with how the industry will be transformed by the National Broadband Network.

The SmartCompany Dun & Bradstreet Industry Growth List shows companies big and small have recorded impressive revenue growth over the 2010 fiscal year.

The list is headed by two-year-old virtual telco BigTinCan, with posted revenue growth of 129,821% to $352,087 in 2009-10. Seven Group, which owns wireless broadband carrier Unwired, was ranked second, with IT and telco support firm Anittel ranked third.

The total revenue of the companies on the list was $70.7 billion, up from $63.6 billion in the previous corresponding period.

Chris Coughlan, director research consulting at telecoms, media and ICT analyst firm Telsyte, says the NBN is a whole new ball game for the sector.

“The NBN is going to cause destruction in the market, and to a degree, you’re already seeing that,” Coughlan tells SmartCompany.

Coughlan says the incumbents – market leaders Telstra and Optus, in particular – have been slicing prices to shore up market share before the NBN gathers steam.

“I expect that Telstra will continue to be very aggressive to get people onto two-year bundled contracts,” Coughlan says.

So with the smaller players pressured by their forceful larger rivals, Coughlan believes consolidation is likely among mid-tier and smaller telcos looking for scale and growth.

Vocus in focus

One company that has already been active in mergers and acquisitions is wholesaler Vocus Communications, ranked fifth on the SmartCompany D&B Growth List.

Coughlan says its chairman David Spence is “very good at bringing businesses into a good cash position.”

Vocus managing director and co-founder James Spenceley is similarly upbeat about the company, speaking proudly of the company’s performance since listing last year, and expecting the industry to continue to grow.

“Everywhere you go, you see people searching their data. That’s the way we’re going,” Spenceley says.

After listing on the Australian Securities Exchange at 50 cents in July last year, Vocus shares have risen to $2.85 each, valuing the company at $164 million.

Spenceley attributes the solid sharemarket performance to listing at a relatively valuation, good results and the fact the company fills an investment niche.

“There’s not that many listed telcos these days; they’re mostly merged or delisted, and there’s a couple of small ones and large ones,” he says.

But after some hefty consolidation over the past couple of years – the merger between Vodafone and Hutchison, TPG’s purchase of Pipe Networks, the purchase of AAPT’s consumer arm by internet service provider iiNet – Spenceley believes the sector is set for an M&A slowdown.

Vocus already has some acquisitions under its belt as a listed company.

Last month it announced an agreement to buy the assets of digital river networks, a national dark fibre network operation for $3.95 million cash.

In March, it entered into a binding agreement to buy the Perth data centre operator PerthIX from existing cash reserves, following up a November 2010 acquisition of Melbourne and Sydney data centre businesses from E3 Networks for $5.9 million.

But Spenceley says after some of these small purchases, it’s getting “harder and harder” to find appropriately sized businesses to acquire.

For someone profiting from the rise in Australians’ hunger for data, Spenceley is also a vocal critic of the $36 billion NBN.

“It’s illogical that we’re spending so much money on FTTN [fibre to the home],” Spenceley says.

He objects to people who’ve never worked in the telco industry – namely Communications Minister Stephen Conroy – making expensive and far-reaching decisions about telecommunications.

“They’re telling people, ‘this is what we’re going to build’, rather than looking at what we want,” Spenceley says.

Spenceley is likewise unhappy with the information out on NBN Co’s $11-billion deal to use Telstra’s copper and push the telco’s customers on to the new network.

“There’s a lot of hesitation about what the deal actually looks like,” Spenceley says.

“And for Telstra shareholders, it’s important. What’s going to happen to the cash? When will it come in?”

Vocus’s Spenceley and Telsyte’s Coughlan give mixed views on whether the NBN will proceed. While Coughlan says even a change of Government is unlikely to hold back the tide (and argues that, if anything to save costs, the fibre component will fall from current plans for 93% to around 80%), Spenceley says the project is not a fait accompli.

“It’s hard to predict if it will go ahead in its current form, or at all, so it’s hard to invest around that,” Spenceley says.

But despite his passionate views on the project, Spenceley concedes the project is popular for the many Australians who simply want faster broadband.

“Things are going really well in the telco space, but it’d be great to get some certainty on the NBN.”

Mobile magic

While Vocus might be finding it harder to do deals, for Horden Wiltshire, chief executive officer of Mnet Group, the M&A activity is hardly slowing down – last week the Sydney-based company announced the sale of a subsidiary.

Mnet will sell its marginal Ring Back Tones Australia business for $3.6 million, including at least $1.6 million in cash, saying it intends to focus on the higher-growth segments.

Mnet, whose clients include carriers and media companies, provides mobile offerings for different viewing devices. Telstra, Yahoo7! and Alcatel-Lucent own stakes in the business.

The company says the opportunities in mobile advertising are real, large and imminent. According to Wiltshire, while companies can “mobilise their content” in-house, by for example developing their own iPhone app, Mnet delivers “scalable” solutions that take into account different platforms such as iPads and Android.

“It’s part of our value proposition – there’s a lot more complexity on mobile, and therefore there’s an incentive to outsource,” Wiltshire says.

Even telcos Telstra and Vodafone look for outside help, Wilshire says. “You can see that’s it’s obviously not easy, otherwise they would do it themselves.”

Wiltshire says after a lot of hype during the original dotcom boom, consumers are now able to do things on their mobiles that people were talking about a decade ago.

And he expects smartphone penetration to reach 100% over the next few years, giving everybody the ability to watch video on phones.

“Over time, people will be spending more time on their phones, on the internet, and on their tablets as well,” Wiltshire says.

This not only bodes well for advertising – with Wiltshire pointing out that in Japan mobile advertising is on track to reach the same levels as radio advertising – but the desire for specialised mobile offerings.

He says the Apple iPhone, rather than the NBN, was the game-changer for his business.

“The iPhone and Android, they transformed the industry,” Wiltshire says.

As for NBN, Wiltshire says if it were cancelled tomorrow, it would have no difference to its business, although down the track the project could deliver some opportunities.

And in regards to M&A, Wiltshire says there’s no doubt the mobile internet sector will continue to grow, and Mnet will continue to look at opportunities.

Telesyte’s Coughlan is upbeat on the prospects for Mnet Group, which came in 11th on the D&B growth list.

“Mnet is in a growth sector and has a good diverse range of customers,” Coughlan says, adding he doesn’t expect the mobile applications area to slow down any time soon.

A changing industry

Coughlan, former vice president of wireless networks Australasia for Alcatel-Lucent, sees a number of other changes sweeping through the telco sector in the coming year.

For example, he says companies specialising in voice over internet protocol might be vulnerable as the NBN rolls out.

“I have a view VoIP is actually something that’s exposed in that there’s a fair bit of transformation in that industry where ISPs are actually getting their own and bundling,” Coughlan says.

“And any retail service provider will actually be providing a voice service with the NBN, so that means that voice providers will probably need to transform.”

Another area of interest is the steady stream of new data centre announcements.

“Every week there’s a new data centre,” Coughlan says.

“I expect there’s a bit of a bubble in the data centre game, which will drive services down, and some of them that aren’t aggressive in acquiring customers will probably go under.”