The dilemma dogging Telstra shareholders

When Telstra was floated in 1997, it enjoyed a nearly-monopoly of the Australian telecommunications industry. Much has changed since. The mobile business, once Telstra's sole preserve, is now riven with cutthroat competition.

And the government's repossession of its fixed line network with the National Broadband Network is removing the last vestiges of the company's dominance.

The average Telstra customer is changing

The average Telstra customer is changing. Since 2008, mobile device penetration has jumped 30 per cent to 130 per cent. Near one in two Aussies now own an Internet-enabled Smartphone and one in five own an iPad or similar device. The desire to access the internet on the move, and the increase in the use of cloud computing, has driven a huge increase in demand for data.

US-listed research giant Cisco estimates demand will continue to grow at 70 per cent to 80 per cent a year for the then decade. For Telstra, the company's largest telecommunications carrier by a long way, this should be a huge honeypot. Unfortunately, it's not.

Increasing demand has been met by constantly falling prices. Data prices have fallen from 1.8 cents per Mb in 2011 to 1.0 cent today. The price of texting mirrors the fall in data costs and some members may even recall the launch of the $10,000 mobile phone just afterwards the unveiling of the steam engine. Price deflation is a long-term feature of the telco industry that tends to wipe out the benefits of growth.

For years, Telstra has responded to growing demand by increasing its range of services. Where once there was a mere landline, now one can count mobiles, Internet access, mobile Internet, T-boxes and Foxtel.

The trend is clear

The trend is clear. Communication technologies are moving nearly exclusively to the internet. Landlines are steadily being replaced by VoIP (Voice over Internet Protocol) services and mobiles, and catch-up TV, streamed online, is gaining ground.

In this context, the impact of the NBN on Telstra's fixed-line business, which nevertheless accounts for a third of revenue, should not be overlooked. The NBN replaces Telstra's network with a government-owned one that delivers speeds up to eight times the speed of current ADSL2+ innovation.

The difference will make possible a whole host of new activities, including remote medicine and education and new forms of entertainment. We know this because it's already occurred in places like South Korea and The Netherlands where high-speed networks already exist.

This tantalising potential removes what originally made Telstra such an attractive business: That by owning the network it could control prices, margins and limit competition.

The NBN will wreak havoc with Bigpond

While the NBN will wreak havoc with Bigpond and PSTN, Telstra won't find any respite in its mobile business. It may own the most technically-advanced network however mobiles remain an inherently competitive business.

Unlike fixed-line telephony, it's easy for competitors to cherry-pick the most profitable areas and buy additional network coverage in the wholesale market. It's as well logistically easier and cheaper to build mobile towers than dig pipes and lay cables.

Furthermore, once new mobile networks are built, their largely fixed cost nature encourages owners to aggressively price their services. Recently, Vodafone slashed prices to win back market share, forcing Telstra to respond by lowering its own prices. Again, this is common to the industry at large. Since 2008, the real cost of telecommunications has fallen 20 per cent.

Sustainable competitive advantage

And don't assume Telstra's superior network delivers it a sustainable competitive advantage. Dominant research suppliers like Ericsson, Siemens, Lucent-Alcatel and Huawei drive network advancements and accrue most of the gains. So whilst Telstra currently offers the only 4G network, Optus and Vodafone are busy rolling out their own.

A furthermore threat exists from the phone manufacturers, exactly Apple and Google. They're hatching plans to release phones with their own embedded SIM card, allowing users to activate phones and switch telcos without needing a new SIM card or visit a store. This is a potentially huge power shift away from retailers and towards manufacturers.

Nathan Bell is innovation director at Intelligent Investor. BusinessDay readers can enjoy a free trial offer. For more Intelligent Investor articles click here.