FYI | Apr 12 2006
In a report last week entitled "Where’s the monopoly rent?", Deutsche Bank analysts independently offered their views on the collapse of fixed-line rental as were put forward in a similar UBS analysts’ report earlier this week (Whichever Way You Look At It, VoIP Will Damage Telstra, FYI 11/04/06).
Deutsche reports its analysis confirms fixed-line returns are being "crunched", and that Telstra’s (TLS) return on invested capital (ROIC) for fixed-line will fall to 8.2% by 2007. In 2004, notes Deutsche, Telstra’s total ROIC was 14.3%, and fixed-line accounted for 63% of returns. A figure of 8.2% is "materially below the company’s cost of capital", says Deutsche.
UBS analysts suggested that it didn’t matter what service customers decided to subscribe to for voice over internet protocol (VoIP) (even Telstra’s own, when introduced), the loss of revenue from the old-fashioned medium would be significant.
One FN Arena reader offered a differing view (Letter to the Editor, FYI 12/04/06), suggesting that what is being overlooked is the money Telstra will save by not having to service the antiquated fixed-line system – money that could be spent on financing new technologies that could ensure Telstra maintained its place as Australia’s dominant telco.
He also suggested that with cheaper calls available to the public (particularly non-local) through VoIP technology, the likely result is a massive increase in "phone" calls that will help to offset the revenues lost from expensive timed calls. Thus as long as Telstra gets its own VoIP happening, rumours of its death are greatly exaggerated.
Hanging over everything Telstra does is the government, and not just because it owns 51%. Even if T3 is sold off, the ACCC will still control Telstra’s destiny. In the latest regulatory development the government has postponed the decision on ULL pricing for one month. JP Morgan points out this is likely due to FTTN.
(ULL is "unbundled local loop", which is basically a reference to Telstra renting out its existing copper wire connection infrastructure to other players. Industry players talk about "the last mile". There is no way they could contemplate establishing their own systems across the country – not even unwired systems are completely unwired. ULL is in the name of competition, and it is the ACCC – not Telstra – who will set the rental fees.
FTTN is "fibre to the node", and is a reference to replacing some of the copper connections from offices or homes with optical fibre, at least to the "node" which is like a big connection junction in a local area. Fibre optics increase delivery speed substantially.)
JP Morgan is suggesting Telstra is looking for a trade off, and that the government may see the need to view the situation "holistically". To wit, Telstra was originally hard-headed about FTTN, implying that no investment would be made by the company if the ACCC was going to regulate to let other service providers access it. At the same time, Telstra has been hanging on the ACCC decision on ULL and how much Telstra would allowed to charge rent from other providers.
Compromise seems in the offing. In the meantime, JP Morgan feels there is still too much regulatory uncertainty surrounding Telstra to offer any more than a Neutral recommendation. The FN Arena database shows one Buy, five Holds and four Sells on Australia’s largest telecommunication company.