alliance coup adds form to sectors future

Alliance coup adds form to sector's future
COMMENT
http://www.theaustralian.news.com.au/story/0,20867,20745992-5002063,00.html
Michael Sainsbury
13nov06

TELSTRA'S long overdue launch of faster broadband services on Friday bookended a week where the future structure of the $30 billion telecommunications sector started to take shape.

The first event was a new alliance between Telecom New Zealand's struggling AAPT business and Powertel, the No3 infrastructure player in the sector.
The deal draws five smaller industry players into an alliance that, if successful, is likely to be formalised further with some sort of shareholding rationalisation later next year. Along with AAPT and Powertel, there is iiNet - which counts Powertel and Perth based Futuris-backed Amcom as major shareholders - and mobile network Hutchison, in which TNZ holds an investment. Such a deal, a major coup for Powertel chief Paul Broad, was long overdue in the sector.

Apart from Telstra and Optus, most other industry players are sub-scale and have been scratching out an existence along with earning margins far less than the 20-plus per cent needed for rational investment. It signals that the chronically underperforming Powertel, recently armed with its first six-monthly profit, has really turned a corner.

Helped along by Optus's apparent inability to strike major wholesale deals and Telstra's ruthless yet rational move to cut wholesale discounts, Powertel now has a golden opportunity to take on the smaller end of the market.

The deal, combined with news that AAPT would shut a 700-seat call centre, goes hand in hand with TNZ finance chief Marko Bogoievski's $200 million information technology makeover.

Bogoievski wants to radically change AAPT's operations base, turning it into a low-cost, self-service telco.

As Hutchison and Vodafone move into fixed broadband services for the first time over the next six months, a new market dynamic will open up, proving the justification for former Optus chief Chris Anderson's determination to keep the group together when it was sold off in 2001. Telecoms customers will increasingly want all sorts of services over a number of platforms and will want one email address and experience.

Telstra and Optus are starting to get their act together on this but will be hampered in the medium term by massive billing and other system upgrades needed to achieve the best results.

Hutchison and Vodafone will have their own issues trying to integrate their systems with the companies they choose as fixed-line partners.

Small investors may have taken a $4.5 billion bet on the Government's Telstra shares but a quick look at the half-year results from Optus this week may give them pause to reflect. The industry remains low growth with shrinking margins, although Optus chief executive Paul O'Sullivan is half way to making good on a promise of holding earnings margins to 26 per cent. Optus is in the top half of its global peers - No2 telcos - and in this regard is looking better against Telstra, whose margins fell to 38 per cent in the second half of FY2006.

Much of what is happening at Optus - IT investment, cost-cutting, outsourcing - mirrors the Telstra transformation project, albeit without the sound and fury. No surprises, it's happening all over the telco world.But right now the question is whether Powertel's Broad, with his wealthy Hong Kong backers, can pull together enough of a coalition to create a genuine third force, or whether the sector will continue its lurch towards an ugly duopoly.

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