Saturday, October 07, 2006

Why you shouldn’t buy T3

Telstra is again* about to engage in a huge and legally-dubious ad blitz. The “legally dubious” part is because companies in the process of offering shares to the public are supposed to confine their sales pitch to a soberly-worded** prospectus, with only normal-course-of-business advertising being allowed during this period, so as to forbid prospectus-bypassing hype. The timing of the "Next G" ad campaign with the share offer is clearly not coincidental, given that the Next G network will not be operational – including having even “demo” handsets available – until next year

But never mind a company spending a mere $20m (penultimate URL) of its shareholder’s funds, money that it can ill afford (given that it has lately been borrowing just to pay dividends), on such legally dubiosities – it gets worse.

Telstra’s Next G network can already be labelled a plain white-elephant, I reckon.

3G spectrums (of which Next G is merely a faster (3 x, or so) version of what is currently provided by all telcos, including Telstra), carry four revenue streams:

voice calls,
video calls,
subscription downloads, and
bandwith-metered “raw” data.

Mobile voice calls have been, for several years, ultra low margin, and voice-calling on 3G is nothing different, anyway.

Video calls are also a fizzer – Jetsons-style future-tastic prophecies have been way off the mark here (but I’m still holding out for personal flying saucers). Re video calling, I know what I’m talking about: I’ve had a 3G video-call enabled phone for 10 months, and have made video calls a handful of times, for novelty purposes only. And don’t you think that I’m being the tech-luddite here; the number of video calls I’ve received is precisely nil.

Then there’s subscription downloads, which do seem mildly promising in comparison to video calls. Such downloads include music (MP3 audio), video-clips (audio-visual) and TV generally. The former two are typically charged at a few dollars per song, while TV seems to be commonly charged out on a per-program, “all you can eat” (or squint, actually) basis.

My own 3G phone-bill for subscription downloads in the last 10 months has been zero. Admittedly, I’m probably an anomaly here (and certainly a disappointment to my telco, who provided me with a “free” 3G handset, and a generous voice-call capped plan, in the expectation of my taking their “fries with that?” bait). In contrast, many 15-25’s no doubt have nothing better to do than spend some of their boomer parents’ capital gain windfalls on subscription downloads. After all, when it’s a whole five metre walk to the landline-anchored computer – from which the same data can be disgorged more cheaply, if not for free – what self-respecting GenYer is going to endure such hardship?

Finally, there’s bandwith-metered data – aka the Internet without either a landline or the geeky arcania of wireless “hot-spots”, which could more accurately be called “acne-spots”, in a tribute to the particular age-group of those who can truly be bothered with them. Again, I’ve got personal experience of the unspotted wireless Internet, having for 10 months had a “free” 3G data card that gives me 200MB of the Internet per month for a $29 cap (excess MB are 30 cents each – ouch).

The profit-potential of such data is the main unknown for Telstra’s Next G network. In contrast to subscription-download data – where subscription revenue should easily and always exceeed the underlying cost of its bandwidth – selling just raw bandwidth, aka convenient wireless Internet access, has to be carefully costed. Here, there are not the economies of scale that you might think. I’m no expert, but I’d guess that Telstra’s break-even figure for providing 1 GB of 3G wireless Internet per month (1 GB being what at typical broadband-over-landline Internet account might go through) would be around $200/month. Few current landline-Internet typical users would cop such a bill regularly, I’d suggest, given that their current landline-rental-plus-ISP/MB-charges would be about a third of this, at $70/month.

The only bright spot in all of this for Telstra is that the old-fashioned home landline may not be doomed after all, at least for now. Landline rental provides Telstra with a notorious, juicy monopoly. Most Australian households my age and younger, if they still have landlines at all, have them mainly for Internet access. Tempting as it might be to snip the landline off once and for all, the underlying, scarce-bandwidth economics of wireless Internet provision - which Next G doesn't fundamentally alter - mean that only light(ish) Internet users (like me) would be likely to sign up for Next G as their primary Internet provider. Meaning, necessarily modest margins for Telstra, for the provision of limited bandwidth to thrifty, landline-bypassing Xers.

On the whole then, the only scalable new revenue source for Telstra’s Next G will be from the ranks of lazy GenYers, doing subscription handset-downloads. And when these grow-up, or their bill-underwriting parents wake-up (perhaps aided by the coming house-price crash that many in my generation are counting on), then Next G is going to be very soon be Oh-So-Last-G, if it isn’t already.

* From memory, it pulled much the same trick with T2, in 1999

** Necessarily so, because of stiff legal sanctions otherwise: Corporations Law Part 6D.3

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