Optus CEO goes over the top in network content battle

When Allen Lew left Australia in 2008, smartphones were barely a blip on the radar, and data was an afterthought for mobile networks focused on voice and SMS.

Lew returned to Australia last year to an entirely different market, where data demands continue to sky rocket, customers are getting larger phones that chew up more data, and video streaming dominates.

The challenge facing network operators not just in Australia, but also globally, is coping with that hunger for data while losing revenues as demand for voice and SMS has declined, with customers moving to apps like Facebook and WhatsApp to communicate for free.

In one of his first sit-down interviews since taking on the job of CEO, Lew told ZDNet that Optus has developed a three-year strategy, aimed at focusing on moving away from just being a mobile operator and fixed network company to one that offers more to customers.

"I think you've seen us starting to move away from being very mobile focused to one that is about integrating communications and entertainment for customers, regardless of where they are," he said.

Lew, who turns 60 next month, returned to Optus in October after heading up Singtel's Digital Life division, and the company's Singapore operations before that.

Lew said that upon his return, he realised that the way people are consuming content is rapidly changing from the days when Optus used to compete with Telstra for pay TV subscriptions. In his "two hours spare" a day, Lew is an avid viewer of US baseball and English Premier League, and he noted that in the US, customers are now looking to pay directly for these sports rather than signing up for pay TV.

"A lot of these sporting codes are going direct to customers. The most advanced market for that is the US. You don't have to have a paid subscription to watch those sports in the US," he said.

"I think that is going to disrupt the pay TV model."

Although Optus has yet to partner with any sports services, the company recently announced six-month subscriptions to Netflix, quota-free access to the streaming service on fixed-line services, and an unlimited broadband package.

Partnering with Netflix in March was an easy choice for Optus, Lew said.

"Entertainment was the low-hanging fruit," he said.

"Pay TV penetration is low -- 30 percent. We think there is opportunity for 70 percent of homes, particularly those who are not big sports fans, to come up with a much stronger media package that is about video on demand.

"That's what we've done with Fetch box and integrating Netflix into the Fetch box."

The next part would be more complicated, he said.

"I think what is clear for us is that we don't want to get into content production, so that means we have to get very good at linking up the brands that stick in the minds of consumers," Lew said.

"I think within the telco space, we are, at best, aggregators of content; we are not good producers of content. It is an entirely different DNA to telcos."

The role of the telco will be to ensure that customers have the best viewing experience possible, Lew said.

The CEO said -- prior to recent reports of capacity issues facing telcos since the launch of Netflix in Australia -- Optus would ensure that customers watching Netflix would be able to view it in high definition.

"There are still some things we can do to make sure the entertainment package can fit people's homes, regardless of how far they are from the Telstra exchange. One of the biggest pain points for our customers in Australia is that the NBN [National Broadband Network] only covers less than 1 million homes today, and the remaining 9 million homes it depends on how far you are from the Telstra exchange," he said.

"When someone is watching Netflix at home, it needs to be high definition on their high-definition TV. Otherwise, they will have a poor experience. And that is where we are putting in a lot of effort, not just bundling Netflix, but ensuring people want to watch Netflix in HD," he said.

"That is a lot of engineering to make sure that capability can be supported."

Optus opts for wholesale

Lew admitted that the company would likely restructure its fixed-line business as ownership of the hybrid fibre-coaxial (HFC) network will be handed over to NBN Co, resulting in Optus becoming more of a pure reseller of NBN and Telstra services.

"We still have a core, but at the end of the day, a lot of the infrastructure to reach homes will be dependent in the short term on Telstra, and in the longer term on the NBN," he said.

"I think we will have to look at our cost structure for fixed very much along the lines that it is not an infrastructure business -- it is a wholesale business. So if you take over the next three years, we will be focusing on the cost to serve, the cost to acquire, the cost to support fixed-line customers."

Optus has implemented "service quality checks" to ensure that fixed network lines are up to scratch, but said that the company would be implementing a new service in the second half of 2015 to go beyond that to ensure a more seamless service for customers at the time of connection.

"NBN is wonderful in terms of opening access to the home, and giving people access to high-speed bandwidth, but by tiering the industry the way that it is, you are creating yet another point where if you don't manage the customer experience, it becomes a hell of a situation for a customer," he said.

"You have NBN Co coming in, you have us coming in, and then there are points of interaction between the two that could get disrupted and can possibly cause problems for our customers, so we have to manage that."

Optus would work to make sure that devices in the home could also be connected up at the time of a new connection.

"As a service provider, we now have to work through all possible points of pain that can happen, and we need to surface over some of these cracks to make it a seamless experience," he said.

"From that perspective, we are used to doing a bit of that with Telstra, but now we have to do that with NBN Co."

Some have speculated that Optus could be a potential counter-bid against the AU$1.4 billion offer TPG has made to acquire iiNet. Lew declined to comment, but indicated that Optus' focus is not on acquisitions.

"We don't talk about [mergers and acquisitions] and all those types of transactions publicly. I think at this stage, we are very focused on our strategy. To us, customer engagement is very important," he said.

"What these guys are doing, I'm sure they have a bigger goal. We understand the dynamics of a wholesale market, but I think we've got a very strong strategy on our own, but let's see what happens with iiNet and TPG."

The possibility of a combined iiNet and TPG entity being larger that Optus in fixed does not concern the CEO.

"We believe we have got scale in mobile, which goes into fixed as well. I think right now, we have an offer that sticks with customers."

Smaller cells for mobile

The mobile network will provide the foundation for much of the company's business, Lew said, with Optus aiming to get the 4G network out to 85 percent of the population, and increasing the capacity in the network to ensure that customers can get faster speeds on the network.

He said that mobile operators need to focus less on the headline figures of the percentage of the country covered by mobile networks, and more on the quality of the network and ensuring a minimum average speed on the network.

For Optus, he said, this would require the company to look to provide not only smaller cell sites, but also more Wi-Fi access in shopping centres and other places around the country to offset its large, "unsightly" tower investments.

"That's where we have to do the hard yards, because the depth of coverage cannot be achieved by the big cell towers, so you have to supplement it," he said.

"You have to go city by city, street by street."

Optus will then need to improve its app to give customers an idea of where best they can use data for the lowest cost, offloading regular mobile use onto Wi-Fi where possible.

"Especially now with the new smartphones and the new applications that are very intensive with video... With the quality of the 4G network, a significant percentage of the video is downloading on your phone, even though you may only be watching 30 seconds," he said.

"That's causing some pain to customers, so we are educating customers, and giving them a little bit more data to get them through this hump until we get more Wi-Fi."

To that end, he said Optus' bill-shock killer offering to bump up customers automatically when they go over their monthly data limit would stay for the short term.

"I think education part of it that there is a cost for doing that. I think it will take a bit of time, but we will be patient, and we will be a key part of this education process," he said.

Lew has set targets internally to grow the company's subscriber base, after two successive quarters of growth. Optus remains the second-largest mobile network company, at over 9 million mobile customers, ahead of Vodafone, on 5 million, but well behind front runner Telstra, at over 16 million.

Data analytics would play a key role for Optus in better understanding the customer, to the point where Lew said he wanted the company to know if there was an issue with a specific customer before that customer ever called.

"We can be more targeted in understanding the individual needs ... and more proactive using data analytics, become more personal, and understand customer experience is something we are doubling down on, because it will be what customers will expect in months and years ahead," he said.

Lew said the fruits of Optus' work should be seen in the next results released in May.

"We want to set ourselves lofty goals, but we don't want to make those public yet," he said.

"We do not share these in detail, but hopefully people can see based on the quarterly trajectory we are heading in the right direction."