Telcos flailing against tide to turn into dumb pipes

Streaming, 5G, and thoughts and prayers are being deployed by telcos to be anything other than bit handlers.
Written by Chris Duckett, Contributor
(Image: Chris Duckett/ZDNet)

It's a funny quirk of 21st century economics that public companies can be profitable, but just not profitable enough, and few sectors feel the need to reinvent themselves into super-profit machines more than telecommunications carriers.

In the modern day, it is an exceptional listed company that is happy to function as a data-passing business with a small percentage of profit on top without any of the bells and whistles that promise to be either the next big thing or the savior of the industry.

Thanks to being in Sydney, my primary examples will be Australian-based, but it is symptomatic of trends happening around the world.

A couple of years ago, faced with the prospect of much of its wholesale business disappearing thanks to the National Broadband Network (NBN), Telstra decided it would be moving beyond being a telecommunications company, and would now be a technology firm.

"This sentiment is behind the evolution of Telstra's brand. Telstra is evolving from a telco to a techco -- to be a world-class technology company empowering people to connect," then-Telstra CMO Joe Pollard said in 2016.

"Our brand needs to reflect this, and demonstrate there are better ways for everyone to thrive in this connected world."

Telstra was fresh off landing former Nokia CEO Stephen Elop, who was tasked with handling the strategy shift.

Fast forward two years, Elop is no longer at the company and Telstra's technology plays have been hit and miss.

In the U.S., Verizon aimed to be a media player via the acquisitions of AOL and Yahoo. Those purchases combined to create Oath, but haven't diversified Verizon's revenue stream. Verizon will live and die with its wireless business. AT&T acquired Time Warner to break into media, but the wireless business carries the day. Resisting being a dumb pipe company gets expensive.

The most spectacular miss could end up being the AU$220 million contract signed in 2016 to construct and run the Australian National Cancer Screening Register for five years, which an audit committee called out for serious underperformance by Telstra Health and said the government should consider killing the contract or imposing penalties on Telstra.

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Being able to build and run IT infrastructure for a government that has a track record of handling IT badly should have been a slam dunk, but it was not to be.

At the same time, Australian telcos have been seeking to boost their offerings by including free data from music and video streaming services, and making moves into sporting rights, but Optus found out what can happen when you undershoot the demand for World Cup games.

To understand why telcos are trying anything that could make money, Telstra detailed the extent to which the NBN is carving out its revenue, at the same time as the previous rivers of gold from SMS and other fees begin to dry up and half a billion dollars annually with them.

"The NBN will have reduced Telstra's net profit after tax by close to a half when fully rolled out. Not a few percent, half," chair John Mullen said last week.

"To give some scale to that impact, what we are losing through this policy of half our business is approximately equivalent to a company the size of Qantas."

Pivoting a company the size of a national telco might sound good on paper, but as reality shows, it is quite the challenge.

It is worth noting that even as these searches for revenue replacement have continued, Australian telcos remain quite good at this bit-passing business.

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The next big thing that telcos are banking on is the coming rollout of 5G, but with the Internet of Things (IoT) touted to be one of the major use cases, the future from a telco perspective looks a lot like the past -- shunting bits. The tiny low-powered sensors themselves are not going to need much value-add from a telco on an individual level, just a good signal and some software networking higher up the stack.

Despite the need to create the next telco entertainment corp or telco everything-as-a-service arm, the telcos that will survive the shift and intense competition we are seeing will be the ones that are best at providing good networks at reasonable prices.

Dumb pipes might not be sexy as the Silicon Valley darlings, but they will be fundamental in a connected future.

ZDNet's Monday Morning Opener

The Monday Morning Opener is our opening salvo for the week in tech. Since we run a global site, this editorial publishes on Monday at 8:00am AEST in Sydney, Australia, which is 6:00pm Eastern Time on Sunday in the US. It is written by a member of ZDNet's global editorial board, which is comprised of our lead editors across Asia, Australia, Europe, and North America.

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