J5800 Telecommunications Services in Australia Industry Report

2 About this Industry2 Industry Definition

2 Main Activities

2 Similar Industries

2 Additional Resources

3 Industry at a Glance

4 Industry Performance4 Executive Summary

4 Key External Drivers

5 Current Performance

7 Industry Outlook

10 Industry Life Cycle

12 Products & Markets12 Supply Chain

12 Products & Services

13 Demand Determinants

14 Major Markets

15 International Trade

16 Business Locations

18 Competitive Landscape18 Market Share Concentration

18 Key Success Factors

18 Cost Structure Benchmarks

20 Basis of Competition

21 Barriers to Entry

22 Industry Globalisation

23 Major Companies23 Telstra Corporation Limited

24 SingTel Optus Pty Limited

25 Vodafone Hutchison Australia Pty Limited

27 Operating Conditions27 Capital Intensity

28 Technology & Systems

29 Revenue Volatility

30 Regulation & Policy

32 Industry Assistance

33 Key Statistics33 Industry Data

33 Annual Change

33 Key Ratios

34 Jargon & Glossary

IBISWorld Industry Report J5800Telecommunications Services in AustraliaJune 2013 Craig Shulman

Wired to wireless: A decline in wired revenue is offsetting growth in wireless services

www.ibisworld.com.au | (03) 9655 3881 | [email protected]

WWW.IBISWORLD.COM.AU Telecommunications Services in Australia June 2013 2

Telecommunications companies are mainly engaged in operating, maintaining or providing access to facilities for the transmission of voice, data, text, sound and video wire, cable, wireless and satellite networks. Not all subdivision participants

own and operate telecommunications infrastructure. Telecommunications resellers purchase network capacity and then retail services to businesses and consumers. Internet service providers are not included in this subdivision.

The primary activities of this industry are

Wired telecommunication service provision

Wireless telecommunications service provision

Satellite communication service provision (except mobile telephones)

Television and radio relay station operation

Paging services

Industry Definition

Main Activities

Similar Industries

Additional Resources

The major products and services in this industry are

Mobile services

Resellers

Satellite, TV and radio relay and paging services

Wired services

About this Industry

E3109 Heavy Industry and Other Non-Building Construction in AustraliaCompanies in this industry lay cable, construct transmission lines or towers and install or repair telephone or telegraphic equipment.

J Information Media and TelecommunicationsEnterprises in this industry operate radio or television broadcasting services.

M6900 Business Services in AustraliaBusinesses in this industry operate telephone answering services or message delivery services.

X0016 Integrated Logistics in AustraliaFirms in this industry deliver freight items but not letters and mail-type articles.

For additional information on this industry

www.acma.gov.au Australian Communications and Media Authority

www.accc.gov.au Australian Competition and Consumer Commission

www.commsalliance.com.au Communications Alliance


Market ShareTelstra Corporation Limited 40.4%

SingTel Optus Pty Limited 16.1%

Vodafone Hutchison Australia Pty Limited 10.1%

Key External DriversDemand from telecommunications and other electrical goods wholesalingNumber of businessesMobile telecommunications densityDemand from heavy industry and other non-building construction

Key Statistics Snapshot

Industry at a GlanceTelecommunications Services in 2012-13

Revenue

$39.7bnProfit

$5.1bnWages

$5.4bnBusinesses

182

Annual Growth 13-18

-1.4%Annual Growth 08-13

-1.9%

Industry Structure Life Cycle Stage Decline

Revenue Volatility Medium

Capital Intensity High

Industry Assistance Medium

Concentration Level Medium

Regulation Level Heavy

Technology Change High

Barriers to Entry High

Industry Globalisation Medium

Competition Level Medium

FOR ADDITIONAL STATISTICS AND TIME SERIES SEE THE APPENDIX ON PAGE 33

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SOURCE: WWW.IBISWORLD.COM.AU

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Revenue vs. employment growth

Establishments

41.9%NSW

1.1%ACT

26.2%VIC

0.4%TAS

16.2%QLD

9.3%WA

5%SA


p. 23

p. 4



Key External Drivers Demand from telecommunications and other electrical goods wholesalingDemand for this industry’s products is reflective of the pace of technological change utilised by this industry. Consistently high, this reflects the need for the industry to consistently invest in making the most of available technology in order for consumers to become interested in upgrading their services rather than persisting with their current service offering. In 2012-13 this is expected to be no different.

Number of businessesBusinesses are an important market for telecommunication companies. Businesses depend on

telecommunications services when producing and distributing goods and services. An increase in the number of businesses in Australia will boost subdivision demand and revenue as it will increase the market size. In 2012-13, these numbers are expected to continue to grow as Australia’s economy remains healthy.

Real household disposable incomeHouseholds’ consumption of telecommunications services depends in part on disposable income. This is particularly the case for spending on the subdivision’s latest services such as mobile internet, GPRS, IPTV and super fast fixed internet. Spending on the

Executive Summary

An explosion in connectivity has entrenched telecommunications as a vital part of the day-to-day functioning of Australian businesses and has changed the way Australians interact, with social networking moving online. Despite the increased demand to communicate over these pathways, IBISWorld forecasts that revenue for the Telecommunications Services subdivision will decrease by 7.2% to $39.7 billion in 2012-13.

Industries within the Telecommunications Services subdivision have posted contrasting results. Overall subdivision revenue has been strongly affected by the decline in wired revenue, and is expected to record an annualised decline of 1.9% in the five years through 2012-13. Notably, over the past five years there has been increased demand and use of telecommunications services. Despite the increased demand, intense intra-industry and intra-subdivision competition has created a fiercely competitive environment. This means that growth in demand has been achieved at the expense of other, more profitable telecommunications services. In particular, the Wireless Telecommunications Carriers industry has been succeeding due to wired-to-wireless substitution. The Wired

Telecommunications Network Operation industry has suffered a collapse in access lines and usage, and will continue to recede in the future.

The overriding factor driving this shift in demand has been price-based competition and as such demand has shifted to lower priced services that benefit the consumer, which is occurring at the expense of overall subdivision revenue and profitability. In an attempt to underpin margins, telecommunications companies (telcos) have looked to improve efficiency by reducing employee numbers.

IBISWorld forecasts that subdivision revenue will struggle to return to growth in the coming five years, decreasing at an annualised 1.4% to reach $36.9 billion in 2017-18. Growth, where it does occur, will be the result of advances in technology, expanding network coverage and network infrastructure upgrades. The National Broadband Network is expected to be a game changer in particular, as it upends the current competitive environment that embodies the Wired Telecommunications Network Operation industry. Furthermore, investment in 4G networks is expected to fuel competition in the Wireless Telecommunications Carriers industry.

Industry PerformanceExecutive Summary | Key External Drivers | Current Performance Industry Outlook | Life Cycle Stage


Industry Performance

Current Performance

The appetite for constant connectivity and the blossoming of data are the two major stories of the past five years. Mobile network infrastructure in Australia advanced with third generation (3G) networks assuming dominance. The next generation of mobile technology enabled significant enhancements to the quality of service offered and, when combined with increased affordability, resulted in extra push behind the fixed-to-mobile substitution trend. This trend resulted in mobile service revenue usurping all fixed-line revenue for the first time in 2007-08, with mobile revenue now about $20 billion.

The preference for mobility is at the expense of wired services, which traditionally generate high margins. However, this does not signal the death of wired infrastructure. The current environment is conducive to mobile infrastructure, as the maturity of 3G and 4G technology is coinciding with the decline of copper and its associated internet access technologies. However, IBISWorld expects that fixed and mobile communication infrastructures will coexist in harmony in the future.

The overall outcome for the Telecommunications Services subdivision is one of treading water. The growth of

Key External Driverscontinued

subdivision’s more traditional service offerings such as voice and messaging are relatively insensitive to disposable income changes. However, the convenience of mobile telephony is cannibalising the subdivision and will threaten its overall performance. In 2012-13 this is expected to continue.

Mobile telecommunications densityTelephone density refers to penetration, the percentage share of the population that own a mobile phone. An increase in mobile phone penetration represents growth in demand for mobile services, assuming that it is not caused by a decrease in the population. Over the past five years, higher penetration has

been driven by an increase in wireless data card subscriptions, and will be the main opportunity for growth for the subdivision as a whole, including during 2012-13.

Demand from heavy industry and other non-building constructionThis sensitivity represents the federal and state government policies and regulations for the telecommunications industries. Regulation in telecommunications is always expected to be high, including during 2012-13, as the potential for the industry to become highly concentrated is high as the industry only attracts players who are able to invest heavily into capital infrastructure.

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Current Performancecontinued

mobile revenue is cancelled out by the decline in wired revenue, ultimately resulting in an estimated annualised revenue decline of 1.9% in the five years through 2012-13. Profit margins have also declined as rising competition has forced the subdivision’s prices down. The decline may seem astounding considering booming telecommunications services consumption. However, the increased price-based competition and new

technologies have resulted in sizeable price declines. Telcos have generally enacted price cuts by offering greater usage for the same plan payment. Importantly, the price decline represents the subdivision’s traditional services’ long-term shift towards a utility service, where the provision of data will eventually mirror electricity, gas and water utilities. Subdivision revenue is forecast to decrease by 7.2% in 2012-13, to $39.7 billion.

Rising competition Over the past five years, the subdivision has been largely defined by its three biggest players – Telstra, SingTel Optus and Vodafone Hutchison Australia (VHA). While Telstra and Singtel Optus participate in both wired and wireless areas of the subdivision, VHA’s business is heavily focused on wireless telecommunications. Furthermore, the company was only formed via a merger in February 2009, making it a relatively new major player.

Remaining subdivision participants operate on a much smaller scale, with the next-largest grouping classified as second-tier telcos. Second-tier telcos are characterised as having market share of 1.0% to 2.0% and tend to be pushing through the new technologies and products that are absorbing the

traditional telecommunications revenue. The best example is M2, which has been growing at a very fast pace due to its continual acquisition activity.

Competition has been intensifying as mobile networks, a market in which Telstra faces the stiffest competition and has the least-dominant market share, become the dominant revenue generator. This is extremely important in terms of industry dynamics, as Optus and VHA own full-coverage mobile networks. To encourage the migration to mobile, VHA’s predecessors and Optus instigated aggressive price competition. This began with the introduction of capped plans and has extended to larger handset subsidies. The fixed-line providers, carriers and resellers responded by slashing their prices, particularly for long-distance calls.

Demand to communicate

Demand for communication services has grown strongly in the past five years. The consumer has been the big winner of the intensifying competition, which is delivering considerable benefits to households and businesses. Lower prices are the most immediate benefits and have enabled much higher use of telecommunication services. This is particularly the case in the mobile space. The price declines have placed pressure on margins and caused telcos to introduce innovative value-added services, in addition to the traditional offerings, to

encourage further usage and to protect margins. This is further embedding telecommunications into the daily lives of businesses and consumers as it makes telecommunication networks the backbone of a growing number of services.

The changes in the mobile space over the past five years exemplify this trend. Mobile phones originally focused on mobile voice services but now provide voice, messaging, email, internet browsing, mapping, GPS and modem services (via tethering). Such service breadth is making household and



Industry Outlook

The next five years will be an exciting period for the Telecommunications Services subdivision as Australia’s digital economy landscape begins to take shape. IBISWorld expects that subdivision revenue will decrease at an annualised 1.4% to total $36.9 billion in 2017-18. In 2013-14, revenue is expected to decrease by 3.4%. There will be further advancements in network infrastructure technologies, the rollout of advanced fibre-to-the-home (FTTH) services and 4G mobile networks will be of particular importance. As the advanced networks expand their coverage, new telecommunication-enabled smart applications for the utility, transport, health, education, commerce and retail sectors will be developed, creating new revenue streams for telcos. This period is when the next generation networks will begin to be adopted by the masses. Advances in network infrastructure will enable the adoption of emerging services such as VoIP, IPTV (TV over the internet) and mobile tethering to become mainstream services, providing significant competition for the subdivision from internet service providers (ISPs).

IBISWorld expects the heightened merger and acquisition activity will continue as the second-tier telcos look to boost their competitiveness, which is obtained through greater scale. The recent announcement that NBN Co, the company created to administer the national broadband network (NBN), will look at acquiring telcos as part of the network expansion will add another dimension to the merger and acquisition activity. External competitive threats will emerge from other fields and beyond

Demand to communicatecontinued

business subscribers greatly dependent on their mobiles. The all-encompassing product range is allowing a growing number of consumers, sole proprietors

and small businesses to rely solely on wireless services for delivering all their communication needs. Such dependency is facilitating a boom in mobile usage.

Fixed-to-mobile substitution

The most significant trend in the past five years has been fixed-to-mobile substitution. The switch is being fuelled by rapid advances in mobile technology, which, in combination with a greater contraction in mobile prices than in wired services, has created a value gap between mobile telephone services and wired services. Increased demand for the constant connectivity that mobile services deliver has been an added incentive fuelling the substitution. Mobile services have become so attractive

that many households have hung up their traditional phone and disconnected their landline altogether. Telstra reports that access lines in service have fallen from over 10 million in 2005 to just 8.8 million in December 2009. Fixed-to-mobile substitution has weakened Telstra’s dominance while providing valuable gains for competitors in growth segments of the telecommunications market. In particular, VHA’s market share has increased by 4.5 percentage points since 2005.

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National Broadband Network

The most significant development faced by the Telecommunications Services subdivision in the short term and throughout the next five years will be the Federal Government’s $43.0 billion FTTH NBN initiative. As the NBN is interconnected with an already-established 4G rollout, the Australian economy will be ushered into the digital age. Wired and mobile connectivity of over 100+ megabits per second will facilitate mass-market adoption of VoIP and IPTV, smart grids, true e-health and e-learning, innovative online shopping and many other applications. The establishment of 4G networks and the NBN will increase consumer and business reliance on telecommunications services.

In April 2009, the Federal

Government outlined a plan to build the broadband network to cover 93% of the Australian population. The remaining 7.0% of citizens are to get at least 12 megabit per second connectivity using a combination of mobile and satellite technology. The plan involves the establishment of a company, NBN Co, legislated to be at least 51% government owned until at least five years before the completion of the build, to act as the wholesale entity. However, this plan is being called into question with the national election in 2013-14. The Coalition, if elected, intends to downsize the initiative to a fibre-to-the-node plan, which will lower infrastructure investment but slow the potential network speed.

Capacity constraints Mobile networks have prospered recently because of the constant connectivity advantage in comparison with the traditional wired carrier market. The mobile networks have been able to cope with the demand that the initial applications have placed on the network. However, the increasing penetration of data-hungry and internet-enabled devices will create challenges for mobile

networks and place capacity constraints on the mobile networks.

Strong growth in the mobile and ISP markets will offset revenue decay in the wired telecommunications carriers segment and anaemic growth from the satellite, television and radio relay operations segment. The latter segment will face some difficulties as analogue TV services are switched off.

Competition Assuming a smooth NBN rollout, towards the end of next five years the 4G-FTTH world will be a land of opportunity for the Telecommunications Services subdivision. Given that the future of communication will be more data-centric, the distinction between ISPs and telecommunications carriers will eventually disappear as the services become one and the same. In addition, the global trend is that companies that

previously operated in non-telecommunication industries such as cable operators, mobile-TV technology providers, content owners and search providers will look to move into the Telecommunications Services subdivision. To gain greater control over the supply chain and a larger portion of the spoils, major market participants will want to fully integrate and operate across key distribution channels. This will

Industry Outlookcontinued

Australia’s borders as the convergence trend in media and communications continues. IBISWorld expects that once the NBN rollout occurs there will be a

spate of new retail service providers looking to enter the market, which will ensure that subdivision enterprise numbers return to growth.



Competitioncontinued

necessitate that the wired and mobile markets coexist within the media, IT and communications sectors.

Ultimately, it will be important for telcos to diversify their operations from traditional telecommunications provision. The wireless segment’s traditional product offering (voice and messaging) is becoming a commodity business with high volumes and low profit margins, reflected by falling average revenue per user. If the segment does not evolve, it will trend further towards becoming a low-margin commodity type segment, where operators become dumb pipe providers that deliver data (i.e. content) from producers to consumers.

One way that players can differentiate themselves is through service integration and cross-selling, marketing and service innovation. Cross-selling is already gaining greater emphasis, with product bundling becoming more prominent through its ability to cross sell and retain customer commitment for longer periods of time. Cost control will also be important in ensuring competitive pricing, but the future of internet access will be low margin, so cost control will simply be a competitive necessity. Furthermore, a greater focus on digital service provision is gaining greater attention as Optus’ parent company SingTel restructures its entire operations towards pursuing this revenue stream.


Industry PerformanceBooming usage has been driven by new technologies, which have replaced traditional revenue

The fixed-to-mobile shift has undermined profitability and has placed added pressure on small operators

Competitive pressures have forced a shake-out

Consolidation has eased the subdivision’s labour burden and has led to a decline in employment and wages

Life Cycle Stage


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DeclineShrinking economicimportance

Quality GrowthHigh growth in economic importance; weaker companies close down; developed technology and markets

MaturityCompany consolidation;level of economic importance stable

Quantity GrowthMany new companies; minor growth in economic importance; substantial technology change

Key Features of a Decline Industry

Revenue grows slower than economyFalling company numbers; large fi rms dominateLittle technology & process changeDeclining per capita consumption of goodStable & clearly segmented products & brands

Heavy Industry and Other Non-Building ConstructionConsumer Goods Retail

Finance

Business Services

Education and Training

Telecommunications Services



Industry Life Cycle The initial perception of Australia’s Telecommunications Services subdivision is one of growth, as information and communication services are becoming increasingly important in the day-to-day lives of business and consumer. However, the initial perception does not reveal the whole truth and by looking a little closer it is clear that the Telecommunications Services subdivision is actually in the decline stage of its economic life cycle.

The last few years have been marked by some landmark events in the subdivision. The past five years have seen a decline in fixed voice telecommunications, where overall decline in fixed networks has been a result of improvements in mobile network speeds and affordability, have made mobile internet connectivity a viable option for a growing number of businesses and consumers. As a result, the subdivision now earns more revenue from mobile infrastructure than fixed. Such a development ultimately represents another step closer to the end for the dominant fixed-line technology, copper. For much of the early 2000s, the life cycle of copper was prolonged by internet services. However, with advanced HFC, 4G and then FTTH networks on their way, the revenue decline for this piece of ageing infrastructure is set to accelerate.

Technology advances, service introductions and price declines have made it convenient and cost effective for consumers to disconnect their land lines to rely solely on their mobiles. As more users and traffic have moved onto mobile networks, further price cuts have become possible. This has ensured the fixed-to-mobile shift has meant a net revenue loss to the subdivision. In addition to the substitution threat posed by wireless services, fixed revenue has been undermined by service innovations such as VoIP and naked DSL. These new services deliver fixed voice at a much lower cost to users, in effect absorbing

operator revenue. The new technologies have been pioneered by small telcos who are yet to have an established subscriber base and have developed business models around the new technology. Dominant providers are remiss to offer new technology as they greatly reduce the life cycle of traditional, high margin, telecommunications services. Industry blended ARPU has declined over the last five years, as the price of services across all infrastructures has reduced as operators compete to retain subscriber share.

The sizable declines in pricing have placed pressure on margins. To ease the load, many companies have engaged in merger and acquisition activity to build scale and realise efficiencies. Infrastructure owners have purchased wholesale clients, Vodafone and Hutchison merged and some resellers have bought infrastructure owners. Alternatively, many small operators have exited the subdivision as margin pressures have taken their toll. In all, the subdivision has been through a significant shakeout that has improved its productivity. A larger number of medium-to-large operators eased the labour burden.

Telcos have continued their investment in additional and upgraded infrastructure over the past five years. However, the majority of investment was undertaken prior to the economic downturn. Infrastructure upgrades have included investment in 3G and 4G technology and fixed-network builds.

With profit, wages and depreciation all on the slide, the subdivision’s economic contribution is expected to contract over the 10-year period through 2017-18. IBISWorld expects the decline in subdivision value added will be at an annualised rate of 1.9%, compared with forecast annualised GDP growth of 2.4% over the same period. The divergent direction in value added and GDP is indicative of a subdivision in decline.

This industry is Declining


Products & Services Mobile carriers have usurped wired carriers as the dominant industry within the Telecommunications Services subdivision. Over the past five years, mobile services have continued to assert their dominance in the subdivision. The mobile market has benefited from the changing behaviour and preferences of consumers as they have shifted consumption from wired to mobile

voice. This trend has been driven by the greater convenience of mobility and rapid declines in prices for mobile voice. It has become cheaper for many consumers to disconnect their landlines and rely solely on their mobiles for voice services. The fixed-to-mobile substitution trend that has accelerated the decline of the Wired Telecommunications Network Operation

KEY BUYING INDUSTRIES

G4200 Consumer Goods Retail in Australia Retailers are becoming more reliant on telecommunication services in running both brick-and-mortar and online channels.

K6200 Finance in Australia Finance companies are big consumers of telecommunication services. This is demonstrated by the sizable contracts signed by the big banks (e.g. $100 million per annum).

M6900 Business Services in Australia The property and business service industries are a key user of services provided by the various components of the Telecommunications Services subdivision.

P Education and Training in Australia Australia’s education institutions are becoming increasing dependant on telecommunications in delivering services.

Q8400 Health Services in Australia Currently, health providers are only small consumers of telecommunications services. However, the establishment of next generation networks will unlock a plethora of e-health applications.

X0016 Integrated Logistics in Australia Logistics operators use telecommunications services in performing a number of functions including fleet management and load tracking.

KEY SELLING INDUSTRIES

J5800 Telecommunications Services in Australia Industry participants are heavily dependent upon the infrastructure and services provided by other participants.

Products & MarketsSupply Chain | Products & Services | Demand Determinants Major Markets | International Trade | Business Locations

Supply Chain

Products and services segmentation (2012-13)

Total $39.7bn

64.8%Mobile services25.7%

Wired services

7.2%Resellers

2.3%Satellite, TV and radio relay and paging services



Products & Markets

DemandDeterminants

Demand determinants outline the various factors that stimulate or reduce the demand for services supplied by the subdivision.

Each industry within the Telecommunications Services subdivision has its demand influenced by the over-riding economic conditions. Consumer demand is largely a function of employment levels, household disposable incomes, taxes and interest rates. An increase in household disposable income is likely to result in an increase in household consumption for telecommunications services, with mobile telecommunications carriers having the greatest capacity to absorb an increase in demand given that consumers can move to higher and more expensive usage plans. The overall consumer demand for telecommunications services is relatively resistant to the economic conditions, but it is the service mix of the demand that is influenced. The correlation of higher income to increased demand in other telecommunication industries, such as wired telecommunications, is not as high.

Business demand is largely a function of economic activity, the state and health of the industry in which the company operates in and company profitability. A

general increase in economic activity tends to correlate with increased demand for telecommunications services. A company that is performing well is also more likely to invest in more advanced telecommunications such as IP-based digital phone systems and in some cases, satellite telecommunications, which offer ubiquitous coverage as opposed to terrestrially based networks.

Perceived valuePrice is a key demand determinant for household users of telecommunications services. Lower, or falling, prices lead to an increase in consumer demand and are the key reason in the increased Australian mobile penetration over the past five years. A new service is initially priced at premium rates but as the service gains subscribers the price contracts until a critical point is reached that fosters mass adoption amongst consumers.

Business customers are less sensitive to price reductions, though it is important, particularly for those companies that have a large workforce. Business customers favour the level and quality of service as opposed to price, the inferior quality of initial VoIP offerings in comparison with traditional voice mediums has been the major factor in

Products & Servicescontinued

industry is also being felt in the internet space. Since 2007-08, the number of fixed internet connections has declined as mobile internet has surged and stolen some of the market.

Despite the continual decline in demand for wired voice services, the wired services segment still accounts for a sizeable portion of telecommunications consumption. This can be attributed to the segment including line access and fixed data services. Line access still generates a significant amount of revenue, as the majority of fixed internet connections depend on a wired access line. However, line access revenue is expected to crash over the next few years as naked internet

connections become more common. Fixed data services are becoming an increasingly important part of the wired services segment as businesses become more dependent on data networks for running their daily operations.

The remainder of subdivision revenue is derived from telco resellers, satellite, TV and radio relay providers and paging services. All of these segments are niche players in the subdivision. Resellers’ revenue share has deteriorated as infrastructure owners have focused on increasing their own subscriber bases, where previously they were happy to resell a higher proportion of unprofitable consumers.


Products & Markets

Major Markets

Households are estimated to account for 67.7% of the total market for telecommunication services. The overall market share accounted for by households varies considerably between industries. Households are the major market in the wired and mobile industries. In contrast, households are reported to account for only a small proportion of the market for telecommunication resellers and satellite, TV and radio relay operators.

Corporate clients are expected to

account for 27.5% of subdivision revenue. This largely includes demand for services from a broad range of divisions such as Finance and Insurance, Manufacturing, Retail Trade, Wholesale Trade and Property and Business Services. Analysis suggests that satellite, TV and radio relay operators rely heaviest on the corporate market. This is because their industry is upstream from telecommunication carriers and broadcasters and therefore gains a large proportion of its revenue from businesses.

DemandDeterminantscontinued

businesses not adopting the cheaper VoIP product.

Advanced technologyTechnological advances enable the introduction of new, or advancements in existing services. The continual improvement to services flows through to increase demand across all key market segments. The Mobile Telecommunications Carriers industry growth has been re-invigorated by the introduction of 3G services. Enhancements of existing services and technologies such as moving from PABX phone systems to digitally-based services and video conferencing as opposed to telephone hook-ups will also result in

increased demand for subdivision services. Satellite, TV and radio relay operations have benefited from the concurrent transmission of digital and analogue services. However, the ideal environment will come to an end in 2013 when analogue TV transmission ceases.

Availability of servicesDemand for telecommunications services is also a function of supply. Presently, a smaller proportion of the population are not covered by any of the terrestrially-based mobile telecommunications networks. Although availability of services may depend on investment principles or government assistant, an increase in coverage will increase demand.

Major market segmentation (2012-13)

Total $39.7bn

67.7%Households

27.5%Corporate clients

4.8%Government



Products & Markets

International Trade Domestic and international markets examine the import source and export destination for services supplied. For the Telecommunications Services subdivision, it represents the value of termination fees incurred by domestic carriers overseas and foreign carriers domestically. Increased competitiveness has put downward pressure on prices. So while international traffic volumes have increased, the value of

exports and imports is believed to have changed little over the past decade. IBISWorld anticipates that the current trend of low trade levels for services provided by this subdivision will persist over the next five years. Ultimately, the Telecommunications Services subdivision provides services to the Australian economy so international trade is not a focus of operators.

Major Marketscontinued

Government is expected to account for 4.8% of the demand for services provided by this subdivision. Satellite, TV and radio relay operators depend on the government

market for a sizeable share of their revenue. Their industry provides services to the ABC and SBS in particular. The government segment is usually fairly stable.


Products & Markets


TAS0.4

WA9.3

QLD16.2

VIC26.2

NSW41.9

NT0.0

SA5.0

ACT1.1

Establishments (%)

Cold Zone (<10) <25 <50 Hot Zone (<100) Not applicable

Business Locations 2012-13


Products & Markets

Business Locations The geographic distribution of the Telecommunications Services subdivision is relatively consistent with the population distribution of the nation, although there is a notable focus on eastern states. The biggest divergence between establishment share and population share is in New South Wales. This is because the head offices of telecommunications companies tend to be in Victoria and New South Wales.

A greater concentration of head offices means Victoria and New South Wales exhibit a disproportionately high share of wages. This is because higher earning roles such as senior management and executives are located at head offices. So a higher average wage means a greater overall share of wages. IBISWorld expects Western Australia has the lowest average wage. This is particularly notable given that state had the lowest unemployment level in the country, which generally puts upward pressure on wages. Ultimately, it suggests

the majority of employment within Western Australia is focused on customer service, sales and administration functions instead of head-office tasks.

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Cost Structure Benchmarks

The Telecommunications Services subdivision’s cost structure largely reflects that of the infrastructure owners. The industries are dominated by the infrastructure owners and as such the overall subdivision mirrors the infrastructure performance, in that the subdivision achieves a high profit margin and incurs considerable

depreciation and interest expense. The only industry in the subdivision that does not own and operate infrastructure is the relatively small Telecommunications Resellers industry. Resellers purchase wholesale capacity on the networks of other industries to then resell services to businesses and consumers. So for resellers,

Key Success Factors Having an extensive distribution/collection networkAn exhaustive distribution network (or access to it), via an extensive infrastructure network, is a key factor to the success of the organisation.

Ability to raise revenue from additional sourcesThe traditional products and markets are entering decline, so large telcos will need to reinvent themselves and look to new revenue streams.

Understanding government policies and their implicationsRegulations and government policies relating to the industry have changed and are changing significantly. This affects many variables, including competition

and pricing.

Having contacts within key marketsThe development of strategic alliances with major end user industries, such as pay-TV, electronic commerce providers and other online service providers, is important.

Undertaking technical research and developmentBusinesses need to undertake research and development to ensure the organisation meets world best practice in operational efficiency and delivering the service.

Economies of scaleFor industry participants, gaining economies of scale helps to reduce the cost of doing business, which contributes to higher profit margins.

Market Share Concentration

The Telecommunications Services subdivision has a medium level of concentration with the top three major companies accounting for the majority of revenue. The subdivision previously had four major players, but the third and fourth largest players, Vodafone and Hutchison, merged operations in 2007-08. There is a large gulf between the next level of second tier telcos. The high level of concentration can largely be attributed to Telstra, which has held onto around 40% of the market over the last five years. The challenger, Optus, has market share less than half of Telstra’s.

Telstra’s subdivision dominance ultimately lies in its incumbency. Being an integrated service provider with ownership

over the public switched telephone network (PSTN) has placed the telco at considerable advantage. This is why Telstra’s share of the subdivision has remained relatively unchanged over the past five years, despite the best efforts of a host of competitors.

While the subdivision as a whole is regarded as highly concentrated, levels do vary between various industries. For example, the Telecommunications Resellers industry has a low level of concentration, especially as Optus gradually exits the industry. Alternatively, the Mobile Telecommunications Carriers industry has an extremely high level of concentration, with the top three players accounting for over 99% of revenue.

Competitive LandscapeMarket Share Concentration | Key Success Factors | Cost Structure Benchmarks Basis of Competition | Barriers to Entry | Industry Globalisation

Level Concentration in this industry is Medium

IBISWorld identifies 250 Key Success Factors for a business. The most important for this industry are:


Competitive Landscape

Cost Structure Benchmarkscontinued

depreciation, interest and profit tend to represent a small share of revenue.

ProfitabilityTelecommunications companies require, and have been able to achieve, impressive profit margins due to the significant risk that they take on via the substantial initial, and the ongoing, investment in building, operating, maintaining and upgrading network infrastructure. Such investment comes with a high level of risk not only because the sums invested, but also the long return timeliness. This substantial investment risk then attracts a relatively high weighted average cost of capital, which necessitates sizeable profit margins. The profit margin will reflect profit erosion in both wired and mobile services. In line with its low capital investment, the Telecommunications Resellers industry tends to generate the lowest margins.

Access chargesThe largest expense for

Telecommunications Services subdivision participants is the cost of services. This cost represents access charges, interconnection fees, Universal Service Obligation fees and termination charges. Resellers spend the most on the cost of services because they have to purchase network capacity.

DepreciationThe subdivision’s heavy investment in infrastructure means it incurs large depreciation costs. Network investment is ongoing because operators must upgrade their networks with the latest technology developments. This is particularly the case in the mobile where there has been rapid technology innovation. Over the past decade, telcos have also invested in IT systems to automate a large number of administrative and processing functions. Over the next decade, the subdivision’s proportional depreciation expense is expected to increase in line with the NBN roll out, expected 4G network builds and ongoing HFC investments.

Sector vs. Industry Costs

■ Profi t■ Rent■ Utilities■ Depreciation■ Other■ Wages■ Purchases

Average Costs of all Industries in sector (2012-13)

Industry Costs (2012-13)

0

20

40

60

Perc

enta

ge o

f rev

enue

80

100

13.7

10.0

15.8

44.8

12.31.02.4

12.9

6.9

14.1

45.6

16.51.62.4




Basis of Competition Over the past five years, competition within the Telecommunications Services subdivision has greatly intensified. The commoditisation of key industry services has lead to price being the major competition basis. Because competition is primarily price-based, it has become increasingly important for companies in the subdivision to have large-scale operations in order to remain profitable. The Vodafone-Hutchison (VHA) merger in the Mobile Telecommunications Carriers industry means that the top three carriers will be able to compete due to their large scale of operations. The Wired Telecommunications Carriers industry, historically dominated by Telstra’s PSTN will also face increased competition once the National Broadband Network picks up pace; competition in wired will be transformed.

The major basis in which telecommunication companies compete is on the basis of price. The fixed-to-mobile substitution shift has been primarily driven by improved pricing position offered by mobile carriers. However, service quality in the form of coverage and product innovation in the form of value-added services has become increasingly important. Price is the critical factor because it is often difficult to differentiate between services that are becoming commoditised. The most

common form of pricing strategy, initially implemented by mobile carriers but later adopted across the board, is the cap (or bucket) plan. These plans offer users a defined usage limit for a particular monthly fee. In the past five years, the value of the caps has increased to attract additional subscribers. So pricing changes can be a change in the cap service value or in the cap price.

The primary means for differentiating services is on quality: speed, coverage and reliability. Speed is increasing in importance as the subdivision transitions towards a digital data-based network. Subscribers have changed the product preference and now prefer to access more sophisticated web content and services such as video, IPTV, social networking, online gaming and innovative e-commerce. These applications require greater downlink speeds to attain usability, but at the same time they place a much larger strain on the overall network performance. Telcos are set to place even greater emphasis on speed (and network capacity) over the next five years as more services become IP based. High speed, high capacity networks will be necessary for enabling the multitude of innovative, web-based services that are being developed for businesses.

Advancements in network and device technology are enabling rapid product

Cost Structure Benchmarkscontinued

Labour forceDespite being capital intensive, success in the Telecommunications Services subdivision relies on a large labour force and as such labour remains a key cost to the subdivision. Critical functions such as sales, marketing, customer service, accountant administration and network maintenance depend on labour. However, over the past decade the labour intensity of a number of these functions (e.g. accounts and customer service) has fallen due to investment in automation technology. Moreover, ongoing merger and acquisition activity has facilitated more productive use of

labour. Consequently, subdivision employment has declined and this has seen the subdivision’s proportional wage expense fall.

Other expensesAdvertising expenses vary between competitors and varies from 1.0% to 4.0% of revenue. While Telstra and Optus spend the most, these companies get to spread this spending over a much larger revenue base. Other operating expenses that are significant include purchase costs, repairs and maintenance, legal expenses, bad debts, leasing expenses, vehicle and travelling expenses and tax.

Level & Trend Competition in this industry is Medium and the trend is Increasing



Barriers to Entry Key barriers to entry to the Telecommunications Services subdivision include economies of scale, capital intensity, service differentiation, distribution networks and licences. The barriers to entry in the Telecommunications Services subdivision are high, despite extensive deregulation of the past 15 years.

Despite the radical changes that have occurred in the regulatory backdrop of the Telecommunications Services subdivision, there still exists a number of barriers to entry that are inherent characteristics of the telecommunications market. For example, a network operator must build, upgrade and maintain network infrastructure. Doing so is very capital intensive and involves an extremely high level of sunk costs. The potential for new network operators is limited to well capitalised firms.

Other barriers revolve around the established position of the previous statutory monopoly. As has been found in a number of other countries that have recently liberalised their telecommunication sectors, these incumbents still maintain a large market share in many facets of the subdivision despite the regulatory changes that have occurred. For example, incumbents

enjoy considerable cost advantages arising from economies of scale and scope. They also in effect still maintain control of essential or bottleneck facilities. The issue of access rights and declared services for new entrants is of paramount importance.

Barriers to entry will vary between the various segments of the Telecommunications Services subdivision. For example, barriers to entry for switched service providers in the IDD (international direct dialling) market segment are lower than the local call market as a result of lower interconnection costs and more concentrated call patterns. There has also been a creation of new niches in the reseller market.

A significant issue determining the ease of entry into mobile markets is the

Basis of Competitioncontinued

and service innovation. For telcos, being first to market with innovation can represent a significant competitive advantage. Optus’ iPhone play exemplifies this dynamic where it was able to leverage the success of the iPhone as a means of increasing its mobile market share. The building of the NBN and eventual move to 4G will further intensify internal competition as the boundaries between historically distinct services are removed. The Telecommunications Services is trending toward a utility type service, high volume but low margin, which will see service innovation become the key to differentiation and to the ability of a participant to maintain strong margins.

Novel marketing and service packaging is also becoming an increasingly significant competitive point as players offer integrated combinations of the latest products and services to encourage customers to become multi-product users. Marketing strategies that focus on cross selling products can enable players to make the most of their subscriber base. A number of players have also cited the importance of branding as a means of achieving differentiation. For example, Optus, an established telecommunications player, has invested substantial resources into developing the Optus brand, believing it to be a significant variable in customer acquisition and retention across most customer segments.

Level & Trend Barriers to Entry in this industry are High and Steady

Barriers to Entry checklist Level

Competition MediumConcentration MediumLife Cycle Stage DeclineCapital Intensity HighTechnology Change HighRegulation & Policy HeavyIndustry Assistance Medium




Industry Globalisation

Globalisation measures the extent to which this subdivision operates on a global scale. IBISWorld classifies the Telecommunications Services subdivision as operating at a medium level of globalisation. This is mainly because foreign operators are heavily involved within the domestic telecommunications market.

Foreign ownership concentration has increased over the past decade. Of the top ten players, five are foreign owned: Optus, VHA, TCNZ (AAPT), Primus and Broadcast Australia. The first two of these companies represent the two largest operators in the Telecommunications Services subdivision behind Telstra.

Telstra remains the dominant telecommunications provider. Telstra is majority Australian owned and the government still holds a sizable stake via the Future Fund. Telstra will remain Australian given that there are foreign ownership restrictions in place. Many of the smaller enterprises are domestically owned and operated.

A number of industries in this subdivision support Australian-owned operators that earn the majority of their sales from domestic activity. The dominant telecommunication provider in Australia, Telstra, has operations in New Zealand and some Asian countries. However, revenue derived from these businesses account for less than 10% of Telstra’s total company revenue. Other players also have operations in foreign countries, however, these business also account for only a small portion of company revenue.

In analysing the level of globalisation in the Telecommunications Services subdivision, it is important to note the worldwide trend towards cross-border investments in global telecommunications. In accordance with the WTO’s General Agreement in Trade in Services, a number of countries have liberalised markets and investment in telecommunications. In the short term, IBISWorld anticipates the level of subdivision globalisation will continue to rise.

Barriers to Entrycontinued

availability of spectrum. Importantly, spectrum availability determines the number of carriers that can be licensed. With the merging of Vodafone and Hutchison, there are now just three network operators that account for over 99% of the Mobile Telecommunications Carriers industry. The potential for new entrants within the industry is limited to niche satellite services. The scarcity of available spectrum is flowing through as an increased barrier to the Telecommunications Resellers industry. Previously, network operators had wholesaled excess spectrum to resellers who would be able to better service particular markets, but as bandwidth use intensifies mobile operators are buying out mobile virtual network operators and

amalgamating the subscriber base onto their own networks.

With convergence being a major characteristic of the Telecommunications Services subdivision in general, there is a growing need for business alliances and strategic partnerships to take advantage of convergence trends. To attract partners to deliver inter-connected information and communication services, telcos must be provide the partner with access to a large enough group of profitable customers that the investment in the partnership is worthwhile. Again this favours the larger telcos, many of which have already established alliances and strategic partnerships with information and communication companies.

Level & Trend Globalisation in this industry is Medium and the trend is Increasing


Player Performance Telstra Corporation Limited is Australia’s oldest and largest telecommunications services provider. The company began as a statutory monopoly in 1901. The company, then called Telecom, was corporatised in 1989 and then privatised in three stages, the first in 1997 and the last in 2006. The loss of its statutory monopoly powers in the early 1990s subjected the company to increasing competition. However, Telstra has benefited from the tremendous scale advantages it has been able to maintain since the deregulation and is still the dominant player in wired, mobile and internet services. The dominance and scale advantages in comparison with its competitors enable Telstra to enjoy the highest margins of all Australian telcos.

Telstra’s full-service business model gives it a number of competitive advantages in the media and communications market. Economies of scope allow the company to deliver price-competitive integrated media and communication packages. The breadth of such bundling goes unmatched by many of its competitors. Similarly, Telstra’s monopoly origins delivered scale economies that have facilitated extensive investment in network infrastructure. Due to this, Telstra has consistently outperformed rivals such as Optus on service quality. With advantages in scale and scope, the company has been able to fend off attacks from a host of competitors.

Financial performanceOver the past five years, the company’s subdivision-related revenue has stagnated as its departments follow industry trends. Its ownership of the PSTN has meant that drops in wired-

related revenue have been particularly significant. As this decline in the wired segment is being fuelled by mobile substitution, the firm has become more reliant on the fast-growing wireless telecommunication market. The company initially lost market share in the wireless realm as rivals Optus and VHA fought desperately to win a larger share of the most lucrative telecommunications market. However, Telstra has responded through promotion of its superior mobile network, winning back market share in the past few years. This is particularly positive as this segment has become the most dominant in the subdivision. The company has been able to benefit in particular from disaffected VHA subscribers wanting to switch to a more reliable network since 2011-12.

Telstra and the NBNTelstra was rocked by the Federal Government’s NBN announcement. A FTTH national network owned by a new company would cause the incumbent to

Major CompaniesTelstra Corporation Limited | SingTel Optus Pty LimitedVodafone Hutchison Australia Pty Limited | Other Companies

Major players(Market share)

33.4%Other

Telstra Corporation Limited 40.4%

SingTel Optus Pty Limited 16.1%

Vodafone Hutchison Australia Pty Limited 10.1%


Telstra Corporation Limited – subdivision segment performance

YearRevenue ($ billion) (% change)

2007-08 16.5 N/C

2008-09 16.8 1.8

2009-10 16.5 -1.8

2010-11 16.4 -0.6

2011-12 16.3 -0.6

2012-13* 16.0 -1.8

*EstimateSOURCE: ANNUAL REPORT AND IBISWORLD

Telstra Corporation Limited Market share: 40.4% Industry Brand Names BigPond Telstra


Major Companies

Player Performance SingTel Optus Pty Limited (previously Cable & Wireless Optus) is Australia’s second-largest telecommunications company. It is a fully integrated telco, offering mobile services, fixed telephony, business network services, internet access, satellite services and subscription TV. Over the past few years, Optus has invested billions of dollars in its four networks: fixed, mobile, broadband and satellite.

Optus was formed in 1991, becoming Australia’s first privately owned fixed and mobile carrier. This private licence was offered by the government as the first stage of telecommunications deregulation. In 2001, Optus was purchased from a UK telecommunications group by the Singaporean telecommunications group SingTel.

Optus operates under four business units: mobile, business, wholesale, and consumer and small-to-medium business. Its mobile unit generates the majority of revenue at about 60%.

Financial performanceOver the past five years, Optus has shifted its organisational focus from the traditional wired voice telecommunications product, repositioning itself as a leading provider of integrated communication services. In fixed-line services, the company’s strategy centres on boosting on-net traffic, which is resulting in its exit from

the reseller space. In mobile, Optus’ strategy is to win 3G and 4G subscribers and to grow data revenue. This move paid dividends, with the company initially winning share from 2007-08. However, this has plateaued in the past few years.

In March 2012, parent company SingTel announced a significant change in its strategic approach and decided to restructure the entirety of its operations along functional rather than geographic lines. A new emphasis will be placed on digital services. The company intends to bring its own mobile advertising to its customers. Despite building the long-term inroads in its mobile operations, Optus has been forced to cut staff in response to the restructure.

Player Performancecontinued

lose one of its key competitive advantages: ownership of the PSTN. As the NBN would make Telstra’s PSTN network redundant, Telstra and the Federal Government reached a agreement allowing NBN Co. to

use Telstra’s infrastructure to construct the new fibre optic network and also monetarily compensate Telstra for lost revenue that it would have gained from the PSTN in coming years.

SingTel Optus Pty Limited – subdivision segment performance

Year*Revenue ($ billion) (% change)

2007-08 6.4 N/C

2008-09 7.1 10.9

2009-10 7.6 7.0

2010-11 8.0 5.3

2011-12 8.1 1.2

2012-13** 7.7 -4.9

*Year end March **EstimateSOURCE: ANNUAL REPORT AND IBISWORLD

SingTel Optus Pty Limited Market share: 16.1% Industry Brand Names Optus


Major Companies

Other Companies There is a large gap between the three major telecommunications companies and the rest. Second tier companies including Telecom NZ, M2 and iiNet all hold around 0.5-2% market share. A large number of companies then follow, each tending to focus on servicing specific markets.

M2 Telecommunications GroupEstimated market share: 1.5%M2 Telecommunications was established in 1999 and is the largest reseller of fixed line, mobile and data

telecommunications that uses infrastructure from a number of different carriers including Telstra, Optus and Telecom New Zealand (PowerTel). M2 targets primarily the commercial market, particularly small to medium enterprises. M2 operates two main business divisions: M2 Telecom and M2 Wholesale. The company is headquartered in Melbourne and was listed on the Australian Securities Exchange in October 2004.

M2 Telecom business division offers bundled telecommunications services and value added offerings targeted

Vodafone Hutchison Australia Pty Limited – fi nancial performance

Year*Revenue ($ billion) (% change)

2008 1.6 N/C

2009 3.4 112.5

2010 4.8 41.2

2011 4.6 -4.2

2012 4.1 -10.9

2013** 3.5 -14.6

*Year end December **EstimateSOURCE: IBISWORLD

Player Performance In February 2009, Vodafone and Hutchison announced an agreement to merge their telecommunications businesses in Australia. Both Vodafone and Hutchison have an equal ownership in the joint venture, which was renamed Vodafone Hutchison Australia Pty Limited (VHA). The joint venture was given the green light by the Australian Competition and Consumer Commission in May 2009. This move was a positive step for both companies. Previously, the efforts of Vodafone and Hutchison undermined each other’s profitability, as neither possessed enough scale to compete effectively with the much larger Telstra and Optus. With their resources pooled, the playing field has been levelled because the merged entity has the scale to compete effectively.

Upon merger, VHA had a customer base of about 6.0 million users with total revenue of over $4.0 billion. In the short term, VHA set its sights on overtaking Optus to become the nation’s second-largest mobile service provider. The company markets its products and services under the Vodafone brand, but retained exclusive rights to use the 3 brand in Australia during a transition period and thereafter.

Financial performanceSince the merger, the company has had to endure significant setbacks due to the global financial crisis (which happened

the same year as the merger) and in 2011, Vodafone’s mobile network received strong criticism, which led to an exodus of many customers. However, the company still accounts for over 10% of total subdivision revenue. While this is somewhat behind market shares of Telstra and Optus, VHA is in the process of merging its operations completely under the Vodafone brand name and subsequently has the potential to generate greater synergies and greater revenue. Furthermore, with its focus on the mobile telecommunications services market, it has an advantage of being in a strong growth area within the subdivision, which creates greater potential to raise its revenue growth rates above the subdivision average.

Vodafone Hutchison Australia Pty Limited Market share: 10.1% Industry Brand Names 3 Mobile Vodafone


Major Companies

Other Companiescontinued

principally at the small business market. M2 Wholesale supplies wholesale telecommunications services to small and medium size telecommunications service providers and ISPs.

In December 2008, M2 reached an agreement with People Telecom to acquire the company through a scheme of arrangement. The $17 million deal was completed in April 2009. In June 2009, M2 Telecommunications completed the acquisition of Commander’s SMB business segment for $19 million. These two acquisitions are expected to push the company’s reseller revenue up to about $400 million. This will make M2 the largest player in the Telecommunications Resellers industry.

M2 continues to pursue expansion through acquisition, as evidenced by the April 2010 acquisition of business assets of Clever Communications Australia.

In April 2012, the company increased its market share significantly by acquiring US company Primus’ Australian operations, in a bid to become a major contender over the next five years through broadening its customer base towards residential consumers and increase its overall scale.

Telecom NZEstimated market share: 0.7%In 2000, Telecom NZ acquired the Australian company AAPT. AAPT was established in 1991 by AAP Information Services, the first privately owned satellite network operator in Australia. AAPT operates an integrated business that provides a range of voice and data services to the business, corporate, government and residential markets.

AAPT has been hit hard by the substitution trend away from fixed service lines. The losses were particularly evident in the consumer segment, as customers embraced wireless devices and reduced usage of the traditional fixed phone. AAPT’s access lines and calling minutes tumbled during the five years

through 2009-10. These decreases were exacerbated by intensifying price-based competition, which weighed on margins.

Due to this continual struggle in the Australian market, the company has sold its consumer business to iiNet in July 2010 for $60 million. The company is still interested in selling the rest of its Australian operations, particularly as the industry undergoes further industry consolidation.

NBN Co. LimitedIn April 2009, the Australian Government announced it would establish a new company to invest up to $43 billion over eight years delivering superfast broadband to Australian homes and workplaces. To achieve this goal, a new company was established, NBN Co. Limited, to build and operate the network.

The network managed by NBN Co. will be an open-access, wholesale-only network. One of the driving forces behind the move is to enhance the competitive environment by removing the large economies of scale that Telstra has previously enjoyed. It is the NBN Co.’s intention to give each provider equal access to the network, which will ultimately lead to increased innovation and choice throughout the market. Thus, the ultimate winner will be the end user who will have the power to choose the service and service provider that best suits their needs.

M2 Telecommunications Group – fi nancial performance

YearRevenue

($ million) (% change)

2007-08 109.2 N/C2008-09 202.5 85.42009-10 406.1 100.52010-11 427.9 5.42011-12 393.5 -8.02012-13* 641.7 63.1

*EstimateSOURCE: ANNUAL REPORT AND IBISWORLD


Capital Intensity The Australian Telecommunications Services subdivision exhibits a high level of capital intensity. There are significant initial investment costs that are associated with the formation and entry into the subdivision. The subdivision is becoming more capital intensive as it sheds employees in an attempt to improve operational efficiency, whilst concurrently investing heavily in new technologies and infrastructure upgrades (including the likes of fibre optic cables and advanced third generation mobile technologies). Initially, subdivision participants undertook significant headcount reductions in the aftermath of the global telecommunications downturn that persisted during the early 2000s. More recently, a spate of merger and acquisition activity has seen further job cuts.

Telecommunications companies employee staff to deliver services to a range of markets from corporate and

government users through to households. Major activities include marketing and sales, account administration and support, web and software development and hardware and network engineering. Over the past decade a large number of lower-paid administrative tasks have

Operating ConditionsCapital Intensity | Technology & Systems | Revenue VolatilityRegulation & Policy | Industry Assistance

Tools of the Trade: Growth Strategies for Success


Labo

ur In

tens

ive Capital Intensive

Change in Share of the Economy

New Age Economy

Recreation, Personal Services, Health and Education. Firms benefi t from personal wealth so stable macroeconomic conditions are imperative. Brand awareness and niche labour skills are key to product differentiation.

Traditional Service Economy

Wholesale and Retail. Reliant on labour rather than capital to sell goods. Functions cannot be outsourced therefore fi rms must use new technology or improve staff training to increase revenue growth.

Old Economy

Agriculture and Manufacturing. Traded goods can be produced using cheap labour abroad. To expand fi rms must merge or acquire others to exploit economies of scale, or specialise in niche, high-value products.

Investment Economy

Information, Communications, Mining, Finance and Real Estate. To increase revenue fi rms need superior debt management, a stable macroeconomic environment and a sound investment plan.

Heavy Industry and Other Non-Building Construction

Consumer Goods Retail

FinanceBusiness Services Education and Training


Level The level of capital intensity is High

Capital intensity

2.0

0.0

0.5

1.0

1.5

SOURCE: WWW.IBISWORLD.COM.AUDotted line shows a high level of capital intensity

Capital units per labour unit

Telecommuni-cations Services

Information Media and

Telecommuni-

Economy


Operating Conditions

Technology & Systems The rapid evolution of the Telecommunications Services subdivision continues to be driven by technology developments. Over the past 15 years, a lot has changed in the subdivision. The shift from analogue to digital technology enabled the transmission of voice, images and data through the same network. Investment in fibre-optic cable boosted transmission capacity and speed, facilitating the delivery of new services such as high-quality video transmissions. The transition through mobile generational technologies presented telcos with the opportunity to expand beyond the traditional voice service to the new world of mobile broadband. These technology developments have altered the mix of products offered by the subdivision.

A significant amount of change has also occurred over the past five years. The life cycle of the copper wire network is nearing an end, as Telstra and the NBN Co. have come to an in principal agreement that the NBN will eventually replace the Public Switched Telephone Network (PSTN). Meanwhile, 3G technology has hit maturity but will not stay for long with the introduction of 4G technology and services already being adopted, the closure of analogue televisions will release spectrum that will

be used for 4G services. Once a national fibre optic network and 4G technology becomes integrated and entrenched within the economy, Australia will be able to transition to a digital economy. Full convergence will be achieved within the media and communications space with each network being capable of delivering the same services using the same devices. This will see telecommunications become a utility and as critical to business success as electricity.

Wireline technology – copper, HFC and fibreWires and cables were the original medium for telecommunications. Copper wires have formed the basis of the Public Switched Telephone Network (PSTN) over most of its history, though fibre optic cables are continuing to make rapid inroads. Other cable types include coaxial cable, which are used by cable television operations. Players with HFC networks include Telstra and SingTel Optus. HFC networks can carry data and voice services to consumers.

Given the capital intensity in building a fibre network in Australia, recent technological developments have focused on extending the functionality of the copper wire local loop to cope with

Capital Intensitycontinued

been automated, with a large number of jobs being replaced by far fewer database administration positions.

While jobs have been falling, Australian telecommunications companies have been investing heavily in network infrastructure and IT systems. The three major mobile carriers continue to splash out on their networks in an effort to squeeze greater speed out of 3G technology and upgrade to 4G technology. Over the next decade the Federal Government will spend (via NBN Co.) several billion dollars on building the national fibre optic network. Fundamentally, infrastructure is an effective means for competing in the telecommunications space. Continuous

investment is necessary due to the rate of change in technologies.

However, not all industries within the Telecommunications Services subdivision invest heavily in network infrastructure and so exhibit a high level of capital intensity. The Telecommunications Resellers industry is the least capital intensive of the subdivision because resellers purchase wholesale network access from carriers to then on-sell services. This means, resellers do not own and operate infrastructure and so bypass network investment and the associated risk. However, this does mean resellers realise much lower margins as they essentially have less investment and risk to achieve a return on.

Level The level of Technology Change is High



Technology & Systemscontinued

consumer and carrier need for increased carrying speeds. This has been done using compression technologies such as xDSL (digital subscriber lines) that allow ordinary copper lines to carry digital content at high speed using higher frequencies. The x refers to the numerous variants of the technology. By using copper wire as a conduit for a wider range of services (e.g. high speed internet, video and multiple channel voice) technologies such as DSL have extended the life of the existing copper infrastructure.

However, the building of the NBN will represent a revolution in Australian wireline technology and render the copper PSTN obsolete. It will ultimately see all voice become IP based and see network speeds jump significantly. What these speeds will be depends on the final product, as different suggestions for the National Broadband Network utilise different amounts of fibre optics. In principle, however, the more fibre optic that is utilised, the faster the network speeds will be.

VoIPThe development of voice over internet protocol (VoIP) technology is challenging the way wired communications operate as it is a potential substitute to the traditional fixed call. Compared with PSTN fixed-voice, VoIP is generally cheaper, has a more efficient call process

and offers additional functions. VoIP technology allows calls to be made in digital form as voice calls are converted into binary code and then converted back to sound at the receiving end.

Broadband infrastructure developments will continue to increase the availability of VoIP to Australian consumers, consequently cannibalising existing revenue streams and for this reason large telcos are remiss to offer the service. It is small participants that are championing the technology and once it reaches critical mass it is expected to be adopted on mass by the major telcos.

Mobile technologyMobile technology is often referred to in a generational sense, consolidating a series of technological advancements at the same time. Currently, Australians are utilising 3G and 4G network technology. 3G technology offers services such as music and video downloads, improved internet connectivity and a host of data intensive services. All carriers rely on wideband code division multiple access (W-CDMA) technology to deliver 3G services. 4G services (as determined by the International Telecommunication Union) are those that support transmission speeds of up to 100 Mbps for downlinks when a user is travelling at high speeds and 1 Gbps when travelling at low speeds.

Revenue Volatility The Telecommunications Services subdivision is becoming less volatile as its services become more entrenched within the daily lives of businesses and consumers. Moreover, instability in specific industries is generally caused by internal competition from other telecommunications industries, but the underlying demand for telecommunications services remains. As such when looking at the big, subdivision-wide picture, volatility is reduced. For example, the shift in wired to mobile is inducing downside volatility for wired and upside volatility

for mobile.Subdivision-wide volatility has been at

a moderate level over the last five years. The high fixed-cost nature of the subdivision magnifies small changes in demand. Also the shift in the product mix is much more influential to the margin, as margins are much higher in the Wired Telecommunications Network Operation industry when compared to the remainder of the subdivision. Another effect on profitability has been the life-cycle transition of mobile technologies, as they transition through their life cycle the margins vary greatly.

Level The level of Volatility is Medium



Regulation & Policy Historically, the dominating feature of the Telecommunications Services subdivision was a publicly controlled monopoly protected from competition via legislation. The last 15 years has seen considerable liberalisation of telecommunications. Governments (domestically and abroad) began in the 1990s by introducing competition through granting new entrants access via a controlled licensing system and then moved to a more open and competitive market regime with an emphasis on industry self-regulation. The primary drivers of this development included various technological advances, the move to a more service-based economy and the associated demand for high-speed electronic information transfers and general dissatisfaction with the existing monopolistic structure.

As most activities in the subdivision require high capital investment, the subdivision naturally attracts few players, meaning that industry players are prone to oligopolistic behaviour without appropriate regulation. Consequently, the primary pieces of regulation that shape the industry is the Telecommunications Act 1997, which attempts to create a sustainable, competitive subdivision with these circumstances in mind. Legislation applicable to the Telecommunications

Services subdivision that goes beyond the Telecommunications Act 1997, includes the Australian Communications Authority Act 1997, the Radiocommunications Act 1992, the Telecommunications (Transitional Provisions and Consequential Amendments) Act 1997, the Trade Practices Amendment (Telecommunications) Act 1997, Telecommunications (Consumer Protection and Services Standards) Act 1999 and the Telecommunications Competition Act 2002.

Industry bodies and regulatorsUnder the new regulatory framework, three main types of industry operators are subject to regulation. The first, carriers, own specified infrastructure facilities and must hold a carrier licence granted by the Australian Media and Communications Authority (ACMA) under the Telecommunications Act 1997. There are no longer any limits on the number of carriers that can be licensed to operate in the local market. The second, carriage service providers, supply certain carriage services using network units and include internet service providers. Carriers may also be carriage service providers. Under the 1997 Act carriage service providers were granted many of the same access rights, as well as

Level & Trend The level of Regulation is Heavy and the trend is Decreasing


Volatility vs Growth

Reve

nue

vola

tility

* (%

)

1000

100

10

1

0.1

Five year annualised revenue growth (%)–30 –10 10 30 50 70

Hazardous

Stagnant

Rollercoaster

Blue Chip

* Axis is in logarithmic scale


A higher level of revenue volatility implies greater industry risk. Volatility can negatively affect long-term strategic decisions, such as the time frame for capital investment.

When a fi rm makes poor investment decisions it may face underutilised capacity if demand suddenly falls, or capacity constraints if it rises quickly.

Revenue Volatilitycontinued



Regulation & Policycontinued

obligations, as carriers.Regulatory control over the

subdivision resides with the ACMA, Australian Competition and Consumer Commission (ACCC) and Department for Broadband, Communications and the Digital Economy. However, the Telecommunications Act 1997 allowed for an increased scope for self regulation, particularly in areas such as access, interconnection standards, technical standards and consumer and customer service standards. The primary avenues for self-regulation include the Communications Alliance (formerly the ACIF and SPAN), the Australian Communications Access Forum (ACAF) and the Telecommunications Industry Ombudsman (TIO).

Declared servicesAccess rights are an all important issue within the Telecommunications Services subdivision given that competitors must use each other’s networks. The Trade Practices Amendment (Telecommunications Act 1997) controls anti-competitive conduct by telecommunications carriers and carriage service providers and deals with access to telecommunication services. Under this ACCC administered Act, carriage services can be declared whereupon carriage service providers supplying these services are under an obligation to supply the services to requesting service providers. Thus, once a service has been declared, it is essentially under the control of the regulatory framework. Declared services to date include those relating to the PSTN, the ISDN, local telecommunication services, inter-city and inter-capital transmission services, digital data access services (DDAS), the domestic global system for mobiles (GSM) and broadcasting services.

Carriers and carriage service providers of declared services are generally required to provide interconnection with, and access to those services, on reasonable terms and conditions, to any access seeker. The approach taken by the legislative regime is based on commercial

negotiation of access terms and conditions between the parties in the first instance, supported by a requirement for arbitration of disputes by the ACCC if the negotiations fail.

Price and costs regulationPrice controls and restrictions have been one of the government’s main regulatory instruments, primarily as a means of preventing abuse of market power. Thus over the years the government has set various retail price controls on some of Telstra’s telephony and data services, particularly within the PSTN market. In recent times, Telstra has been pricing services under the proposed prices set by the ACCC, a sign that the Telecommunications Services subdivision is actually extremely competitive and that the deregulation is working as the subdivision is self-regulating.

Interconnection costs (otherwise known as PSTN originating and terminating charges) are also regulated by the ACCC. These are the charges levied by Telstra on other telecommunications carriers for Domestic PSTN Originating and Terminating Access services and represent a considerable proportion of the costs incurred by service providers in supplying long distance, fixed-to-mobile and mobile-to-fixed calls to consumers. The price of interconnections costs has come down over the past decade, which has benefited competing telcos at Telstra’s expense.

Other types of regulationBeyond price controls, subdivision regulation also covers customer service guarantees, which impose a level of performance on carriage service providers of standard telephone services in line with the government’s efforts to improve the quality of specified services such as fault rectification and new service connections.

Previously obligation placed upon the designated universal service provider to ensure that defined telecommunications services are reasonably accessible to all people in Australia on an equitable basis,



Industry Assistance Import tariffs do not apply to the Telecommunications Services subdivision. Following the 1997 removal of regulatory barriers to entry, Australia now has a liberalised telecommunication services market that is open to foreign participation. The Federal Government actively encourages foreign investment in the Telecommunications Services subdivision, in line with the WTO’s General Agreement in Trade in Services (GATS), which contains an annex on telecommunications. Under the annex, governments must ensure that foreign service suppliers are given access to the public telecommunications networks without discrimination.

Over the last decade the government has provided a number of packages to improve the provision of telecommunication services within Australia. Examples include the numerous initiatives aimed at improving the provision of telecommunication

services in remote Australia. One such program is the Universal Service Obligation. Previously the subsidies allocated to achieving this goal were directed to the universal service provider (Telstra), but as of June 2011 these responsibilities have been allocated to the Telecommunications Universal Service Management Agency, which passes on relevant subsidies to all significant players that have contributed to maintaining and extending the telecommunication network.

Industry assistance in the Telecommunications Services subdivision will increase over the next five years under the Federal Government’s NBN initiative. The government will invest several billion dollars in establishing the NBN. However, the NBN Co. will not be just another telco and it will be positioned to have trans-subdivision benefits instead of focusing solely on the Telecommunications Services subdivision.

Regulation & Policycontinued

wherever they reside or carry on business where outsourced to one of the players in the industry, such as Telstra. However, in June 2011 the Telecommunications Universal Service Management Agency was introduced, taking over these responsibilities.

National Broadband NetworkThe introduction of the National Broadband Network has meant that

Telstra’s PSTN will be replaced. In order to make sure that this new technology is adopted, Telstra and the Federal Government have reached a deal where Telstra’s retail and wholesale operations will be split by July 2018 through a gradual migration of its customers to the NBN over the next five years. This deal has been formalised under the ACCC’s Structural Separation Undertaking plan in February 2012.

Level & Trend The level of Industry Assistance is Medium and the trend is Increasing


Key StatisticsRevenue

($m)

Industry Value Added

($m) Establishments Enterprises Employment Exports ImportsWages ($m)

Domestic Demand

2003-04 44,880.7 20,035.1 1,041 212 57,507 -- -- 5,744.8 N/A2004-05 44,589.2 19,333.5 1,110 226 59,358 -- -- 5,818.8 N/A2005-06 47,399.5 18,186.3 1,144 233 64,859 -- -- 7,055.9 N/A2006-07 44,780.2 18,244.9 1,173 232 63,074 -- -- 7,117.1 N/A2007-08 43,577.5 17,830.3 1,205 219 63,511 -- -- 6,644.0 N/A2008-09 42,299.7 17,050.0 1,377 209 62,644 -- -- 6,371.2 N/A2009-10 45,421.2 16,807.4 1,404 200 63,539 -- -- 6,332.9 N/A2010-11 44,547.6 16,345.5 1,404 194 62,262 -- -- 6,404.1 N/A2011-12 42,752.3 16,156.0 1,376 187 60,430 -- -- 6,078.5 N/A2012-13 39,659.1 15,266.7 1,345 182 59,639 -- -- 5,446.0 N/A2013-14 38,304.7 14,523.7 1,300 181 58,794 -- -- 5,415.0 N/A2014-15 37,099.9 13,809.4 1,284 183 57,761 -- -- 5,302.4 N/A2015-16 37,017.2 13,546.1 1,256 186 56,804 -- -- 5,247.2 N/A2016-17 37,296.5 13,304.4 1,243 186 56,351 -- -- 5,185.2 N/A2017-18 36,908.3 12,670.7 1,232 187 54,675 -- -- 5,014.2 N/ASector Rank 1/21 1/21 6/21 13/21 1/21 N/A N/A 1/21 N/AEconomy Rank 32/602 32/602 279/602 417/602 68/602 N/A N/A 44/602 N/A

IVA/Revenue (%)

Imports/Demand (%)

Exports/Revenue (%)

Revenue per Employee

($’000)Wages/Revenue

(%)Employees

per Est.Average Wage

($)

Share of the Economy

(%)2003-04 44.64 N/A N/A 780.44 12.80 55.24 99,897.40 1.842004-05 43.36 N/A N/A 751.19 13.05 53.48 98,028.91 1.722005-06 38.37 N/A N/A 730.81 14.89 56.69 108,788.29 1.572006-07 40.74 N/A N/A 709.96 15.89 53.77 112,837.30 1.522007-08 40.92 N/A N/A 686.14 15.25 52.71 104,611.80 1.432008-09 40.31 N/A N/A 675.24 15.06 45.49 101,704.87 1.352009-10 37.00 N/A N/A 714.86 13.94 45.26 99,669.49 1.302010-11 36.69 N/A N/A 715.49 14.38 44.35 102,857.28 1.242011-12 37.79 N/A N/A 707.47 14.22 43.92 100,587.46 1.192012-13 38.49 N/A N/A 664.99 13.73 44.34 91,316.09 1.092013-14 37.92 N/A N/A 651.51 14.14 45.23 92,101.23 1.012014-15 37.22 N/A N/A 642.30 14.29 44.99 91,798.96 0.922015-16 36.59 N/A N/A 651.67 14.18 45.23 92,373.78 0.882016-17 35.67 N/A N/A 661.86 13.90 45.33 92,016.11 0.842017-18 34.33 N/A N/A 675.05 13.59 44.38 91,709.19 0.80Sector Rank 12/21 N/A N/A 5/21 15/21 3/21 3/21 1/21Economy Rank 250/602 N/A N/A 120/602 398/602 66/602 87/602 32/602

Figures are inflation-adjusted 2013 dollars. Rank refers to 2013 data.

Revenue (%)

Industry Value Added

(%)Establishments

(%)Enterprises

(%)Employment

(%)Exports

(%)Imports

(%)Wages

(%)

Domestic Demand

(%)2004-05 -0.6 -3.5 6.6 6.6 3.2 N/A N/A 1.3 N/A2005-06 6.3 -5.9 3.1 3.1 9.3 N/A N/A 21.3 N/A2006-07 -5.5 0.3 2.5 -0.4 -2.8 N/A N/A 0.9 N/A2007-08 -2.7 -2.3 2.7 -5.6 0.7 N/A N/A -6.6 N/A2008-09 -2.9 -4.4 14.3 -4.6 -1.4 N/A N/A -4.1 N/A2009-10 7.4 -1.4 2.0 -4.3 1.4 N/A N/A -0.6 N/A2010-11 -1.9 -2.7 0.0 -3.0 -2.0 N/A N/A 1.1 N/A2011-12 -4.0 -1.2 -2.0 -3.6 -2.9 N/A N/A -5.1 N/A2012-13 -7.2 -5.5 -2.3 -2.7 -1.3 N/A N/A -10.4 N/A2013-14 -3.4 -4.9 -3.3 -0.5 -1.4 N/A N/A -0.6 N/A2014-15 -3.1 -4.9 -1.2 1.1 -1.8 N/A N/A -2.1 N/A2015-16 -0.2 -1.9 -2.2 1.6 -1.7 N/A N/A -1.0 N/A2016-17 0.8 -1.8 -1.0 0.0 -0.8 N/A N/A -1.2 N/A2017-18 -1.0 -4.8 -0.9 0.5 -3.0 N/A N/A -3.3 N/ASector Rank 19/21 17/21 21/21 18/21 15/21 N/A N/A 21/21 N/AEconomy Rank 585/602 558/601 544/602 542/602 483/602 N/A N/A 595/601 N/A

Annual Change

Key Ratios

Industry Data



Jargon & Glossary

BARRIERS TO ENTRY High barriers to entry mean that new companies struggle to enter an industry, while low barriers mean it is easy for new companies to enter an industry.

CAPITAL INTENSITY Compares the amount of money spent on capital (plant, machinery and equipment) with that spent on labour. IBISWorld uses the ratio of depreciation to wages as a proxy for capital intensity. High capital intensity is more than $0.333 of capital to $1 of labour; medium is $0.125 to $0.333 of capital to $1 of labour; low is less than $0.125 of capital for every $1 of labour.

CONSTANT PRICES The dollar figures in the Key Statistics table, including forecasts, are adjusted for inflation using the current year (i.e. year published) as the base year. This removes the impact of changes in the purchasing power of the dollar, leaving only the ‘real’ growth or decline in industry metrics. The inflation adjustments in IBISWorld’s reports are made using the Australian Bureau of Statistics’ implicit GDP price deflator.

DOMESTIC DEMAND Spending on industry goods and services within Australia, regardless of their country of origin. It is derived by adding imports to industry revenue, and then subtracting exports.

EMPLOYMENT The number of permanent, part-time, temporary and casual employees, working proprietors, partners, managers and executives within the industry.

ENTERPRISE A division that is separately managed and keeps management accounts. Each enterprise consists of one or more establishments that are under common ownership or control.

ESTABLISHMENT The smallest type of accounting unit within an enterprise, an establishment is a single physical location where business is conducted or where services or industrial operations are performed. Multiple establishments under common control make up an enterprise.

EXPORTS Total value of industry goods and services sold by Australian companies to customers abroad.

IMPORTS Total value of industry goods and services brought in from foreign countries to be sold in Australia.

INDUSTRY CONCENTRATION An indicator of the dominance of the top four players in an industry. Concentration is considered high if the top players account for more than 70% of industry revenue. Medium is 40% to 70% of industry revenue. Low is less than 40%.

INDUSTRY REVENUE The total sales of industry goods and services (exclusive of excise and sales tax); subsidies on production; all other operating income from outside the firm (such as commission income, repair and service income, and rent, leasing and hiring income); and capital work done by rental or lease. Receipts from interest royalties, dividends and the sale of fixed tangible assets are excluded.

INDUSTRY VALUE ADDED (IVA) The market value of goods and services produced by the industry minus the cost of goods and services used in production. IVA is also described as the industry’s contribution to GDP, or profit plus wages and depreciation.

INTERNATIONAL TRADE The level of international trade is determined by ratios of exports to revenue and imports to domestic demand. For exports/revenue: low is less than 5%; medium is 5% to 20%; and high is more than 20%. Imports/domestic demand: low is less than 5%; medium is 5% to 35%; and high is more than 35%.

LIFE CYCLE All industries go through periods of growth, maturity and decline. IBISWorld determines an industry’s life cycle by considering its growth rate (measured by IVA) compared with GDP; the growth rate of the number of establishments; the amount of change the industry’s products are undergoing; the rate of technological change; and the level of customer acceptance of industry products and services.

NONEMPLOYING ESTABLISHMENT Businesses with no paid employment or payroll, also known as nonemployers. These are mostly set up by self-employed individuals.

PROFIT IBISWorld uses earnings before interest and tax (EBIT) as an indicator of a company’s profitability. It is calculated as revenue minus expenses, excluding interest and tax.

VOLATILITY The level of volatility is determined by averaging the absolute change in revenue in each of the past five years. Volatility levels: very high is more than ±20%; high volatility is ±10% to ±20%; moderate volatility is ±3% to ±10%; and low volatility is less than ±3%.

WAGES The gross total wages and salaries of all employees in the industry. Benefits and on-costs are included in this figure.

Industry Jargon

IBISWorld Glossary

AVERAGE REVENUE PER USER (ARPU) A key performance indicator in telecommunications and indicates whether revenue is due to increased customers or phone usage. ARPU is revenue divided by the average number of subscribers.

BROADBAND A term used to denote any always-on, high data rate internet connection, in excess of 265kilo bytes per second.

FIBRE-TO-THE-HOME (FTTH) An internet connection where fibre reaches the boundary of the living space, such as a box on the outside wall of a home.

INTERNET SERVICE PROVIDER (ISP) Provides internet access via fixed lines using dial-up and fixed broadband connections. ISPs may also offer a number of internet based support services.

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Documents

J5800 Telecommunications Services in Australia Industry Report