At the moment, according to Telstra, its margins on its fixed-line service are well above zero because it still has a lot of customers on its old network, where margins are more like 40 per cent.
Shrinking fixed-line profit
That averages out to provide a 21 per cent margin overall for the fixed-line business – albeit one that is steadily reducing.
Telstra calculates the net cost to Telstra of the conversion to NBN at about $3 billion a year once the network is fully rolled out.
For the six months to December, that net cost added up to $1.7 billion – even counting the $1.6 billion the other way in NBN Co payments to Telstra for access to its equipment and connections.
The shrinking fixed-line profit is certainly not the only reason for Telstra’s 28 per cent drop in net profit to $1.23 billion in the first half of the financial year. Competition in the mobile market is also crimping Telstra’s earnings.
The company’s long overdue efforts to continue to simplify the business and slim the enormous Telstra bureaucracy are paying off via a reduction in costs to partially compensate.
Head-on crash of business models
Frustrated customers might not agree with the trade-offs – and with 14 million calls coming in over the half, even a small percentage of unsatisfied complaints translates into considerable free-floating aggravation about Telstra service, especially from offshore call centres. Just ask around.
But the head-on crash of the Telstra and NBN business models is more proof of how decisions, often lousy decisions, by a succession of governments in Canberra can have a very direct effect on the profit results of major Australian companies for decades.
In this case, the need to project a viable return on almost $50 billion of government equity and loans obviously affects the prices NBN Co must then charge telcos in order to make its financial commitment to Canberra credible.
Penn sombrely notes a number of other telco resellers have left the industry and two have gone into liquidation because they couldn’t make the figures work.
Yet NBN Co, which will announce its results on Monday, is certainly in no mood to change its pricing structure or logic. Indeed its plan requires it to increase its revenues per customer.
The real budget cost
Neither will a government determined to declare an imminent surplus on April 2 concede the real budget cost of maintaining a convenient accounting charade.
A new Labor government might be more inclined to quickly write off some of the money spent and blame the Coalition for the hit to the budget although it will hardly make such a promise before the election.
But what seems inevitable is a financial reckoning of huge magnitude – probably sooner rather than later. Penn can only hope this happens in Canberra rather than Telstra HQ.
It’s hardly as if Telstra customers will be willing to pay a lot more for their fixed broadband given its relatively high costs already.
At the moment, the Telstra CEO is predicting that only about 10-15 per cent of customers will give up their fixed broadband connection to go entirely mobile, even given the super-fast speeds available with the rollout of the 5G network.
He points out the average household downloads 250 gigabytes of data per month via the fixed-line service relative to only five to six gigabytes over mobile. That means, he says, the mobile network cannot really become an effective substitute for a fixed-line network.
Better services for less money
But the advance of telco technology means customers constantly expect ever more and better services for less money. Prices going in the wrong direction for fixed broadband would create plenty of competitive, as well as political, problems for Telstra – as it would for other telcos.
Even Penn’s expectation that Telstra’s mobile customers will be willing to pay more for the speed and extra services of 5G is likely to prove a challenge.
Telstra won an unexpected competitive advantage in terms of the shift to 5G given Vodafone, Optus and TPG were planning on using Huawei equipment before the Chinese telco equipment supplier was banned by the government last August. TPG has announced it is no longer interested in building a mobile network.
Telstra has traditionally used equipment from Ericsson and described 5G as a “game-changer”. It said its first 5G phone will be in the market within a few months while 4G users will also benefit as heavy data users tend to upgrade quickly, translating into more capacity on the 4G network as others exit.
Any new NBN connection with Canberra will take much longer.