Copper or Fibre?
Morris Kaplan, one-time stockbroker and venture capitalist, brings his finance skills and recent experience as a business journalist and writer to IT, with a special interest in telecoms and how communications is being transformed by technology.
The NBN desperately needs people to switch from copper wire to fibre. Telstra too - despite its huge, legacy investment in copper wire. The near-to-be-executed deal between Telstra and the government owned NBN to pay across $11 billion to benefit Telstra shareholders, is going to rely increasingly on a business model that is fibre focussed. Yet Telstra continues to pump over $1 billion a year into its ageing copper network. So what’s going on?
Well, first a copper network is expensive to maintain – to the tune of about $300 million a year plus an expected capital expenditure on copper of about $1 billion. Telstra is pushing the accelerator on marketing cots in acquiring new customers – about $1 billion going in the acquisition of what Telstra hopes are lifetime mobile and broadband customers. To date this bet on the future looks like it’s paying off with new customer growth strong.
What was once the X-factor in telecoms – how would mobile and the internet affect fixed line usage is pretty much down to winning the hearts and minds – and wallets – of digital age consumer who at any time may be using their smart phones to send SMS messages or checking out the latest deals on offer or sending pics and video clips to friends and family on Facebook. Business mobility is sky rocketing with new applications surging for iPhones and the Android platform.
A new X factor is emerging in terms of valuations the telecoms business. While not pure telecoms business the new wave of IPOs in the US has shown what is the rise and rise of a new dot.com boom. In the US, market valuations of social networking (or social media) companies have surged. LinkedIn, a business networking channel, had a market capitalisation of $US9 billion soon after its listing.
Microsoft is purchasing Skype for $US8.5 billion. And Groupon, a buying agency founded less than three years ago - and as yet unprofitable - is expected to have a market valuation of $US20 billion when it soon lists on the stock exchange.
These leading social networking businesses are being valued as multiples of revenue not earnings, just as happened to many technology companies during the dotcom boom of the late 1990s.
None of these businesses have legacy issues associated with buildings, networks or people. All are highly scalable business models which allow the businesses to deploy their IP – largely the details of warm and friendly millions of members and friends – to participate in their new creative product offerings. Telstra is a late starter but understands this market far too well to leave it untouched.
In business, doing nothing has a potentially very high opportunity cost.