Telecoms profits set to dip

FOR almost 12 months a dark cloud in the shape of the Rudd Government's national broadband network has hung over Australia's $38 billion a year telecommunications sector.

With the exception of the boom in third-generation mobile phone infrastructure and use, it has been the main topic of discussion in the industry.

Yet no one knows with any certainty how much it will cost. Telstra chief executive Sol Trujillo and chairman Donald McGauchie have put a dizzying number of estimates into play this year.

When the project started as an ill-considered back-of-the-envelope attempt by Telstra to harvest $3.1 billion in taxpayer funds, its estimate was $5.7 billion, and that was before the Australian dollar surged to almost 1-for-1 with its US counterpart.

That early Telstra figure formed the basis of Labor's policy, which increased the cost to $8 billion or $9 billion, a golden lesson for politicians that they should do a bit of their own research instead of relying on numbers from interested parties. Trujillo now hands out a new figure almost every time he opens his mouth.

Early this year Telstra's estimates rose towards $30 billion -- once the number placed on a broadband network of fibre all the way to the home, rather than a street-side cabinet, or node.

McGauchie's price tag was $15 billion to $25 billion only a few months back.

Many saw the rising estimates as a crude attempt to scare off rival bidders and justify a higher price for rivals and consumers to connect to the network.

Last week the Telstra chief was at it again, slashing McGauchie's range by a cool $10 billion to $10-15 billion. That is quite a cut, but Telstra's public relations team yesterday could not explain why there had been such huge discrepancies.

The numbers from Telstra's main rival, Terria, have been rubbery as well, but not by nearly as much.

Trujillo's last estimate was before the full extent of the global financial meltdown emerged, taking the battling Aussie dollar with it. With the dollar sliding more than 30 per cent against the greenback and about 20 per cent against the euro in the past two weeks, the cost of network equipment has risen sharply. The companies that will supply it, in Telstra's case, are the struggling Paris-based Alcatel-Lucent and US internet gear providers Cisco Systems and Juniper Networks.

The dollar's slide will hit not just Telstra -- which has the sector's biggest annual capital budget, of about $4.5 billion -- but most other local operators.

Telstra claims it is the only company that invests in networks in Australia, but Optus spends about $1 billion and the other mobile networks, Vodafone and Hutchison, several hundred million each year. Again, the vast majority of telecoms capital spending will go to network and computer hardware and software vendors based in the US, Europe and China, where the currency has tended to track the US dollar but is now becoming more expensive.

The rising cost of the national broadband network and other projects is but one of the effects of the downturn on the telecoms sector. This is despite Trujillo's claim last week that Telstra has not suffered from the crisis so far.

One thing is for sure: Telstra's Sensis directories business will be hit by the nasty fall in advertising across all media sectors. There have already been job cuts, some heavy, at the major print media publishers, and revenues in the television sector are falling.

Even the online sector, the boomtown of the advertising world for the past decade, is not immune. People working for the most visited web portals and sites in Australia point to a decline of between 10 and 20 per cent in online advertising from previous targets. It will still grow but not so quickly.

Some operators privately report softer demand for new mobiles. In tough times people tend to shop around more, which will probably mean more churn in the sector, lifting costs, but on the upside leading to a cut in the subsidies eating into mobile company profits.

If the more pessimistic observers of the financial crisis are correct, we could be in for years of tough times. This could lead to rationalisation as consumers choose between wireless and fixed-line broadband, or cut their pay-TV services.

As the climate becomes more gloomy, the big companies with their better balance sheets and access to funding will tend to benefit at the expense of their smaller rivals. Already the downturn has claimed Commander, and there will be further consolidation among internet service providers.

It all points to a less profitable sector with fewer, bigger players, no matter what happens with the national broadband network.

sainsburym@theaustralian.com.au