Optus makes surprise strategic shift to focus on fixed

Optus has announced a significant refocussing on its fixed network business with the loss of almost 300 staff, but Mobile accounts for 66% of revenues and almost 70% of EBITDA.

It's not usual for company executives to open investor presentations with bad news, but that's what Kevin Russell, CEO Consumer Australia for SingTel (ie Optus), did at SingTel's investor day last week.

His opening slide took a swipe at the mobile business in general, saying: "Mobile customer growth slowing and industry revenue growth is negative in 2012." Presumably not wanting to point the finger too hard at his own mobile arm, Russell devoted the slide to "mobile market" data in Australia indicating that blended ARPU across the industry had dropped 13% in the two years since December 2012, from $49.64 to $43.30, and that a 2010 year-on-year growth in service revenue of 7.8%, across the industry, had turned into a shrinkage of 4.7% in the year to December 2012.

In hindsight it might seem as if Russell was softening up the market for the company's surprise announcement last Friday that it is increasing the focus on its fixed network business.

Martin Mercer - formerly CEO of the recently acquired Vivid Wireless - has been named managing director, strategy & fixed to lead the fixed line business and "ensure it is well-placed to play a significant role in the company's future business strategy." As part of this refocussing, 290 positions -- mostly in Marketing, IT, Networks and Sales -- have been blurred out of existence.

However, far from talking up fixed, the remainder of Russell's presentation was devoted to telling investors and analysts how Optus intended to keep its mobile business growing: by focussing on data "a key revenue growth opportunity," optimising device subsidies, restructuring distribution and wholesale models, making productivity improvements and investing in the network to close the gap between it and Telstra.

With Vodafone still haemorrhaging customers, investors might have taken some comfort from this. After all, those that have watched Optus closely over the years will have seen mobile as long being by far the largest contributor to revenue and EBITA, and one that has continued to increase its share of total on both measures.

Just a month earlier, delivering SingTel's Q3 results, group CEO Chua Sock Koong had talked up the Optus mobile business. He reported an EBITDA increase of 4% over the year despite a 7% decline in total mobile revenues. In that quarter mobile revenue accounted for 66% of Optus' total and 68.4% of EBITDA.

'Fixed' was spread across three business units: Optus Business Fixed; Optus Wholesale Fixed; and Consumer and SMB Fixed that between them accounted for the remaining 24% of revenue and 21.6% of EBITDA. Clearly any shift in focus from Mobile to Fixed will have to produce dramatic improvements in the performance of Fixed to compensate for any deterioration in that of Mobile.

With a supposed increase in focus on Fixed, it seems likely that contributions to the ranks of the 290 redundancies will largely have come from the Mobile side of the business.

As for the Fixed business, Koong portrayed its strategy as being defensive, "protecting margins". The Q3 results press release said that "In Australia, Optus is restructuring the business to drive profitable growth, improve customer experience and capitalise on the growing demand for mobile data." No mention of any focus on Fixed there.

However according to Mercer, quoted in the Optus press release announcing his appointment. "Fixed is the heart of our business." Sorry, but the figures show that it's not.

The rest of Mercer's statement was also less than a convincing argument for the new strategy. "Optus was established on the back of providing choice in fixed line telephony." (True, but that was over 20 years ago).

"We've been advocates for structural change in telecommunications for over a decade, and now it's happening we want to show Australians that we are committed to helping take advantage of the opportunities becoming available to them. We have historically provided Australians with real choice and this will be enhanced with the reach and the services made possible by the NBN."

Well, the NBN is presently running behind schedule. With a change of government almost inevitable it is likely to be radically reshaped and almost certainly delayed while a new Coalition Government works out just how much commitment to the current plan it has inherited, develops its alternatives and renegotiates the Telstra contract.

The focus on Coalition policy has been on broadband delivery technologies, but the other central plank of the NBN -- an open access layer 2 network providing access to all customers from 221 PoIs -- is a great playing field leveller, destroying the advantage of network ownership and putting acquisitive tier 2 players like iiNet, TPG and M2 on a more equal footing in the fixed market with the former duopolists Optus and Telstra.

Optus has so far said very little about its new focus on Fixed. It will be interesting to see how it justifies this to the market in future investor presentations.