Telstra exemplifies the difference between market hegemony and mere market leadership. Making this point is not a matter of moral judgements about good and evil in corporations. It is simply about seeing the landscape of the telecommunications sector as it is. Within this landscape, Telstra is both a victim and victor.
Telstra today is arguably more influential than it was five years ago. This is largely because of the happy accident of emerging competitors shooting themselves in the foot, and because a Telstra with strong cashflow is set up to be the beneficiary of the current - and temporary - global downturn in the telecommunications sector.
Dominance is a much debated notion. A narrow view of competition policy subdivides the telecommunications market into discrete, standalone product or service segments such as cellular mobile, local, long distance and international calls, and so forth.
But individual product or service segments are seldom standalone markets within networked businesses. Networked businesses - whether telecommunications, airlines, banking or e-commerce - show high degrees of interdependence within an industrial ecosystem. For example, it makes no sense to look at airline competitiveness by treating competition for airport landing slots, for terminal facilities, or reservation systems, as independent markets. The market sum of the corporate components of networked industries tends to be greater than the impact or worth of the individual parts.
In telecommunications, therefore, dominance is non-linear. What we need is some formula to capture those network effects determining the competitive landscape. My dominance formula is still work in progress, but it involves the functions of:
Competitive intensity is itself a function of the number, and scale, of competitors across the industry value chain. For example, a large number of small, niche competitors will not constrain a market leader as much as a competitive landscape comprising strong challengers who are able to inter-work independently of any one industry operator.
Now the position we have in Australia is this. Telstra is arguably the most vertically integrated telecommunications operator in any member country of the OECD. Telstra is the lead player in most segments of the communications sector (except for the free-to-air broadcasting area). Telstra's nearest competitors are increasingly constrained by lack of access to capital and the dislocation of ownership changes.
The strongest early competitors, Optus and AAPT, are both in the thrall of the uncertain processes of takeover and merger. The failure rate for mergers and acquisitions is high. It is higher when the change involves the challenge of trying to integrate different cultures. In the case of Optus, Chinese management culture will collide with a quintessentially Anglo culture. Kiwis are trying to take remote control of an Australian management team and customer base in the case of AAPT. Both acquisitions have left the acquirer with limited working capital to contribute to any meaningful investment in growing these operations or even to capitalise on existing assets.
Across the board, the market write down of telecommunications stocks combines with a rising cost of capital to limit new investment and to drive debt strapped new entrants towards insolvency. One Tel has hit the floor, and Primus is laying off staff. Junior telcos are winding back their expansion plans.
Now this situation is not especially Telstra's fault, nor is it necessarily the result of superior performance by Telstra.
I must shoulder part of the blame because of the 1990 "megacom" competition model I promoted in the face of fierce opposition from Paul Keating who was advocating a structural break-up of monopoly more along the lines of the United States. The creation of a national flagship operator in Telstra was a good result for my then employer, and it did enable the then Labor Government to win a hard fought battle with the unions over the very introduction of competition. But we are now all paying a high price in uneven access to new services, particularly in regional Australia, bottlenecks to Internet networking and broadband rollout, and declining reinvestment in infrastructure.
It is also true that Optus failed to exploit its privileged seven year duopoly franchise to entrench itself as a major player, able to constrain the behaviour of the market leader.
In addition, Telstra's unwieldy and fractious Board composition has created an innate conservatism which has, ironically, limited Telstra's exposure going into a downturn.
Whatever the contributing factors, it is the outcomes that matter. Telstra's market hegemony within the whole communications and convergence ecosystem matters for two reasons.
First, this outcome makes a mockery of what is now a very old regulatory regime, a regime which assumed a stable, mature industry environment and a steady shift from regulatory controls to industry self-regulation. The Internet and the digital revolution suddenly catapulted a predictable telecommunications sector into a maelstrom of change and volatility, globally. The need for regulatory oversight is now greater than ever.
Secondly, Telstra's hegemony has acted to slow sector innovation and the nation-wide roll out of new services. This last point merits a future column in its own right.