Moutter mouth

SIMON SAYS
Telecom's boss talks to NBR ONLINE about:

• The future of telecommunications
• Competing, cooperating with or ignoring Sky TV
• Why UFB fibre to the home is not ready for primetime
• Telecom's Aussie division: is it still on the block?
• The coming spectrum auction and 4G
• Restructuring

New Telecom CEO Simon Moutter is explaining why I can’t have all-you-can-eat broadband, and never will.

He’s seen the future and it’s all about data.

 “What else are we going to sell but gigabytes?," Moutter says.

"Inside the next few years, voice is just software, messaging is already rapidly turning into software via Facebook messaging and iMessage and everything else. All of us then – Voda, CallPlus  - we’ll all going to sell gigabytes actually, fundamentally.

 “So you can’t move to a position where that’s unlimited. That would be like saying electricity is $150 per house, use all you want.

“You can’t have unlimited and fixed [price] because what else do you earning any revenue for in the future?

“We saw this on the internet when we removed speed as a differentiator. So there’s no differentiation in the product any more. It just is what it is at your house. At the moment the bundling of gigabytes and a bit to do with the service wrap – whether you’ve got a 9-5 call centre or 24 hour – is about it for causing product differentiation.

“And I don’t think differentiating in content [like pay TV and movies] is going to be all that significant because there are so many places to buy that over the top. 

“So gigabytes is actually what we’re going to sell.”

That’s a blunt assessment of where telecommunications is going. And I would say an accurate one. Moutter began his carrier selling power, now he’s selling bandwidth – which is rapidly becoming just as much a commodity as electricity.

His big plan
As for his immediate next steps, Moutter is not saying much until he unveils his big strategic plan.

It will outline where he sees Telecom heading in a world where he sees the company as a “mobile-centric reseller with thinner margin fixed broadband” and “enormous variable costs” as it pays spun-off network division Chorus around $900 million a year for access to its lines.

Content: the defining question
His big plan will come out in April or May for implementation in Telecom’s next financial year from July 1.

That being the case, we’re left with the big conceptual stuff, and the small stuff – which can be revealing.

Regardless, I always ask people in the industry about their personal setup, because I think it colours their outlook (which is why I was disappointed our new Telecommunications Commissioner is a relatively low bandwidth, bit-of-browsing-and-email internet user.”

I ask Moutter how he watches movies.

He downloads them from iTunes. He hasn’t visited a video store in ages.

I find this encouraging. He’s keenly aware which way the world is heading.

But nor does that mean he’s necessarily going to go ga-ga over bundling content with broadband.

A turning point will come when Telecom launches residential fibre under the Ultrafast Broadband (UFB) rollout (which Moutter says will probably be in the second quarter of next year; more of which shortly).

Vodafone has made its position clear: it doesn’t want to be in the business of signing content deals. It’s happy with its partnership with Sky TV, and its TelstraClear purchase has brought with it a ready-made MySky clone in the form of the T-Box, which it will deploy, or a settop box like it, if it decides to bundle video.

I put it to Moutter that Telecom’s decision over content will be a defining one for Telecom. It will play into whether it’s a very similar company to Vodafone/TelstraClear, trying to do a sharper job at selling essentially the same set of services, or whether it busts out and signs it’s on content deals and competes with Sky TV.

He agrees.

 I’ll quote him at length here, because it’s something so central to his company (not to mention Sky TV shareholders).

Telecom’s talked about value-added services with fibre. Does that mean it could potentially get more average revenue per customer – because of course you’ll be losing the fixed line [home lines were always a cash cow for Telecom; on a fibre connection, phone calls are all via the internet]? Chris Quin [now Telecom retail CEO] said video would be one of the services, including sports, but didn’t detail how.

"That’s one decision where we’ve got no decision yet in strategy so today there are a couple of people who resell Sky and there are a couple of over-the-top media and video offerings emerging from YouTube to Quickflix and Apple TV," Moutter says. [Apple’s wi-fi widget that lets you watch movie and TV programmes downloaded from iTunes on a regular television].

Telecom NZX performance since the Nov 11 Chorus spin-off. The company's shares took a hit in August after it announced a relatively buoyant result but suspended a buyback programme - apparently considering its own shares overheated. Source: S&P Capital IQ. Click to zoom.

"So that stuff’s underway. I think in New Zealand where the telco might fit in that in anything other than the provider of the bandwidth or the provider of the gigabytes is still a very big question mark and I think that one of the more significant elements of a strategic decision set we will communicate – where exactly we will play in that process … and that can be from nothing – we provide a fantastic, managed data pipe and make sure it works well and you buy everything you want over-the-top from various providers to some form of partnering with various providers to actually being a provider ourselves and aggregating or providing particular content.”

That will be quite a defining decision, won’t it?

“It will. It will be.”

Moutter notes that in the US, it’s often the case of a phone company (that’s diversified into pay TV service) competing with a cable company (which has added VoIP calling).

Here, things are complicated by the fact Chorus, not Telecom, owns the lines. 

“Because we’re resellers, we have a different driver in New Zealand. Overseas the telco and the cable company are offering the full triple play [voice, data, TV/movie content] but they’re mainly competing for the profit in the line. So they justify … they might not make much money from the content, but if they can win the customer and they stick they get the ebitda; they get the earnings for the line. Well, we don’t own the line – and neither do our competitors – so none of us have the rationale to make the line sticky," he says.

"So therefore the only basis for being in it [content] is if you make money from it. And they only way you can make money from content is if you add value to the process somehow. That’s the interesting thing. That’s the question I’m really asking my team. How will we add value to the provision of content if you can get it already from somewhere else?"

"Unless we can really answer that question, the default would be ‘get your content over-the-top’ and we’ll just provide you with a great data service.”

But couldn’t some kind of keenly-priced bundled pay TV service be the driver to get people to upgrade to the UFB I ask?

"Digital-terrestrial is still a great mechanism for broadcasting live events or the six o’clock news or whatever. There’s no particular reason to substitute it. But I think for our country the broadband network is going to substitute anything that’s ondemand viewed or satellite delivered," Moutter says.

"For me the challenge has always been ‘how do you get to the living room’ and I’ve always been very sceptical in the past was set-top box driven stuff – the economics are terrible, especially if you’re up against a good player like Sky, but the new enabler is the performance of in-home wi-fi and now with TVs [with built-in wi-fi] backending directly to the wi-fi modem it’s solving the problem.

“I watch high definition pay-per-view movies off iTunes. I don’t go to the video store anymore. And it’s there on QuickFlix and it’ll be there on other alternatives."

New technology will change content contracts
Certainly, Moutter brushes aside the Vodafone/T-box.

“My personal view – and my team is still looking at this strategically so I wouldn’t want to be definitive – is ‘why would I want a set-top box? The internet can do all of this and the wi-fi hook in new TVs and the dongle you can buy to convert a non-wifi TV. So I would be much more interested in models that don’t require any more investment in set-top box infrastructure. I think that’s yesterday’s solution. All the new TVs come with Quickflix on the front page. You just click here and buy so why would you want a set-top box? Why would you want to replicate a model from the past 50 years into the next 50?”

But Sky TV is not really fighting a technology fight. It’s locking down content rights (so for example, unless you use a workaround to joint iTunes US, none of the broad range of TV shows on Apple’s ondemand service can be accessed its NZ customers). Quickflix – whom Moutter keeps namechecking – has HBO among its investors, but threadbare content for its streaming service in NZ, where Sky TV has dibs on HBO content. And of course Sky TV has the All Blacks locked up – its live sport ace that sees many a BitTorrent pirate pay for a premium Sky TV package each month, whatever they download on the side.

Moutter concedes this is the case, but says “Look the new technology will cause changes to those business models. It just will. In the same way music rights have been enabled around the world.”

"I don’t think you want to assume because the way content owners currently trade or manage the value of their content through

"All those owners of content whether it’s sports or news or Hollywood movies will all adjust their models to maximise the advantage of the internet.

"And one of the things that’s profound about that is that they can take stuff to market quickly and efficiently all around the world at once. So the technology and the delivery mechanisms will cause those owners to find different models from today so I’m not stressed about what the current [local content rights] situations are.”

At some point, when rights come up for renewal, the likes of HBO are going to ask if it’s worth having a set-top box-toting middleman like Sky TV, or whether its better off selling directly to viewers around the world via global services like iTunes.

So, while Simon says everything is up in the air, if I had to bet my life I’d say there will be no Sky TV clone set-top box coming with Telecom fibre, or Telecom buying up content rights itself. The new Telecom boss quite clearly sees a future where TVs are seamlessly connected to the internet, and viewers browse any number of internet-based services for their premium TV and movie content.

UFB fibre being laid in Richmond Rd, Grey Lynn.

UFB: testing installers, testing patience
When will we see Telecom offering fibre to the home?

“We’re targeting the second quarter of the next calendar year. Our main concern is that when we go we’re going to go with scale,” Moutter says. “So the fibre companies [Chorus, Enable, NorthPower and Ultrafast Fibre] need to be able to deliver with scale, and volume and the service experience has to be good because probably our highest value customers are going to go their first so they’re the last customers we want to have a disappointing install or reliability experience.”

He also echoes Vodafone boss Russell Stanners’ comment that the UFB install experience is “nowhere near ready for primetime.”

“We’re still not satisfied. If there’s something that holds us up it won’t be our ability to purchase it and deliver the technology, it will be our concern about a poor service experience,” Moutter says

“Today, the reality is on the trials -  we’ve got a few dozen lines - they have been ... testing would be a polite word.”

Testing as in testing patience?

"Yeah. If you talk to people who’ve had fibre installed, it’s a big deal. It’s a lot of guys, a lot of complications. It’s sometimes taking a couple of days. It’s making a big of a mess.

“And there are quite high first-month failure rates.

“I’m not down on the companies for that. I does actually take a bit to learn and get your processes sorted but we’re not going to have confidence rolling out to our best customers until we’ve got that that more seamless.”

4G: It's all about the auction
Telecom has a 4G trial lined up for several business customers, using its existing 1800MHz and 2100MHz spectrum.

But Moutter makes no bones about Telecom wanting 700MHz spectrum when it comes up for auction shortly (the government hopes to realise around $200 million from selling the 4G-friendly radio bands freed up by the transition from digital to analogue TV).

In sparsley populated, hilly New Zealand, 700MHz is "orders of magnitude more economic [requiring fewer cellsites] and work a heck a lot better than 1800MHz or 2100Mhz,"  the Telecom boss says. "Our competitors will favour 700MHz too."

A reader asks, via Twitter, how big a role 4G will play; another when it will arrive.

Ahead of his Big Plan, Moutter won't comment in detail on either point (we do know Telecom has no capex for 4G in its current financial year).

He does allow that "It's reasonably inevitable that New Zealand market revenue will continue to bias towards mobile and mobile will get bigger than fixed.That's happening everywhere else in the world and it won't be any different here.

"Mobile revenue will dominate. We've barely started." New Zealanders are currently using 1 and a bit mobile devices per capita. He sees that going to three or four, or more.

He sees 4G wireless as a substitute for DSL or fibre in some households and small businesses, though with limits. For those who use tens of gigabytes, a fixed line will be more economic.

AAPT: on the block?
Under Paul Reynolds, Telecom tried to sell its Austrlian subsidiary, AAPT for half a billion or so. There were no takers for the division as a whole, but its retail division was sold.

Is AAPT still on the block?

"I've been over and had a couple of decent rounds now with the AAPT and Gen-i Australia teams," Moutter says.

"And AAPT is the best structured it's been since I've had anything to do with Telecom. It's got a clear market position as a wholesaler to carriers and systems integrators. It's got a very good high-end data product set, it's got a very good [11,000km] fibre network between the cities" [said cities now being connected by Australia's National Broadband Network]. 

Many wholesale customers like AAPT because they compete against Telstra and Optus, so appreciate an alternative.

"It looks closer to stable now in terms of earnings than it's ever been.