Wednesday, October 29. 2008The Whiff Of Early 'Financial' Casualties?John Linton While I have so little knowledge of the financial and economic outlook for the world generally and Australia particularly I have been quite happy to believe that statements from various sources relating to Australia's relative 'immunity' from any major impact have some semblance of credibility. Not the ones that aver that there will be little/no impact on anything (a la krudd and whine) but the more measured RBA and conservative economic agencies that say "negligible growth, lower exports and lower dollar". So I read this yesterday with a touch of bewilderment: http://www.misaustralia.com/viewer.aspx?EDP://1225143418953 Steve met with representatives of Pipe last week to discuss what they may be able to offer in terms of IP services when they turn on their new cable service which, at that meeting, they said would be around mid 2009. Knowing very little about the laying of under ocean cable, but assuming a mid 2009 availability date would mean that it was well under way (and I thought I had read some time ago about how it was already in testing with some "foundation customers") and therefore I don't know what to make of the statements by Pipe's CEO that the financing of the project is not yet in place and that, because of the 'global financial crisis' (that was not going to have much affect on Australia) there may be some delays and there may be a need for 'restructuring the ownership of the new service': "Obviously we are hoping to proceed as planned....or quite simply we won't be able to meet our own stated criteria". I'm assuming he was both quoted correctly and chose his words carefully. If that was the case then, it seems to me, that there are some very real doubts about just what the situation is with this new service. The fact that Pipe has chosen to comment on what appear to be some serious doubts about the project's viability is even stranger than the comments themselves. I would have thought that if there was just some minor delay, contract tidying to be done, then no comment at all would be either necessary or wise at this very late stage of development. All it can do is to call into question how such a large project can be entered into, let alone accepted by the cable laying ship's owners and other contractors without locked down finance in place (which these comments seem to call into question) doesn't make any sense. Another article which, in many ways, makes even less sense was this one reporting that iinet had decided to use Telstra's ADSL2 services and retain Telstra's ADSL1 services for its Westnet customers: http://www.australianit.news.com.au/story/0,24897,24564954-15306,00.html Despite the attempt at explanation by the iinet CEO in the article - this makes absolutely no sense at all. Iinet, along with every other ADSL2 DLSAM deployer has gone out of their way to justify these investments by stating, over and over again, how it gives them a huge financial advantage over using Telstra Wholesale's services and yet, in a 'blink of an eye' iinet are now saying that rationale isn't true because "Telstra Wholesale have improved their 'deal/pricing' to such an extent that it's no longer necessary to invest in their own ADSL2/ADSL1 DSLAMs"????? That must have gone down really well with the iinet board who have agreed to such a major set of investments to "free themselves from Telstra's restrictive pricing" and make a massive contribution to the bottom line'. I, obviously, would have no idea what iinet would be charged for ADSL2 services by Telstra Wholesale. The only company re-selling Telstra's ADSL2 services who has published prices is, as far as I know, PeopleTelecom whose prices can be found here: http://www.peopletelecom.com.au/internet_plans.php?PlanType=1&ProductType=1 These published prices are sky high when compared to ALL other ISP's ADSL2 plans (including iinet's) which would have to indicate that the price PeopleTelecom have negotiated for a Telstra Wholesale ADSL2 service is far higher than other ISPs ADLS2 networks cost them or far more than Optus Wholesale charge their ISP wholesale customers. If you compare the 10 gb download ADSL2 plan at $85 per month and the 10 gb download 8192/384 ADSL1 plan (also sourced from Telstra Wholesale) at $80.00 per month you could conclude that either: a) PeopleTelecom were buying an ADSL2 service at $5.00 more than an 8192/384 service from TW or b) PeopleTelecom were buying at an unknown cost but had decided people would pay more for a possibly faster service and they could justify, somehow, a far higher ADSL2 price than anyone else offers in the market (including Telstra Retail). If you think about it for more than a few seconds you will almost certainly conclude that a) is the more likely scenario. Now, undoubtedly iinet has many more customers than PeopleTelecom and would therefore have more 'negotiating power'. So undoubtedly they would buy at a better rate than PeopleTelecom. It would have to be at a much, much better rate than the rate implied by the PT published pricing........and, when you think about it......that is not so easy to believe. So the most likely conclusion you could come to is that the cold winds of debt servicing and financing in a "global financial crisis" which includes a 'plunging' Australian dollar has somehow made iinet think that buying from Telstra (after all the harsh words its published about TW's pricing and how it was holding iinet back from its ambitions) is in fact better value than providing ADSL2 services via upgrading its own DSLAMs. Then again, irrespective of the quasi logic I've used above - that surely can't be the case can it? If the last sentence in that article becomes a reality then it will seem to mean that investing in ADSL2 DSLAM networks was a very, very bad idea. But then I always predicted what Telstra would do and the time frame they would do it in to make that assertion true. So, perhaps the cold financial winds may already be blowing and they are having some affects on the Australian communications industry. Perhaps, for once, enduring all the pain of 'ploughing a lonely furrow' will pay off?
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Could I suggest a couple more reasons for iinet buying ADSL2 from TW.
c) They are running low on DSLAM ports and are sensibly reluctant to invest in more with the uncertainty of the NBN so they have a choice of stagnating until the NBN clarifies or adding customers (albeit at lower margins) until an NBN puts all customers back on the same margin. d) TW has a much wider geographic coverage than iinet presently has so previously inaccessible customers can be serviced (still at low margins) until an NBN puts all customers on the same margin independent of location. Regards C Bumkin Comment (1)
You could well be right.
But it still doesn't make any sense to build a network to avoid the high Telstra costs and then use the Telstra network - it seems a refutation of the reasons given for building the network in the first place. I realise times change and change quickly. Comments (4)
The trouble is, if iiNet and the rest never invested in DSLAMs, Telstra would never have even offered ADSL2 to start with. Catch 22. My understanding is that the DSLAMs have an ROI of about 2-3 years so the vast majority of them would be paid off by now.
As for Pipe, I believe it's bridging finance they are after. Their foundation customers have already bought enough capacity to make the project viable (and somewhat immune to price wars). Someone on whirlpool made the suggestion that perhaps Pipe are just trying to get a better deal from the bank. Have a look at pipeinternational.com if you haven't already seen it. Comment (1)
I very much doubt that Telstra wouldn't have made ADSL2 available.
iinet et alia didn't build ADSL2 to 'force Telstra's hand' - they stated they did it to reduce costs of providing ADSL services. Having said that - the point remains as I stated it over 12 months ago - Telstra would simply wait until their 'competitors' reached the point of no return on DSLAM investment and then make it unprofitable for them. Pretty much what seems to have happened. In terms of Pipe - my comment was simply that it seemed very strange that the CEO would publicly state that there were financing problems at this stage of implementation and to add a caution that the company's originally stated objectives may not be achieved. I have no knowledge of the scenario beyond those statements and only used it as an indication that "the global financial crisis" appeared to be having some effects on Australian communications businesses despite the statements by some idiots in the ACT. I could well be wrong - I often am. Comments (4)
The continuous disclosure obligations of a public company would require PIPE's CEO to make the comments he did.
Comment (1)
.....the point I was having trouble understanding was why, at this very late stage, is there an issue with something as basic as financing.
I suppose the conditions of the financing could be affected by the precipitous fall in Pipe's share price breaching a loan covenant and therefore triggering a need for additional collateral? It is immaterial to my simple point that an Australian communications company appears to be an early victim of the GFC (as Im informed its now called). Comments (4)
Try as i might, i can't find anywhere in the Australian IT article where it states that iiNet see it no longer necessary to invest in their own network.
If you actually read the article or even the ASX release that Mr Malone eluded to in his comments, iiNet had previously stated that by migrating what they could of Westnet's ~140,000 ADSL customers onto iiNet's network they would make $6million within 4years. Obviously to do that there would be massive CAPEX costs to build the additional capacity. What this deal has done has allowed them to realise some of that $6million straight away, without the CAPEX spend as well as offer ADSL2+ to people outside of iiNet's and Optus's footprint. I note that this week they started offering ADSL2+ to Westnet off iiNet DSLAMS, so one can assume that Westnet will eventually be offering ADSL2+ plans on all 3 major ADSL networks in the country. They will still be able to move all of the customers with in iiNet's footprint onto their hardware but also have something to offer Westnet's regional customer base. Comment (1)
Hi John
Your People Telecom prices link is actually the same link as the iiNet / Westnet link. Cheers Gidget Comment (1)
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