Top telcos tough it out

Internet and mobile services are seen as a necessity by most individuals and businesses, and demand has remained robust despite worsening economic conditions.

But as many customers begin to cut back on spending, internet service providers and telecommunications equipment manufacturers are being forced to reduce prices or create new value-based deals.

That will put further pressure on this low-margin sector, but flexible operators are already proving they can find pockets of growth.

The 50 companies on the SmartCompany Dun & Bradstreet Industry Growth List (scroll down for the full list) include infrastructure providers such as Service Stream, ($450 million in revenue), telco service giant Singapore Telecommunications, ($14.8 billion) and smaller companies such as telephone service provider Vonic, ($1.2 million).

The combined revenue of the companies rose 6.7% to $79.9 billion for the 2008 financial year, from $74.9 billion in 2007, while the average revenue comes in at $1.6 billion.

Given the current focus on value, it isn’t a surprise that the top company on the list has focused its efforts on providing low-cost alternatives to landline phone connections.

Voice-over-internet and telecommunications hardware provider Hostech has seen revenue grow 27-fold, jumping from $163,282 in 2007 in to $4.5 million in 2008.

The company provides SMEs with typical landline-based equipment to manage large telephone systems, but also sells voice-over-IP services (phone calls made over the internet, or VoIP), and markets the technology as a major cost-saver.

Chief executive Michael Abela says that customers will be looking for cheaper alternatives and companies must be ready to respond.

“Value is still a key focus. There are a lot of solutions available and sometimes the cheapest option isn’t the best value. Getting a good equipment deal is important for an SME – if you get it wrong you can damage your business, so they need to get value,” he says.

“We’re getting customers saying, ‘I was going to buy a new phone system, but can I use the one I’ve got and get a better outcome?”

Abela says Hostech has always targeted the SME that is looking for a good deal, especially now with the emerging technology of VoIP, so “the current environment certainly helps our business”.

“Telecommunications as a utility is like water or gas or anything else – people aren’t going to give that up.

“But they are holding back a little bit,” Abela says, “and if you’re a telco that can provide a better way to utilise your technology and save people costs, there’s still a lot of business. To a great extent that’s been driving us.

“On top of that, we’re raising capital to take a buying opportunity, when the value of companies is quite low, so that we can acquire additional companies at relatively low prices.”

Abela also says Hostech is managing its internal operations and shedding processes that don’t work to ensure its survival.

“When you buy assets that used to be private companies and are now public, you need to get them ready to be so. For the last 12 months we’ve been concentrating on cleaning them up regardless of the economy.”

Another company focused on cutting internal costs is telco service provider M2. Chief executive Vaughan Bowen says the company even outsources all of its sales teams to keep costs under control.

“We run the business lean generally – we don’t have elaborate offices and don’t have massive advertising budgets, though that can be very tempting,” Bowen says.

“We use direct sales in the form of third parties, and they’re not actually employed by us, therefore keeping our business very light in terms of our budget.”

The company focuses on providing general telephone and internet services to SMEs, and recorded $45 million in revenue in 2007-08. Bowen says the group will shortly eclipse $250 million if recent acquisitions – including the purchase of People Telecom – are approved by shareholders.  

But Bowen says M2 isn’t just keeping a tight rein on costs – it is also ramping up its sales teams and creating new bundled deals to ensure its customer base keeps growing.

“We’re turbo charging our sales channel and adding agents. Secondly, we’re doing more with our existing customers, offering improved arrangements and most importantly offering more services.”

Bowen says part of the company’s survival strategy in the downturn is moving more of its clients on to packaged deals, which will consolidate a client’s bills and also produce more revenue for the company.

“Once you’ve got a mortgage with a bank it’s hard to disentangle, and it’s the same way with telco services. If you’ve got a client with one special package it’s very hard for them to move without it being difficult.”

But like any business, M2 has felt the impact of the deteriorating economy and now has more staff in its credit control department than ever before. “We are trying to be pro-active about that and offer alternative structures to them that don’t affect our margins,” Bowen says.

“The fortunate thing in our favour is that the last thing people will turn off is their phone service. We expect to be the last one standing and we do have the benefit of having to turn the tap off if a client can’t pay their bills properly.”

Internet and VoIP provider iiNet is also ramping up its efforts to attract new customers, and is even introducing new products.

“One offering we’re focusing on is our entertainment packages,” says managing director Michael Malone.

“This is akin to TiVo, and is really focused towards consumers who can’t afford Foxtel, or perhaps don’t want to spend that money, so we can offer something to that person who’s wanting more.”

The new products offer about 15 free-to-air channels with otherwise inaccessible content.

“Now I don’t imagine this will bring customers away from Foxtel, but it should bring in customers looking for a little more than they have. If you couple that with our internet services it’s definitely a good alternative.”

The company recorded $229.6 million in revenue in 2007, which jumped to $251.1 million in 2008. Malone claims that trend is continuing, and says iiNet has just recorded five consecutive months of record growth.

But as this is the first downturn iiNet has experienced, Malone says he is keeping a close eye on the company and the industry in general.

“We started in the 1990s, so we’ve never actually seen a recession or any type of softening economic growth. So in one sense, we don’t know what this means.

“That having been said, we’re very worried about being complacent,” he says. “We are trying to be conscious in taking care of bad debts. The concern is that this goes on for long term, and obviously we don’t want that for anyone.”

But Malone says he has noticed the industry take advantage of the downturn by introducing products that will both save customers money and increase profit. “To be honest, I’m astonished that VoIP hasn’t been taken up by more of the population. So we’re advertising that more.

“Of course we are relying on value-based deals and propositions, so we’re relying on things like VoIP and other internet deals that will provide major cost savings, and we think we can offer that.”

Malone says that despite volatile economic conditions, telecommunications as a whole will continue to remain strong due to consumer demand and new technology.

“No one wants this bad period to continue…but as it does, we will absolutely continue to advertise and provide products and deals for our customers who are looking for value.”

SmartCompany Dun & Bradstreet Industry Growth List for the telecommunications industry: Top 50