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Australia Post, Telstra and the ‘dying business’ dilemma

Australia Post’s business is evolving, but it still has to support loss makers. Australia Post/AAP

Who would run a former government-owned monopoly these days? In the last week, Australia Post’s Ahmed Fahour announced 900 administration jobs were to go from its Melbourne operations, while last week Telstra’s David Thodey recounted discussions from his recent trip to the US, where he was told his “business model is dead”.

Both organisations, ironically once part of the same Commonwealth Postmaster General’s department, face massive disruptive change from new technologies. How they manage these changes will have consequences far beyond their corporate results, with important consequences for the nation.

The Good Old Days …

Once, for Telstra and AusPost, the future was certain. Growth in the core telecommunications and mail businesses was seen as a function of general economic growth. The demand for these essential services, it was expected, was assured.

The internet, in different ways, put paid to those certainties. For AusPost, the most significant change was the collapse of the traditional letter delivery business. Once a monopolistic license to print money, the era of the internet has seen the demand for its core letter delivery services collapse by 30% over the last five years. This has seen this segment of the business become a significant drain on the organisation’s performance – letter delivery lost A$122 million in 2011, A$187 million in 2012 and A$218 million in 2013.

Future Ready or Future Shock?

In 2010, AusPost announced its “Future Ready” strategy, seeking to identify future market segments where its performance could be developed and improved. This strategy revolves around developing three areas, namely communications (digital and physical), the provision of a physical portal to access government, business and financial services and finally as a deliverer of parcels.

Of the three business segments identified in Future Ready, one is promising (parcels), one is questionable (the services portal business) and one is abominable (letters) – hence the recent manoeuvres to clarify and separate the business into its core elements, most probably with a view to the future privatisation of that part of AusPost that makes profits – parcels.

AusPost is seeking to innovate – thus far with limited success. For example, in 2012 it launched MyPost Digital Mailbox, seeking to offer customers a secure way to pay bills (sound familiar, BPay?). Recent reports suggest it has met with limited success.

The Digital Mailbox illustrates two key problems for AusPost as it attempts to transform itself into a digital transaction hub. First, it pursues such initiatives as a late mover, confronting established incumbents with deep pockets and an installed base. Second, any such intiatives are subject to eventual competition from the likes of PayPal, and indeed the Australian banks, whose global reach and e-commerce capabilities should frighten AusPost.

Whither Telstra?

Telstra too faces serious challenges. Ever since voice was digitised, telecommunications companies have essentially been in the business of shifting data between users. The problem with this is that the transfer of data is rapidly commoditising, with a large number of alternative and interoperable access arrangements or gateways (wireless, optic fibre, copper) and network infrastructure (NBN, satellites, subsea communications cables) interconnected through the internet.

The risk for players like Telstra has always been that one day (soon) virtual Telcos would emerge, bundling fast data and seamless access points located within cherry-picked markets like our major urban centres.

Don’t forget the Community Service Obligations

A major problem for both AusPost and Telstra relates to their community service obligations. These are enshrined in the relevant Commonwealth legislation for both Telstra and AusPost, generally requiring both companies to provide an adequate service to all Australians, wherever they be.

The problem is that postal and telecommunications services to rural and remote areas, while of fundamental importance to those communities, tend to be a financial deadweight for the companies.

For example, one aspect of AusPost’s community service obligations is the provision of at least 2,500 outlets in rural and remote Australia. These are often integrated into local retailers, providing an important hub for communities, allowing access to mail, banking and financial services. Significant closures of these outlets would have devastating consequences for many rural communities.

Thus the government should proceed with caution with any plans to allow AusPost to split in two, and it should monitor carefully the implications of technological change on Telstra. For AusPost, selling the profitable parcels business would leave a legacy letters and services business that would almost certainly see declining use and huge financial losses into the future. For Telstra, the consequences of a myriad of new competitors cherry picking its profitable city markets, while ignoring the costs associated with ubiquitous infrastructure in the regions, could be calamitous.

Regardless of promises and projections, the temptation for AusPost’s and Telstra’s managers to cut services and costs to reduce (especially non-urban) losses could well be irresistible.

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