Telstra's 3G Decision - Where the Analysts Missed the i-mode Play

While it might not seem obvious it actually does follow that if the analysts and commentators all got it wrong about Tesltra’s i-mode alliance then this explains why they missed the i-mode connection in its decision to pay AU$450 million to share H3GA’s radio access network infrastructure.

The network sharing announcement is important for three main reasons:

firstly, it shows that Tesltra is suddenly prepared to shoot sacred cows within its own organisation;
secondly, it gives Hutchison a chance to fix its poor 3G coverage and network performance, and;
thirdly, it validates one of the strengths of Telstra's i-mode alliance.

However, in a delirium of post-traumatic babble analysts and commentators grouped around the theme of increased competition being the key outcome. This is incorrect - the key outcome of this single decision is simply reduced network operating costs.

The trauma was caused by the announcement itself as Telstra declared itself suddenly prepared to shoot sacred cows within its own organisation.

In particular the announcement trampled on the “Not Invented Here” and the campaigns of fear and doubt which were the standard fare of the network and operations groups within Telstra.

This is without doubt a major announcement from the perspective of Telstra’s business culture, and this effectively stunned silent the analysts and commentators.

But, from a competitive and business strategy perspective it is on the same level as a bank announcing a joint venture for back-end mortgage processing, or any other routine shared service announcement.

That is, it is a sensible cost-cutting outsourcing or shared-services decision, and per se it is only interesting from a Telstra cultural point-of-view and for the benefits to Hutchison - in the absence of the i-mode alliance.

In order to distance myself form the group think of others, I’ll present an overly back and white case and say that the network sharing announcement does nothing for competition except to cut delivery costs for both parties. Therefore, removing the impact of the culture shock, it is an efficiency decision above and beyond anything else.

This will result in both parties reaping increased margins – or at least lower operating costs. This has little bearing on increased competition except as a potential source of cash flow to direct to building new revenue and services.

While of course there is the potential for increased competition from increased efficiency this efficiency is a hygiene factor not a core driver in the mobile market.

For example, Optus's incoming CEO Paul O'Sullivan says Telstra has overpaid. "...because we would do a similar number of base stations for about half the price that they have contributed," O'Sullivan said. Hutchison has more than 2,000 base stations for its 3G network.

O'Sullivan could not see what obvious benefits Telstra would gain from the deal but considered it to be a reasonably good deal to Hutchison (Optus has about 35% of the Australian mobile- phone market, as compared to Telstra's 46%).

This is not just competitive sour-grapes from O'Sullivan, because in fact there are no big bold strategic benefits unless you bring the i-mode decision into the strategy framework.

The real significance of the competitive value to Telstra derives from its i-mode alliance.

Ironically, since all the analysts and commentators were negative or sceptical about Telstra’s i-mode strategy they are blinded to this aspect of the real competitive position created by the 3G announcement.

Through i-mode Telstra will be able to convert a very useful share of their current large mobile subscriber base to new forms of content and entertainment delivery, and potentially create new demand in the youth market.

In effect, more Telstra users will be able to take advantage of data services designed for wideband and broadband networks through the stepping-stone of i-mode on the current 2.5G network.

See this press report 10 days after this post where Telstra's managing director wireless and mobility products Holly Kramer confirms that "Telstra's strategy calls for an increase in usage and demand for i-mode mobile services, which will then be migrated across to 3G".

This idea was part of i-mode alliance partner E-Plus's strategy back in March 2002: "In launching i-mode on the GPRS platform, E-Plus is offering European consumers an early taste of the mobile multimedia experience that UMTS will deliver", notes UMTS Forum Chairman Dr Bernd Eylert. "As NTT DoCoMo has already demonstrated with the launch of its own UMTS service in Japan, the lure of exciting services - such as those already available with i-mode - gives mobile subscribers a powerful incentive to migrate to third-generation networks as they become more widely available."

Telstra's chief executive Ziggy Switkowski fought back criticisms that it had overpaid "We're absolutely convinced that doing the infrastructure sharing deal with Hutchison was a good move," he said a couple of days later. "It was good from a Telstra strategic and tactical point of view."

This is the key strategic outcome: Telstra will now be in a strong position to roll its i-mode services and customer base seamlessly across from 2.5G to 3G and to bring large numbers of i-mode clients onto a more efficient network with lower operating costs. This will be a very distinct advantage, if they can capitalise on it from a marketing perspective.

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To understand better the i-mode business model see my related blogs on imodestrategy.com and DIblog.com:

Aussie Commentators Scatter as Telstra Endorses 3G - here
Who's who in the Zoo of Hutchison 3G in Australia? - here
How to Build Your Linkedin Business Network - here
Why the Open Mobile Terminal Platform Alliance is a Win for the i-mode Business Model - here
Why the Analysts Have It Wrong About Telstra's new i-mode Alliance - here
How to Redesign the i-mode Sales Process for Success - here
Sourcing Strategies for Telco IP Core Network - here

What's your view of the network sharing agreement between Tesltra and H3GA - what will be the main outcomes in the marketplace? Post your Comments.

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