Tell Ziggy he's dreamin'

By David Walker (Google profile)

In late March of 204, Telstra CEO Ziggy Switkowski announced the phone company has bought the Trading Post, the venerable institution made famous all over again by Darryl "tell 'em they're dreamin'" Kerrigan in the movie The Castle. The month before, The Bulletin magazine revealed that Ziggy had wanted to buy the Fairfax newspaper group, publisher of  The Age, the SydneyMorning Herald and the Australian Financial Review. In the past four years Ziggy has played with buying television's Nine Network, and toyed with Channels Seven and Ten. Ziggy reckons content is Telstra's next big thing.

Ziggy's dreamin', to use Darryl Kerrigan's phrase. The simple truth is that content doesn't make enough money. Most of the cash in communications and entertainment media is in the pipes that carry the content, not in the stuff content. The US telephony industry, for instance, has seven times the revenue of US broadcast television and is growing much faster. And even television is outpacing the newspaper industry, a business whose vital classified ad revenues and reader attention are both under siege from the Internet.

Switkowski has said that he wants to get into the content game to stimulate demand for high-bandwidth connectivity. But that's madness, since Telstra couldn't hope to add more than one per cent to the supply of content available to Australians today.

Of course, Telstra also looks at Fairfax as a way to defend and expand Sensis, its phone book business. The first time you hear this, it sounds like a strategy. Sensis's torrents of cash from those thousands of Yellow Pages ads make the Fairfax newspapers' "rivers of gold" - the Sydney Morning Herald and Age classified ad businesses - look like a couple of creeks.

But adding Fairfax would make Sensis bigger, not better. They may both sell ads, but the only true synergy between Sensis and Fairfax is that the Internet threatens them both. Like Fairfax, Sensis has thrived as a quasi-monopoly - the single intermediary that could connect businesses with the casual user in search of an immediate supplier. Revenue grew by six per cent last year, in line with the national advrtising industry resurgence, so the cash torrents clearly aren't drying up yet. But they are threatened, by Web sites that let business owners make their information available direct to the public. Instead of looking up a business in the telephone directory, today you can simply Google it. Just like the managers at Fairfax's Darling Park headquarters, Sensis chiefs wake up every day scared that a massive, history-changing force is working against them. And just like the Fairfax managers, the Sensis chiefs don't know what to do. When Sensis boss Andrew Day talks bravely about taking on Google, the Internet search industry sniggers at him.

The unanswered question is why Ziggy bothers dreaming about the content business, when its prospects look so ropey. Most of Telstra is in the connectivity business, which has been in a cyclical downturn but which is on the right end of a huge social technology trend, an explosion in demand. Telstra owns every flavour of connectivity network: mobile, cable, ADSL and plain old copper-wire voice telephony. Milk Sensis for every cent and sell the buggery out of connectivity: what's so hard about that?

What's so hard about it is this: Telstra lacks faith in the business of connectivity. Its corridors brim with managers terrified that if they make bandwidth cheaper, then one day everyone will have all the bandwidth they need. Then Telstra will be left sending all its customers monthly bills for $1 each, and none of those managers will have jobs.

The truth, though, is that people keep finding new ways to use bandwidth - everything from downloadable music to call-forwarding to SMS messages. Broadly speaking, as the researcher Andrew Odlyzko has pointed out, demand for bandwidth doubles each year. Again, Telstra's dealing with a massive historical force - but here the force is helping the company.

The trick is to extract as much money as possible from the demand for bandwidth, keep bandwidth prices from plummetting too fast, and ruthlessly market every new bandwidth-consuming idea that comes along. (The latest $29.95-a-month low-volume broadband offer points the way.) Telstra, still the default telecommunications option for most Australians, should be able to make this work. Certainly, Telstra has a better shot at this than it has of succeeding in newspapers, television or just about any other damn thing.

History is running in Telstra's favour. All it has to do is to give in. It has to believe that delivering better, cheaper connectivity is a great business to be in at the start of the twenty-first century.