Wednesday, November 23, 2011

Australia Post and the Digital Economy UPDATED

Since Maha Krishnapillai announced that he was leaving Optus everyone has been wondering "where is he going?" We were only told it was a commercial role in a non-competing organisation. Today it has been revealed in CommsDay that he is off to Australia Post.

It was an interesting way to find out - given that the only other news coverage in the AFR and The Register seems to also have been sourced from Comms Day.

The only direct quote from Maha in the story is;

I’m genuinely excited by the transformation opportunity at Australia Post, and the opportunity as part of that in terms of their communications products and services strategy. The thing that really appealed was that [Australia Post CEO] Ahmed Fahour is a really interesting character.

I know the opportunity sounds counter-intuitive to some, because that’s what a lot of people have said to me… ‘are you going back to the public service, is this going back to PMG’? But it’s actually none of those things. It’s a pure commercial role, and that’s what appeals… [to] explore the potential for Australia Post in communications products.

So all we are really told is that the role is "to explore the potential for Australia Post in communications products", to which Maha's new colleagues might say they already do "communications" and what you mean is "telecommunications".

Comms Day goes on to speculate that Post's new strategy will encompass three areas - but how much of this is speculation versus information from Maha is hard to know. But I suggest that if Post was a listed company the CEO and company secretary would be having conniptions right now about the way strategy was being briefed to the market. I suspect (as I mention further below) that the shareholding Ministers in Australia Post might be having them anyway.

But let's assume for a moment that CommsDay is accurately describing the strategy. They say it has three elements;

1. Develop strengths in e-commerce….linked to parcel delivery.
2. Adding to the financial service and banking portfolio.
3. Opportunity to become an SP leveraging “massive distribution, trusted brand, logistics advantages and easy-to-use payment systems”

The first two of these are really better described as Digital Economy initiatives - they are how Post needs to respond to the overall economic transformation that is spurred by the fourth phase (telegraph, telephone, network computing, broadband IP) of the communications revolution. (also see below on history).

I've actually heard from elsewhere that there already is an Australia Post manager who has worked on the model for leveraging posts parcels business and looking for an executive sponsor. Hopefully he and Maha will hook up (and the person who told me that reads this blog so hopefully he'll make sure it happens).

The second area is a bit vague, and there are plenty of reasons why Post should not build its own bank - just as there were when the idea was raised in 1910. The Kiwi post office would also have a view. More importantly why cut off all that agency revenue just to try to make some margin between borrowing and lending.

Australia Post is an interesting case for the whole strategy thing - do you diversify or do you stick to your knitting. I think I've written previously about the strategy bit that said "the railways thought they were in the train business but they are in the transport business" - this is the stuff Telstra has grappled with, are they in the telco biz or the comms biz or in the converged "media comms biz".

Post is in the collecting and delivering business. To do that they've had to have shopfronts. They have leveraged the shopfronts to generate agency fee revenue and to sell products to create demand for the collecting and delivering business - presents, stationary etc. These activities bear some of the fixed and common costs incurred in running stores. The agency business in part grew by accident - as the collection of telephone bill payment went from core PMG business to agency Australia Post business.

There is a great deal of value that AP can add to e-commerce by providing an identification certification business - that could extend to providing to individuals encoded USB sticks that could be used by Centrelink recipients to establish their online credentials.

However it is in the area of actually getting into comms and perhaps seriously considering being a retail Service Provider of the NBN that is a worry. There are plenty of consu;tants (notably Ovum and Venture) promoting the idea of non-telcos getting into the NBN service biz. They all cite Tesco in the UK as a model. But Tesco is a service brand, post is a delivery brand. The bigger value for AP is getting large scale delivery business as part of NBN Co - creating drop points for collection of hardware by installers for example, or guaranteeing delivery of the hardware through offering the kind of "where is my package" service.

But the bigger issue is that AP has two shareholding Ministers who happen to be the shareholding Ministers of NBN Co. To allow AP to get into the RSP business would blow the whole separation plan out of the water.

But, all we really have is CommsDay's speculation that this might be the AP strategy. My sense is that it won't be for long.

(see below)

A history note:

Both Maha and Grahame Lynch in CommsDay touched on the history note of the fact that as the PMG telecoms and post were integrated and whether this is a logical step. They get a bit of the history wrong.

The PMG that was formed in 1901 was simply the amalgamation of pre-existing state based PMGs that existed prior to Federation. The model of an integrated post - telegraph - telephone behemoth dates from the middle of the preceding century. How the PTT model evolved in the European countries and their colonies varies from place to place - but Eli Noam in Telecommunications in Europe proposes the position that revenue from the monopoly "royal mail" in all European states was one source of revenue that was not subject to Parliamentary approval. Preservation of that monopoly was paramount and extending the post office role to the telegraph and then telephone was a process of preserving the monopoly and its rents.

In the Australian context the newly Federated Post Office did not operate at all well in its initial years (a position that in part was built on interstate rivalries that remained in Telecom until the Divisionalisation move of 1987). This resulted in a Royal Commission that reported in 1910. The report and its record of evidence make interesting reading, not least because the issue faced was that the PMG was restricted to be able to spend only as much on capital as it could raise from revenue in each year - there were no "taxpayers funds" employed.

The other was that it was the postal service that was profitable. Indeed within the two loss making services the Director-General of the Service Robert Townley Scott revealed in his evidence;

Q:Then the telegraph and telephone systems are non-payable?
A:I do not think the telephones are non-payable. Sometimes a very considerable profit is made on the lines run on the condenser system.
Q: Generally speaking, the telephone system is a payable one?
A: Yes, with regard to the trunk lines and condenser system.
Q: what is to stop the Department from further reducing the telephone rates?
A: I think that would be a mistaken policy. Take a case in point. One can speak by telephone over a distance for 2 [pennies] for three minutes, which would cost one [shilling = 12 pennies] by telegram.
(Paragraphs 358-360 Interestingly the evidence at this point goes into Scott's proposal for a Post Office Savings Bank).

The Post Office never received much taxpayer money, and from 1959 on it only received Government funds as loans. When the Post Office was split into Australia Post and Telecom Australia in 1975 a basis of it was that the former was a labour intensive business while the latter was a capital intensive one.

{This para has been amended} Grahame Lynch writes that "international services were excluded" when telecom and post were formed in 1975. This construction could give the impression that the international services were part of the PMG at that time. Instead the history of overseas telecommunications is far richer. OTC was formed in 1946 when the previously privately held assets of AWA and Cable & Wireless were nationalised. It was a recommendation of the Vernon Commission into the Post Office in 1974 that OTC be merged with Telecom, but OTC saw off that threat. The story of the final merger of Telecom and OTC has really only been half told - Professor Steve Burdon at UTS threatens to write a tell all book one day.

Finally the carrying value - that is cumulative unrecovered funds - invested in Telstra before it was privatised for some $60B was precisely zero.

For avoidance of doubt, I think CommsDay did a brilliant job in getting this scoop. I have referred to the AP strategy as being "speculation" on CommsDay's part since they preceded it "CommsDay understands". However, I assume, like every other reader would, that CommsDay actually got this from Maha. I do think that that is a strange way for AP to brief its strategy to the media, and I do wonder what the shareholding Ministers would think of AP being an RSP.

Also the history note says that CommsDay gets the history "wrong". While there was one specific error (since amended) the import of this note is that the relevant history is far more interesting and richer than the potted version provided by CommsDay would suggest.

Novae Meridianae Demetae Dexter delenda est

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