Reach, the wholesale telecoms joint venture set up in February by Telstra and Pacific Century CyberWorks, is betting that a cautious strategy wins the international bandwidth race in Asia.
And as ballooning capacity and plunging prices trigger consolidation around the industry, Reach intends to be a survivor, said Chief Executive Alistair Grieve.
"There are a lot of companies getting into difficulty, basically because they boldly went forth and invested a great deal of money in building infrastracture in one form or another," he said in a telephone interview.
"They borrowed too much money, spent too much money...and suddenly have discovered that the demand is not as much as was thought."
Not that Hong Kong-based Reach nor its 50/50 parents are immune to the currently harsh industry environment.
Some watchers were disappointed earlier this month when Telstra said Reach would generate EBITDA (earnings before interest, taxes, depreciation and amortisation) for the current calendar year of between $400 million and $500 million.
That guidance fell below Goldman Sachs' expectations, causing the investment house to slash its EBITDA forecasts for Reach for this year and next by 23 percent and 27 percent, respectively, to US$498 million and US$522 million. Goldman Sachs noted in its report that Reach faces tightening EBITDA margins, partly from pricing pressure in its international voice services revenue.
Wise - or less wisely
But Grieve said that compared with its once-giddy rivals Reach has invested wisely - or at least less-unwisely.
"The network has been scaled to a size that looks about right for today's world," Grieve said, adding that if Reach needs more capacity, it can buy it from competitors. "The later we leave it to buy it, the cheaper it'll become."
The company has said capital spending will be based on the combined US$200-$300 million a year invested separately by its parents' international backbone units before the joint venture was formed.
International telecoms traffic through Asia was once choked by bandwidth constraints at the wholesale level. But aggressive construction by the likes of Asia Global Crossing and Level 3 Communications, planned during a more ambitious era in the telecoms and Internet sectors, is creating a glut and driving down prices.
The bottleneck is now at the local level, where consumer adoption of broadband connections has mostly lagged forecasts.
Grieve said basic bandwidth prices will continue to fall, although volume growth on most major Internet protocol (IP) routes is running at 60 to 100 percent a year, according to industry estimates.
"The growth is still there, providing one can keep the customer base, the market share - which I'm pretty confident we can," Grieve said.
A buyer, not a seller
As for industry consolidation, Reach sounds more like a buyer than a seller.
"It is likely that there will be a consolidation in this business in Asia," as there has been in the United States and Europe, Grieve said. "Reach will certainly be a survivor in that process."
Grieve also said Reach's shareholder structure could conceivably be altered to accomodate an acquisition. "It's possible," he said. "That is envisaged in the agreement between our shareholders."
Both of Reach's parents have felt the pain of the global rethink in telecoms valuations. Telstra shares dipped yesterday, one cent above a 52-week low.
Well, if Telstra push through the same unreasonable high prices and lunatic 3G cap that they have imposed locally, the uptake will always be slow!