Author: Paul Wallbank

Lessons from Commander’s mistakes

Will cutting senior management and 30% of the workforce be enough for Commander to survive?

The recent travails of Commander Australia are a lesson for all managers and business owners in technology industries.

When Commander were floated in January 2000 they had a wonderful position in the market with over 100,000 small business customers and being the name for small business communications systems. No competitor could come close to them.

So how did they manage to get themselves into a position where their stock price has dropped 80% in six months?

The first point was they became greedy; as the former small business arm of Telstra they tried to overcharge for the older systems many of those 100,000 customers had. So clients went elsewhere.

Faced with a declining market share they decided to look to new markets rather than examine why their core business was shrinking; they went on a bank funded acquisition spree.

Like many managers in the technology sector, the managers of Commander didn’t understand their own market. Nothing shows this better than the references to computer hardware in their announcement to the ASX.

In the ASX presentation they blame in part the “low margin” hardware business. This of course begs the question as to why they were there in the first place.

It’s no secret margins are awful in the white box business. Unless you have a very good business model you can’t survive in it and it’s questionable whether CDR had a model at all.

The lesson from Commander’s demise is that the technology sector is a tough market and to survive it takes tough management who understand that market.Too many businesses, like Commander, think a few acquisitions can grow their business into markets they don’t understand.

In Commander’s case they went into the IT hardware and enterprise support markets. These markets are as different as chalk and cheese to each other and totally outside Commander’s core telecoms business.

Personally, I think Commander is doomed. The brand name is tarnished and there are thousands of more nimble, better run competitors. It’s certain many of those competitors have learned from Commander’s mistakes.

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What the new government means for the IT sector

With Labor now in government and the ministry announced it’s time to review what their policies mean for the IT and communications sectors.

Broadband, education and regional development were major issues in this election so there are some serious policy differences to those of the previous government.

One encouraging result for these policies is the relevant opposition spokespeople have become the ministers for those portfolios, the most important being Stephen Conroy retaining the communications portfolio. This means we have an incoming minister who is aware of the major issues in the sector.

Labor’s biggest emphasis was on education with the promise of a computer for every senior secondary student, encouragement for science and maths students, a tax deduction for parents of students and programs to encourage skilled and vocational training.

National Secondary School Computer Fund

Every child between years 9 and 12 will have their own government provided computer. This is a big headline issue as school computers are a concern for most parents whether they are in the state, independent or Catholic education systems.

The reality is most schools already have the bulk of these facilities. The real challenge is supporting the infrastructure and providing the resources for teachers to properly use these powerful tools. Rolling this out is going to be a short term boost for the IT industry.

Education rebate

Every family can claim half of their education costs up to $750 for primary and $1500 for secondary students. This can include computers, software and Internet access. This proposal is great for laptop and software vendors and its no coincidence Harvey Norman shares surged on the Monday after the election. We can expect to see small and large service providers and vendors get another short term boost out of this.

Skilling Australia

The proposal of a new training system is welcome given the problems we currently have with vocational training. But on one level this is a worry; will we see another duplication of the existing state based TAFE system like the coalition’s Australian Training Colleges program?

The encouraging part of this particular announcement is business will have a large say in the training policies. Industry has a much more acute understanding of where vocational training is needed than government.

The proposal to fund training up to Certificate III level is welcome, but some fields will need training to Cert IV, diploma and even degree and post grad level.

Overall this is good news for the IT industry, but we need to make sure we are adequately represented in the proposed industry skills councils.

Trades training centres in every secondary school

We can expect to see more techs, web designers being produced. This is good for addressing the immediate skill shortages at the lower ends of the ICT industry. Again the industry needs to make sure they are represented in the development of these centres and the allocation of resources.

Financial incentives for university students

There’s a mixed bag of ideas here with the aim of encouraging students into teaching, nursing, science and maths degrees. This is a critical investment in Australia’s future as it’s essential we get more people into these courses. This will be a long term gain for the industry.

The broadband rollout

While this is the biggest ticket item, and probably the sexiest, it does have serious effects for the nation’s development. One question is how far the previous government’s OPEL scheme has developed as we may end up with either duplication or most of the subsidy going to the OPEL partners.

Online safety

Another program that will pick up from the previous government’s policy is the cyber-safety plan. The biggest difference between the parties is Labor’s commitment to provide a family safe “clean feed”. This is going to take negotiation and may well end up being a subsidy for the incumbent telcos.

Enterprise Connect

This is not strictly speaking an IT policy, but Enterprise Connect will have an effect on IT Investments and tech innovation. The regional focus of many of the programs will be an opportunity for many businesses in those locations to invest in ICT.

Reform of the energy rating system

Another peripheral program to the IT industry are the changes to the energy rating system. Green IT will be one of the major issues facing the ICT sector in the next five years. While IT equipment was not mentioned in Labor’s policy it’s difficult to see computers not being subject to this program in the next few years.

The emphasis on education is good for the long term future of the ICT industries, for the short term the equipping of students with computers and the rollout of broadband is very good for vendors and service providers.

In the medium term, the provision of technical training in high schools addresses the skills shortages that are already biting Australian employers. There is no shortage of keen young kids that want to have a career in IT. Giving them the opportunity to develop this interest is an extremely good thing for the industry.

The long term view is probably the most important of these policies. Australia has slipped badly in technical and scientific education, the very fields that will be critical in the first half of the 21st century. Hopefully, it’s not too little too late.

One of the problems with the date of the election was its proximity to the Christmas break, as a consequence it’s unlikely we’ll see any solid government action until well into the new year.

We should always remember what politicians promise and what they deliver are often two different things. Even the most well intentioned promises may figure out differently when put into practice. We’ll be watching with interest as these policies are put into place.

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TIO annual report

The Telecommunication Industry Ombudsman’s 2007 annual report is a less than proud moment for the Internet industry.

The headline is an 84% increase in complaints about ISP behaviour. But this is only part of the story, the details are even more disturbing.

The most notable jump was in complaints about excess data charges. This is only going to get worse as more people start using VoIP and downloading videos. It’s exacerbated by the swing towards ISPs counting uploads and downloads towards their download limits.

One item that jumps out of the report is the confirmation ISPs don’t keep proper records of conversations with customers. While the TIO points at smaller providers our experience is the bigger providers are not better.

The biggest increase was complaints about debt collection procedures where customers have been listed as defaulting on an Internet bill without any notice from the ISP. This probably relates to a couple of sizable and incompetent ISPs going broke late last year.

As we saw with the One.Tel liquidation, the record keeping of these companies is disgraceful and it’s highly unlikely they can prove any debt when challenged. Not that this stops them trying to recover what they claim is owed.

In the category of customer service, ISPs were by far the worst performer. The biggest category of complaint was inadequate or incorrect advice. This is barely surprising

Direct debit problems continue. Part of the problem here is with the banks who consider direct debit requests to be more important than their customers. The TIO points out this a breach of banking code of conduct.

Given ISPs can’t get their billing right and don’t give records it does appear that giving a direct debit authorisation to them is a risky thing to do.

This report is a wake up call to ISP and the entire IT industry. Things have to improve. Some of the areas we need to look at are;

  • better training
  • improved record keeping
  • proper QA and procedures, especially for escalating customer complaints
  • clearer and more concise bills

The silly thing is all of these would have positive return for ISPs. By providing better information to customers and staff, they will reduce costs and probably improve sales.

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The broadband explosion

For a typical exciting Sunday afternoon, I’ve been trolling through the Telstra annual report.

One statistic that leaps out at me is the growth in consumer broadband subscribers of nearly 60%, even if we assume all the 373,000 customers who ditched their dial up plans went over to broadband, that’s still a whopping 35% growth in customers.

According to the Australian Bureau of Statistics, the nine month growth in consumer broadband connections from June 2006 to March 2007 (not quite the same period) was 46%.

The decline in dial up connection was 26% over the nine months, as opposed to Telstra’s decline of 36.3% over the twelve months.

Interestingly, Telstra’s dial up decline would have been greater if their systems allow customers to transfer their existing dial up email address to broadband. As it stands, they have to retain their dial up account and we steer customers to Bigpond’s Casual User Plan as a cheap way of doing this.

So Telstra’s performance isn’t out of the line with the industry. What it does show is the massive take up of broadband. It’s also profitable, as Telstra’s report also shows their income has grown by over 66%.

Over the next few weeks I’ll have a look at how other providers are doing. It will be interesting to see how others are performing.

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Commander takeover

The failure of a communications company is due to weak management.

The saga of Commander’s slow demise raises some questions about the ability of Australia’s technology companies to meet the needs of the small to medium sized business market.

Commander, or Plestel as they were previously known as, were the monopoly provider of small business telephone systems prior to deregulation. At the time of being spun off from Telstra they had a marvellous position in the market.

For most small businesses, the term “Commander System” was synonymous with small business telephones and PABX systems and they had a ready made customer base of over 100,000 small businesses.

You’d think with hundreds of thousands of customers, an incumbent position and such a level of name recognition, it would be impossible to mess up a business like this.

Somehow, through a combination of overcharging and poor service, Commander’s management blew it. In the last nine years their customers have fled to other providers.

This year the share price has fallen from over $2.00 to around 40 cents. The 42c closing share price last Friday was half their issue price when they were floated in December 2000.

The final humiliation was their 18 day suspension from the stock exchange due to the auditors not being prepared to sign off the annual report.

So it’s funny we now see Australian IT reporting AAPT and Optus are looking at buying the company. The rationale being that Optus and AAPT have failed to get into the SMB market.

Commander failed because management didn’t understand the small business market and the economics of selling to the sector. Optus and AAPT have continually struggled with exactly the same issues.

So it’s hard to see how Optus or AAPT buying Commander could add anything to either company’s expertise (0r lack of it) in this field.

The other prospective buyers of Commander are various private equity groups. AVCAL, the Australian Private Equity & Venture Capital Association Limited, cite Commander as one of their success stories.

One hopes the next owner of Commander’s going to give AVCAL a real success story to crow about.

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Should Australian tech startups head to Silicon Valley?

Paul Graham’s VC blog has a provocative story on why startups should move to Silicon Valley to improve their chances of success. This raises the question should Australian startups follow his advice.

My view is a firm “yes”. Not only are Australian investors inexperienced in finding and nuturing startups but they are notoriously reluctant about putting money into anything remotely innovative or “outside the box”.

So it’s probably even more important Australian innovators to go the US than it is for their British, Irish or Indian counterparts.

What’s always amazed me with Australian investors is how they will keep backing known dogs. The best example was One.Tel where the founders repeated the mistakes they’d made in previous ventures but we’re able to keep the investor’s cash coming in because they were the right people who’d gone to the right schools.

For an unknown kid without connections and with a truly original idea (and One.Tel was certainly not an original idea) it’s difficult to see how they’d have any reason not to be on the first plane to San Francisco.

Interestingly, Paul Graham’s follow up blog post on the future of startups says “you don’t beat the incumbents; you redefine the problem to make them irrelevant”.

It’s going to be interesting to see how the incumbent Australian investors are going to deal with the new economy. Will they just sit on their behinds and enjoy the blessings of the current commodities boom and wait for the next housing boom? Or will they learn new tricks?

Or will a new generation come along and redefine the problem?

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