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For a country with a relatively small population, Australia has one of the most competitive telecommunications sectors in the world.

The millions of dollars invested in fixed and mobile network infrastructures mean subscribers have access to a bewildering array of services. This is a far cry from the situation which existed before the 1997 liberalisation of the market by the Federal Government.

According to the Australian Broadcasting Authority, there are 101 carrier licences currently active in Australia. Although many will never be used to provide commercial services, they demonstrate the high degree of activity within the sector.

The domestic market is dominated by two players - Telstra and Optus - who between them control the majority of both corporate and consumer customers. Telstra's extensive national fixed and mobile networks put it in a virtually unassailable position. Optus, also with fixed and mobile offerings, comes a strong but somewhat distant second.

Indeed, when you add Telstra's $20 billion and Optus' $5 billion revenues together, there is not a whole lot of market left for other operators to chase.

But despite this dominance, Australia does have an active second-tier carrier sector. Innovation, niche offerings and an understanding of market demands has allowed a number of players to establish lucrative businesses.

However, the economic downturn that has struck many technology and telecommunications companies during the past couple of years has also taken its toll on second-tier players. Many are finding it considerably tougher to grow customer bases and improve profits.

"There is a lot of confusion in the second-tier segment at the moment," says META Group telecommunications analyst Bjarne Munch. "Many of the players seem to be trying to figure out just what sort of direction they should be moving in and what they have to offer to customers."

Munch points to the rapid evolution of IP (Internet protocol) and wireless technologies as triggers that will force many second-tier carriers to rethink their strategies.

"You have to be prepared to remain current with what you are offering the market," he says. "Technology is moving quickly and carriers have to be sure their product ranges reflect this."

Of all the second-tier carriers registered in Australia, only a handful have managed to carve out a significant market share. One success story is AAPT.

With the backing of its New Zealand-based parent, AAPT has continued to aggressively court both consumer and corporate business. The company has built a comprehensive national network through which it offers local, long-distance and international voice and data services.

AAPT owns a fibre-optic backbone running from Melbourne north to Brisbane and with loops in major city centres. This interconnects with other links covering the entire country.

However, despite all its activity, it's been a hard slog for the carrier. The company recently reported net earnings for the six months to December 2003 of $69 million, up just $1 million from the previous period.

"We think we are going to see some improvement, but we're still a few quarters away from having a standout value proposition," said Telecom NZ chief executive Theresa Gattung, speaking after the results announcement.

At the same time AAPT chief executive Jonathon Stretch admitted there was some "hard work ahead" to get sales activity up.

Also facing some hard work is Macquarie Corporate Telecoms which has carved out a small niche at the top end of town. Offering a suite of services tailored to large Australian companies, the carrier has built a sizeable client list. The challenge for the company is to ensure that growth rate remains.

Macquarie's strategy manager Maha Krishnapillai says the market first showed signs of picking up around 12 months ago and he was bullish about the next year.

"A lot of corporates looked at refreshing their systems in 2003 and this process extended to their telecoms," he says. "We are now seeing strong demand for new IP-based services in particular.

"Telecommunications is a major driver of economic growth generally and that is not going to change."

Krishnapillai says Macquarie has no plans to extend its offering to smaller companies, preferring to focus on large firms that require a high degree of specialisation.

"We understand our target market very well. We know what large companies want and we deliver that to them," he says.

Also chasing the big corporate dollar is PowerTel. The carrier has invested in building Australia's third-largest fibre-optic network, with access points in all major centres. The company is focused on offering high-quality voice and data services to large-scale users.

"PowerTel is looking particularly strong," says META Group's Munch. "With their acquisition of Request, it will be interesting to watch what they do with an expanded product offering."

Late last year the company announced its plan to acquire DSL specialist Request. Industry analysts say the fit is strong as it will allow PowerTel to extend its high-speed internet and data offerings to a much larger customer base.

Request chief executive Phil Sykes, who will become PowerTel chief operating officer when the transaction is completed, says Request has been bullish about the market for high-speed data services for some time.

"It's important to have your own equipment out there, however, and not just be reselling Telstra," he says. "There will always be a squeeze on for switch-less carriers."

Sykes sees considerable potential in the business data market, particularly in demand for IP services. As the technology continues to mature it is important for carriers to have a strong offering.

"Private networking is very big for us at the moment," he says. "A lot of companies are linking all their offices and locations with a single network. This is where the action for carriers tends to be."

Sykes says the voice over IP (VoIP) market is particularly attractive. "VoIP is at about the same stage in its evolution as the mobile market was in about 1993. There is a very long way to go."

The secret to success in the second-tier space, he says, is to identify a niche and then develop a highly differentiated product offering for that niche. "Just offering what Telstra offers but at a 10 per cent discount is no way to build a long-term, strong business," he says.

Request increased its customer base by more than 80 per cent during 2003 with 80 per cent of sales coming from virtual private network services. The company serves more than 500 companies operating over some 3300 physical sites.

The launch of Comindico's IP network last month is set to shake up the Australian voice and data telecommunications industry, according to telecommunications commentator, Paul Budde. Comindico has commenced the roll-out of its eCall IP Telephony service to business. ECall allows businesses to make telephone calls over Comindico's 100 per cent IP network to another Internet phone or normal landline using the company's existing telephone system and external network connection. A residential service will be offered in May or June this year.

Call rates using eCall between two Comindico's customers is an 8 cents flat fee for an untimed on net call, while a local call between a Comindico eCall customer and any other organisation on a network is 8 cents flat fee for an untimed call.

The company has spent over $400 million to build its fully integrated IP network that is capable of delivering high speed Internet, voice calls, data, video and fax services to more than 98 per cent of Australian homes and businesses. It estimates there are 11,000 businesses that can shift very quickly to the eCall service.

Also aggressively chasing customers is Primus Telecom, the local arm of a US-based carrier. Through a combination of owned infrastructure and capacity resale, Primus has built offerings for both the business and consumer markets, the latter of which accounts for around 70 per cent of total revenues.

Primus national general manager and consumer division head Geoff Neate says the company's key advantage came from being able to bundle services for customers. "We don't offer everything but we say we have everything you need and nothing you don't," he says.

Primus recently announced the acquisition of the AOL7 Internet business, together with its 90,000-strong customer base. Neate says that although the operation will remain a separate operating entity, it will allow content and some services to also be offered to other Primus customers.

"You will see us fine-tuning our product offerings and marketing efforts over the coming months," says Neate. "This does not mean that we have done things badly in the past but more that the market is changing and we have to change with it."

He says the company has no plans to build its own local network, but relies on its existing infrastructure of international and long-distance links to drive business.

There is also considerable activity amongst second tier carriers operating in the mobile market. As increasing amounts of voice traffic move from fixed to mobile networks, the opportunity to carve out profits grows.

Wireless analyst with research firm IDC, Warren Chaisatien says most second-tier mobile companies are so-called Mobile Virtual Network Operators, which simply resell capacity on the Telstra, Optus and Vodafone networks. Collectively they account for about 8 per cent of the market or some 1.2 million subscribers.

"The majority of them are pre-paid subscribers," he says. "Virgin is the largest second-tier mobile operator with around 400,000 subscribers and growing."

Chaisatien says Virgin has been successful by focusing on a particular segment, young people aged between 16 and 24 years. It has not tried to attract business users in any great number.

Leading the technology race in the sector is Hutchison Telecoms, which has launched Australia's first third generation (3G) mobile network. The network, called 3, allows high-speed data services as well as two-way video calls.

Hutchison manager of stakeholder relations, Steve Wright says the service had attracted a predominantly consumer customer base, however some business users had been attracted by certain features.

"We have business users that enjoy things like the pricing caps and the extra capabilities offered by the network," he says.

Wright says the company has devised a business package designed to appeal to smaller firms, but he did not expect much penetration into larger corporates.

Chaisatien says the number of mobile operators is likely to fall as competition gets ever hotter. Second-tier players will also feel the pinch if Telstra makes any significant moves on the pricing of its mobile services. The carrier is examining ways to protect its share of the lucrative mobile market.

With so much activity in both the mobile and fixed-line markets within the second-tier space, the next 12 months will prove particularly interesting.

IDC telecommunications analyst Landry Fevre says there are no firms that are going to provide a large challenge to Telstra or Optus, but by offering innovative products they should be able to grow the sector.

"We are likely to see some consolidation in the sector as firms struggle to expand," he says. "Carriers will have to constantly evolve to stay up with what both the consumer and business markets are wanting."

Primus's Neate agrees, saying it is inevitable that there will be more consolidation in the second-tier space "sooner rather than later".

"Just as there were 750 ISPs and this came down to 500 and will go lower, so we will see the number of second-tier players decline over time."

META Group's Munch says he does not expect to see dramatic growth in the sector, but companies that find a niche and exploit it will do well.

"A successful niche can either be a new product offering or by covering a geographic area better than the larger carriers are doing," he says. "We will continue to see innovation because the market as a whole is not going to get any less competitive. Overall, this is very good news for subscribers."

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