No clear advantage to new Telstra strategy

Friday 16th November 2001

The occasional slice of humble pie does nobody any harm. Shoeshine had to swallow hard this week as he reread his column of March 3, 2000.

"How Telecom blew the last mile" suggested our biggest company had squandered its most valuable asset, a near-monopoly on the final leg of access to New Zealand's homes and businesses, by failing to provide its customers with high-speed internet and data.

Back in those distant days, Telstra Saturn's plans to roll out a $1.1 billion "state-of-the-art" broadband network throughout the main population centres looked like the arrival at long last of full-scale, full service competition.

Lately the picture looks a bit different.

Telstra's cable TV partner Austar, incapacitated by its crippling debt levels, has pretty much dropped out of the joint venture.

With it have gone, for now at least, Telstra's ambitions to take on Telecom head-on in all its local markets.

Now pundits are concentrating Telstra's buyout of Clear.

Industry scuttlebutt has it the deal was held up by Telstra and Clear's owner British Telecom haggling over the worth of Clear's customer base, which is made up almost entirely of toll callers.

BT reportedly insisted these be valued at a multiple of the revenue they bring in whereas Telstra insisted those revenues are diminishing over time as toll prices sink inexorably lower.

At the price of $435 million, BT will take a deep bath on its exit.

The deal, like Telstra Saturn's last year and Vodafone's BellSouth takeover a few years before, is inevitably being called "the biggest telecommunications shakeup in years" but it's by no means clear, no pun intended, that it's any such thing.

Telstra Saturn, for all the lionisation of its boss Jack Matthews, has a minute share of the New Zealand market.

No official figures exist but the industry's collective wisdom holds Telecom has about 78% of the national tolls market and 70% of international calls.

Most of the rest is Clear but the second-ranking carrier scraped its way back into profitability only this year, and then only marginally in relation to the hundreds of millions that have been pumped in since it was set up.

So putting the two together will deliver neither a big increase in the second-ranker's market share nor a big rise in profitability.

Certainly there are cuts to be made - talk is of up to 800 jobs from the combined operation. Both are big spenders on advertising and marketing and the joint budget is likely to be far smaller. Saturn's Wellington headquarters will almost certainly be integrated with Clear's North Shore facility and executive cuts are inevitable.

On the other hand both players have invested large sums wiring up the main centres and there will be a considerable amount of duplication. It's possible the networks can to some extent be employed jointly to deliver high bandwidth but that remains to be seen.

Clear's surviving employees will have to brace themselves for yet another round of change under yet another leader.

Long-time boss Matthews, who has never been seen as a Telstra sort of person, is on the way out and will be replaced by Rosemary Howard, the head of Telstra's wholesaling division.

Howard, for what it's worth, is said to be an aggressive and ambitious operator, a member of Telstra chief Ziggy Switkowski's dominant cabal within the faction-riven Aussie giant, and a habituee of the "CEO's circle" even though she has not yet attained CEO status.

The new boss will have a tricky time integrating companies with very different business, operational and management cultures. An influx of Australians is expected to ease the pain of necessary job cuts across the Tasman.

Once integrated and regrouped, the operation will have to be led in a new direction.

The signs suggest the consumer and pay TV markets will take a back seat if they aren't junked altogether. Efforts will be concentrated on the business market, where Clear has existing market share, relationships and profile, and the growing transtasman corporate market where Telstra's weight can best be brought to bear.

All this will have to be done during tight times. The Reserve Bank this week chopped its forecast of economic growth for the March 2002 year to 1.5%. Given the extent to which world commodity prices have so far defied gravity the risk has to be on the downside.

If there's one recent positive for Telstra Clear's new boss it's the re-election of Australian prime minister John Howard's coalition government.

Howard's commitment to complete Telstra's privatisation by selling its 51% controlling stake will free the carrier to raise fresh equity, an option previously denied it as the government refused either to subscribe to a share issue or to be diluted.

That might come in handy if the local boss comes up with a plan to relieve Telecom of serious market share.

But digging up the streets, which last year burdened Telstra with a $118 million operating loss, doesn't look like it.

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