Peter Nowak: TelstraClear playing a dangerous game

Is TelstraClear bluffing? Lack of evidence to the contrary is certainly making it look like it - and it could be a very dangerous bluff indeed.

Chief executive Allan Freeth last week "waved the white flag" and said TelstraClear would no longer try to be all things to all people.

The company was backing down from pretensions of being a national full-service competitor to Telecom and was instead settling for niche status by focusing on existing markets where they were profitable.

Freeth called the strategy shift his mission statement for the company. Under his watch, TelstraClear will no longer be a focus for the pro-competition camp - it will concentrate on maximising profit. Let somebody else fight the good fight.

The announcement grabbed headlines and raised the ire of competition critics. Here was proof positive that New Zealand's competition regulation was broken and needed immediate fixing. Calls for immediate regulatory action followed.

But where is the proof of this "mission statement"? Where are the specifics? Where's the tangible evidence that this is a retreat?

On closer inspection there isn't much and it sure looks like TelstraClear is engaging in some high-stakes regulatory gaming.

The first damning piece of anti-evidence is the lack of actual movement towards the new reselling strategy. TelstraClear says it will be moving towards a tiered or discount pricing model that will supposedly cause low-value, high-maintenance customers to drop off. But the company didn't take the opportunity during the announcement to outline this model. That smells fishy.

Then there is the larger issue of job cuts. Will there be any? Yes, Freeth said. But when and how many? No idea.

That doesn't sound like a very well thought-out mission statement - especially since it's the result of a four-month review.

Surely such an in-depth study should have yielded some ideas on staffing levels the new strategy would require? And if TelstraClear can't decide how many staff to cut after four months, will it ever?

No answer means the company is either afraid to say, for public relations reasons, or, more likely, it's bluffing. After all, there's nothing like the threat of job cuts to get a Government's ear. Once again, it's an empty promise with no legitimate numbers so far to back it up.

Next up is the company's actual profitability. Freeth last week acknowledged that after years of losses, the company has indeed posted small profits in each of the past two years. Those earnings came under a regulatory regime that all pundits but Telecom would qualify as poor.

But the same observers agree the regulatory environment should improve over the next little while, which means that profits for Telecom rivals should follow suite. So why is TelstraClear pulling back now?

The timing points to the biggest evidence of a bluff - a 3G mobile network. At the same time as stating there will be no further investment in fixed lines and admitting to increased pressure from Australian parent Telstra for better profitability, Freeth refused to rule out building New Zealand's third mobile phone network.

Such a network could cost up to $600 million and likely wouldn't result in any profitability for years.

As a report from Macquarie Research Equities suggests, if TelstraClear was really serious about a retreat, it's amazing it didn't finally put the kibosh on its mobile network plans as part of its announcement.

So how stupid must you be to believe that TelstraClear can have both better profitability and its own mobile network? Pretty darn. And the market is anything but stupid.

The market clearly thinks the strategy move is just that - a marketing and regulatory ploy.

There is little doubt that telecommunications regulation is failing and needs help, but TelstraClear's gambit could do more harm than good.

Its move could reinforce Telecom's argument that it is the only company of any size that can be relied on to invest in New Zealand, and it should thus receive special treatment from the Government. We all know where that got us.