KEY POINTS:
Once upon a time, Telstra had big ambitions for New Zealand.
The Australian telecommunications giant crossed the Tasman in March 1996, saying it would take on Telecom, backed by hefty investment from its deep pockets.
Telstra New Zealand's then managing director Peter Williamson said the company would start
by winning 10 per cent of the $3 billion New Zealand telecommunications market over the next three years.
It would be "extremely price competitive" and would have a complete range of services.
Williamson expected to take market share from Telecom and Clear Communications.
The company also made noises about building a mobile network by using the resources of its Australian parent to compete with BellSouth - later Vodafone - and Telecom.
But more than 10 years later, TelstraClear - as it is now known - had barely made an impact, and is still a minnow in New Zealand telecommunications.
TelstraClear has about 14 per cent of the telco market, compared to Telecom's 62 per cent, and Vodafone's 19 per cent overall share and 55 per cent mobile share.
What happened? Why did a company with more money than Telecom fail to make headway? And why, after a decade of flat growth, is it hanging on in New Zealand?
TelstraClear chief executive Allan Freeth stunned the industry in December with a speech to senior managers describing the company as being on a "trajectory to disaster".
It would be "anorexic and starving" by the end of the financial year, unless staff worked harder, he said.
Telstra Corporation set up Telstra New Zealand in 1996. It merged with Hutt Valley pay-TV provider Saturn Communications in 1999, and bought Clear Communications from British Telecom in 2001 to become TelstraClear and the New Zealand's second-largest telco.
It was at this point that TelstraClear had a perfect opportunity to take on Telecom, having inherited Saturn's Wellington cable network - through which Saturn had been providing cheap phone services - and Clear Communications' fibre backbone between Auckland to Wellington.
Telstra sent the hard-nosed and ambitious Rosemary Howard to be chief executive of the New Zealand company and fight for a better regulatory regime.
When she was appointed, she said the company's aim was to be a "best of breed" challenger.
But TelstraClear made losses over the next few years, claiming that the pace of regulatory reform had been slower than expected and that access to residential wholesale services from Telecom had not been forthcoming.
In 2005, after taking over as chief executive, Freeth said he had "waved the white flag" and was backing away from being a national-full service competitor to Telecom after TelstraClear's parent rejected the business case for building a third-generation mobile phone network.
But his stance was seen as a ploy to pressure the Government to force regulation on Telecom.
Observers believe TelstraClear has struggled because it has been employing the same business strategies as Telstra Australia, which do not fit in New Zealand.
It has never been able to unify its different units and produce consistent bold strategies that proclaim a separate identity.
Yet, if ever there was an opportunity to take on Telecom, it is now, say people in the telecommunications industry.
The Government announced in May last year that it would open Telecom's network to rivals, in a process called unbundling, to create a more competitive industry.
Telecom's competitors say they will be able to place equipment in Telecom's exchanges and road-side cabinets from the middle of this year and have been extremely noisy about the new phone and broadband services they plan to introduce.
But the silence from TelstraClear has been deafening.
Telecommunications User Association chief executive Ernie Newman says now is the perfect time for TelstraClear to open its purse in New Zealand.
"This is the moment - at long last, Telecom has been tamed. While it will take a few months for the material results of that to come through, there is now a far greater degree of certainty for a New Zealand business case."
Freeth declined to be interviewed by the Business Herald, instead sending a list of "generic points" by email. Freeth, who has a doctorate of philosophy in population genetics, came from agricultural company Wrightsons to TelstraClear.
TelstraClear had fought for more than 10 years for unbundling and a fair market environment, he said in his email.
"Our shareholder has been patient with poor returns, and we are now close to having the tools we need to improve them - it's a very exciting time."
TelstraClear conducted a "ground zero" review of whether to sell the company 18 months ago but concluded it had scale and the ability to grow.
At the time, unbundling and other access options were not available and the company would need to grow in a "constrained and uneven playing field," said Freeth.
"So, when the Government passed the Telecommunications Amendment Act last year, it was a case of staying focused on strategy and seeing how we could drive growth."
Newman said Telstra's management and board appeared to be preoccupied with the confrontational position they were taking with the Australian regulator and Government.
"It must be galling for TelstraClear that due to Australian issues, the moment does not seem right for them to make an investment," he said.
"I don't think investment in New Zealand is featuring very large on their radar screen."
The industry agrees. Telstra chief executive Sol Trujillo made his first visit - for one day - to New Zealand last year.
He was clearly unimpressed by TelstraClear's drop in turnover of 4 per cent to $335 million for the half-year to the end of December.
"Obviously I am not pleased with the deterioration in performance, full stop, no qualification to that," Trujillo said. And his verbal commitment to investment in unbundling was vague.
Telstra's annual report profiles the company's 15 top executives, but does not mention Allan Freeth - perhaps a reflection of where the New Zealand subsidiary is in the hierarchy of the parent company.
Observers believe the company's main bright light is a $50 million investment in a third-generation mobile network in Tauranga due to go live in July. But a lot more capital would be needed to extend the network around the country.
Some analysts are questioning how forthcoming this investment will be considering TelstraClear's history of mismanagement and confused plans, and the apparent neglect from its Australian parent.
IDC analyst Darian Bird said the company's major obstacle was a lack of national mobile network, which prevented it providing the full telecommunications package, so important as the market moved to bundled mobile, internet and home phone services.
"It is an important step, but only if it can extend it nationwide," said Bird.
The industry chorus is that TelstraClear needs a new strategy and quickly.
Deutsche Bank analyst Sameer Chopra believes it may be forced to seek a partnership with Vodafone.
"It makes economic sense for TelstraClear to consider a tie-up with Vodafone in which Vodafone focuses on residential customers and Telstra on business," said Chopra.
Vodafone did not wish to comment on the speculation.
Small companies such as TelstraClear and AAPT, Telecom's subsidiary in Australia, make an 8 to 12 per cent margin on earnings before interest tax and amortisation, while Vodafone and Telecom enjoy 44 to 48 per cent.
This means it is difficult for TelstraClear to compete effectively as a full-scale telco because its margins are so much lower than those of the big companies.
Chopra said TelstraClear needed to cut costs out of its business model and provide more niche services to make a decent return.
Telstra's plan in New Zealand was always to be like Telstra in Australia - which was misguided, he said.
"If they want to be an effective challenger, they should treat themselves as a challenger. If you continue to be the fat guy in the small market, it is not going to work."
Industry analysts agree that the company is at a make-or-break point.
Bird said it was still operating as Telstra, Clear, Paradise and even Saturn.
"Rather than adopt the strategy of a nimble challenger, it acts like a multi-divisional incumbent."
Its wholesale division appeared to have lost its hunger and even though it has excess capacity on its network, customers had to chase the sales team for service.
The company had been plagued by billing issues which it claimed to have resolved, "but it'll be a while before we see proof of that," said Bird.
And it appeared to have staff turnover issues, limiting its ability to form relationships with businesses.
Budde Communications senior analyst Phil Harpur said TelstraClear needed a different offering from Telecom to be really effective.
"It's going to take a significant step in its business model for it to change and move up again."
TelstraClear
* Telstra Corporation set up Telstra New Zealand in March 1996.
* It became TelstraClear in 2001 after buying Clear Communications from British Telecom.
* It provides phone and internet connections throughout New Zealand and has about 300,000 customers.
* It owns two internet service companies, Paradise and Clear.
* Has a fibre backbone that runs from Auckland to Wellington and Christchurch and is being extended to the bottom of the South Island.
* Has a hybrid fibre coaxial network providing phone, broadband and pay TV services to customers in most parts of Wellington and Christchurch.
* Resells mobile from Vodafone under an agency agreement.
* Has a 14 per cent share of the telecommunications market.
