Telecom answers the call for clarity

Chairman Wayne Boyd (left) says he has faith in the ability of Theresa Gattung's team to reform Telecom. Picture / Mark Mitchell

By Telecom's own admission, the future of its business is mired in some "fundamental uncertainties".

The rules and pricing around the Government's watershed decision to unbundle the local loop are yet to be finalised. Strong competition from internet phone services and other technology is rapidly eroding the company's once-solid revenue base. Its investment in Australia has been a financial disaster and it is looking into the expensive possibility of having to replace its mobile phone network.

Telecom used last Friday's full-year result announcement to brief the market on its post-unbundling strategy. While some analysts complained the briefing fell short of providing enough detail, it did shed some light on where the country's largest listed company is heading.

Does Telecom need to build a new mobile network?

Speculation that it will have to spend hundreds of millions of dollars replacing its mobile network has dogged Telecom for the past year.

It is one of a dwindling number of telcos around the world still running a CDMA mobile network.

Vodafone New Zealand's network is the more popular Wideband CDMA technology, which has effectively become the global standard, with a much stronger global roaming proposition, a strong hook for attracting high-spending corporate customers.

Telecom's head of technology and enterprise, Mark Ratcliffe, admitted at Friday's briefing that the "risk profile" of CDMA had deteriorated since the start of this year. Telstra in Australia will shut its CDMA network and cellphone maker Nokia is pulling out of the CDMA market.

But Telecom continued to invest in CDMA, Ratcliffe said, spending $16 million on a world-leading upgrade to increase data transfer speeds.

He said reported estimates of an $800 million cost to build a new network were "wildly inaccurate"; the actual figure would be more like $300 million to $400 million.

"There are an increasing number of options that don't necessarily require us to make any of that investment at all in terms of partnering with other people or the kinds of alternatives we've got in terms of providing mobile services to New Zealand customers. So we'll continue to monitor wideband CDMA but [have] no plans for investment at the present stage."

Asked whether Telecom had any plans to sell its stake in Australian WCDMA operator Hutchison 3G, chief financial officer Marko Bogoievski said: "We're fundamentally satisfied with our investment in that business with Wideband CDMA, [we're] unable to rule that out as a long-term option for the business, Hutchison still becomes very, very relevant. [We have] no plans to do anything with that asset today."

Why doesn't the company quit Australia?

Like many New Zealand companies, Telecom has taken a bath after expanding into the Australian market. Last week's full-year loss was a result of a massive write-down of its Australian AAPT business, for which it paid more than $2 billion and now values at A$270 million ($330 million).

But Telecom insists that walking away from Australia is not an option.

"It's still true that from a New Zealand business and corporate customer perspective many of them operate on an Australasian basis," said chief executive Theresa Gattung. "We have a very strong position in the business and corporate marketing in New Zealand. For us it's fundamental that we have an Australasian proposition as part of that.

" ... it's simply not an option to exit Australia. We did not have a good position prior to buying into Australia. It was very difficult. All that's happened since then is that the links between Australia and New Zealand in top-end business have grown."

Will the new accounting separation model work?

In a bid to stave off a more severe Government-mandated carve-up of the business, Telecom has instigated a new wholesale/retail structure along the lines of the acclaimed model used by BT in Britain.

Critics say the accounting-level separation does not go far enough to ensure the independence required to offer true competition. Under the new structure, wholesale head Matt Crockett reports to technology and enterprise boss Mark Ratcliffe, who in turn reports to Gattung.

But Ratcliffe argues the structure is sound. "We do see that our wholesale unit having close ties with our technology group gives them better access to resources to meet the needs of their customers and allows us to maintain that very strong independence between our retail operations and our wholesale operations," he said.

"From our point of view non-discrimination does mean non-discrimination. We totally get that we will be watched and commented on every step along the way as we go on this journey and I think we're up for that level of scrutiny."

Crockett also used Friday's briefing to insist his division would adopt an "independent and proactive" stance.

When will Theresa Gattung go?

Chairman Wayne Boyd has maintained a consistent response to the regular question of whether he has faith in a management team that failed to foresee the Government's unbundling decision. Boyd repeated that answer last week: he has faith in the team's ability to reform the company.

In a similar vein, Gattung has said she is committed to overseeing the transformation.

Finding a new chief executive and replacing senior executives is a long, disruptive process - the last thing the board, and the company, need at this time.

What does it all mean for investors?

Telecom's share price will continue to suffer while uncertainty remains over the final shape of the Government's regulatory changes. Investors reacted negatively to last week's result announcement, with Telecom shares yesterday touching a 13-year low.

The prospect of a reduction in the dividend payout ratio was enough to frighten investors, although the company said after the announcement its target payout ratio for this financial year remains unchanged at 85 per cent of net earnings.