Paul McIntyre: Telstra gets back to basics

COMMENT

Australia's dominant telco provider, Telstra, has finally given up its ambitions to be a major player in the media industry and is now staking its growth plans on a strange concept known by an elite few in business as customer service.

This week, the carrier announced a record profit of A$4.118 billion ($4.4 billion) for the 2004 financial year and unveiled a A$750 million share buyback and a A$750 million special dividend to be paid next February.

They're fancy sounding numbers, but underlying concerns in the market about Telstra's outlook were unchanged because its sales growth last year was 1.2 per cent - less than the 4 per cent industry average.

The pending fat cheques to shareholders helped Telstra pay its way out of what could have been more trouble with the markets but it also highlights the carrier's return to conservative capital management.

The telco also officially buried its considerations for media acquisitions, especially the mooted A$2 billion takeover of newspaper publisher John Fairfax Holdings in February. Former Telstra chairman Bob Mansfield was a victim of that plan, and was forced to resign after losing the support of the majority of the board.

Since Telstra chief executive Ziggy Switkowski also backed the Fairfax merger proposal, his hold on the top job has appeared less secure, as evidenced by continuing rumours that the board has lost confidence in him, too.

Under pressure to focus on improving the provision of basic communications and boosting customer service levels, Switkowski this week backed away from any future media expansion plans.

"We are not a media player. You will not see us go out there and take a big step. That's not part of our thinking," Switkowski told analysts this week.

Still, investors weren't convinced, and the company's shares were marked down 8Ac to A$4.96 on the day its record profit was released on Thursday.

In reality, Switkovski has now been forced to re-model his strategy to be more aligned with that of Telecom New Zealand, which is now the preferred stock for investors in telecommunications companies in this part of the world.

In other words, Telstra is focusing on better capital management, investing in its network, and trying to give the customers what they want. "Trying" is the key word for Telstra on the customer-service front.

In the past two years, Switkowski has restructured his management five times.

His biggest bets were to split the mobile division into separate consumer and business units, and to create divisions based around customers, not product lines.

Investors, however, are not yet convinced that those restructurings are paying dividends, particularly since Telstra's overall sales growth is about one quarter of the rate of its rivals.

Switkowski believes he can return Telstra to sales growth of 4 per cent in 2006, but he knows this growth must come from improvements at the coal-face.

"Customer service is our top commercial priority," Switkowski said. "As customer satisfaction lifts, churn decreases."

Switkowski had better hope that he can engineer rapid improvements in customer service, or his next strategic moves may fall flat.

Telstra, which now has 830,000 broadband customers, is set to unleash a significant spending programme in the next year in a bid to head off competitive threats from all quarters.

It recently paid A$450 million to Hutchison Telecommunications to get a foothold into the 3G mobile phone market, and is now planning to undertake a large roll-out of consumer wi-fi services, by placing wireless base stations on 30,000 new payphones around the country.

The carrier is also planning an aggressive rollout of business-grade DSL services before the end of the year, while its own CDMA-based mobile phone network will be upgraded to higher speeds within the next two months.

"If you look at the next few years in this industry, the technology infrastructure will be capable of very high bandwidth, whether that's copper or cable or wireless or eventually satellite," Switkowski said.

He predicted that by the end of the decade, the mobile phone would be the device of choice of consumers, with more than 25 million high-resolution handsets in the market.

But Telstra continues to upset many customers in regional and rural areas who still cannot secure a decent internet connection or mobile reception.

The central complaint about Telstra is that even with control over the dominant access platforms, and money to burn, it is continuing to frustrate Australia's digital communications future through inadequate service levels and glitches in its network.

"Telstra's record profit of A$4.1 billion provides a great opportunity for Telstra to reinvest in its network," said Labor Party communications spokesman Lindsay Tanner.

"Labor has revealed three leaked Telstra reports this year showing problems in Telstra's fixed line and mobile networks due to underinvestment and a lack of adequate staffing and maintenance.

"Telstra must get its network up to scratch."