Fran O'Sullivan: More than just a network failure

Telecom invested a huge amount in the lavish launch of its new XT network. Photo / Norrie Montgomery

Roderick Deane looks likely to set a new record when he steps down as chairman of Fletcher Building on March 31.

When the NZX opened for business yesterday morning, Fletcher Building's market capitalisation stood at $4.788 billion - 6.6 per cent higher than Telecom's $4.489 billion.

Almost imperceptibly, Fletcher Building has knocked Telecom off its long-time perch as New Zealand's largest listed company.

The change of the relative positioning of the two market heavyweights seems to have escaped the notice of many market commentators and shareholders.

But if it is sustained through to the end of March, Deane can be quietly satisfied that when he finished his stints as, first, chairman of Telecom, and then Fletcher Building, each respective company was the market leader.

Sceptics will have a poke at Deane's performance on the Telecom front, arguing his team kept revenues intact by bolstering its relationship with respective Governments through adroit relationship building thus ensuring the company's de facto network monopoly stayed in place far longer than was healthy from the point of view of the overall economy.

They might also say that Fletcher Building's revenues have been sustained through the Government's decision to bolster the construction industry through difficult times by bringing forward major construction projects.

There is an element of truth to each observation. But company leaders also make their luck.

The loss of Telecom's pole position as market leader will diminish further the company's reputation and put the acid on chief executive Paul Reynolds to drive financial performance harder.

And right now shareholders should be asking some very serious questions about the repetitive failure of its heavily promoted XT mobile network.

Reynolds tried to mitigate reputational damage yesterday by flying to Dunedin to announce a $5 million compensation package for those XT customers who lost service last week.

The company also chipped in $250,000 for community projects in the lower South Island, which bore the brunt of the outages. Reynolds again repeated his spiel that the outage was unacceptable: Telecom was taking comprehensive action and an independent report was being commissioned into the problems.

Gen-I's head Chris Quinn has also had to assure major Telecom customers that the company will get on top of the problems.

Telecom earns some brownie points for quickly stumping up with its compensation package.

But the real issue is how the problem occurred in the first place. Employing an independent reviewer simply allows Telecom to gloss over the fact that it has not got to the bottom of the root cause of the failures.

The company invested a huge amount last year in the lavish launch of the 3G network. Designer Michael Mizrahi "wrapped" the Auckland Town Hall with an exotic light show while inside Reynolds gave a space-age type presentation.

Richard Hammond - who is the host of UK television show Top Gear - was chosen as the face of the television campaign because of his wide appeal and international profile.

This rampant image building now looks an absurdity.

Bizarrely, Telecom's website was yesterday even noting that "if one achievement really captures the extent of Telecom's turnaround in 2009, it's the successful launch of the XT Mobile Network on 29 May 2009".

It went on to say this sought to dramatically shift market perceptions of price, brand, service and quality through a number of key initiatives, and achieve the mission to be number one in mobile.

"XT is simple ... XT is about providing our customers with the best. It provides 3G services to 97 per cent of places New Zealanders live and work, and the launch of XT has given New Zealanders access to a range of world-class devices to make the most of the services XT delivers.

"These devices deliver faster mobile broadband and enable customers to select from a range of content that best suits their needs."

Telecom has over 90,000 customers on the XT Mobile Network. About 57,000 of these have migrated from the existing CDMA Network to XT.

Reynolds has endeavoured to calm feelings by pointing out that network failures occur elsewhere.

But the reality is other 3G networks have back-up capacity - Telecom doesn't.

The most unlucky aspect of Telecom's XT failure is the impact it will have on confidence at Government level that the company can deliver on its proposal to ensure a national broadband network using its fibre-to-the-node programme.

Just last week Reynolds was boosting the Chorus-led projects as an "ongoing example of our decades of experience in building and operating national infrastructure".

Communications Minister Steven Joyce will want to be assured that Reynolds and his team do have the superior engineering skills it claims.

After the repetitive failure of the XT network, the rival NZ Regional Fibre group's proposal must be looking that little bit more tempting to Joyce. This ought to concern Telecom's board.

Ironically the $5 million compensation package announced yesterday is roughly the same as the board paid Reynolds last year in what has to be New Zealand's most gold-plated salary package.

Pity the XT network is not gold-plated too.