Telstra CEO Andy Penn
Telstra CEO Andy Penn

If there was any remaining doubt that the Australian telecommunications sector is caught in a perfect storm, Telstra CEO Andy Penn removed them at Telstra’s annual results briefings, warning of upheaval, disruption and an uncertain future for Australia’s most widely held listed company.

There are plenty of elements in the storm that the entire global telecoms industry is facing, but in Australia the federal government-funded National Broadband Network has accelerated the reckoning, ramping up competitive pressures across the entire sector.

But underpinning the changes roiling the industry is the imminent emergence of 5G mobile technology, continuing revenue erosion by over-the-top internet companies (such as Google, Facebook, WhatsApp and Skype) and the commoditisation of bespoke business services as cloud computing increasingly become an inextricable part of telecoms services.

Nowhere is all this being felt more keenly than at Telstra, Australia’s biggest telecoms company and the traditional fixed-line gorilla in the market that also holds the biggest market share in mobiles.

Now its mass-market fixed-line monopoly has been removed after it was forced to sell its copper and HFC networks into the NBN, leaving it open to competitors prepared to take smaller margins and who do not have dividends to protect, and more than $4 billion in capital expenditure each year to fund.

“When you flow it down to the bottom line, that’s more like 50% of the profit historically that Telstra has received is impacted by the implementation of the NBN,” Penn said at the results briefing in Melbourne yesterday.

As forecast at the emergency investor day that Penn held on June 22 to unveil a dramatic and, at least on paper, comprehensive overhaul of the company, Telstra’s $26 billion-a-year revenue flatlined and its earnings and profits fell: 5.9% and 8.8% respectively.

Also as forecast, dividends were trimmed once more, leaving the full year dividend at 22 cents per share, slashed from 31 cents the year before and no promises that it won’t fall further in the current financial year where, as Penn noted there will be more “challenges”, a 2-3% fall in the Australian mobile market, falling average customer revenues and restructuring costs. Ouch.

The Telstra chief — under pressure from markets as the share price has been more than halved, and dividends cut for the first time in the company’s history — continued to rail against the NBN.

“I do think that there are major structural problems with NBN pricing,” Penn said. “Wholesale prices have more than doubled … And they’re set to triple if the current model continues. And I just think that is unsustainable and it’s going to create the wrong sort of dynamics in the industry, and I think they have to structurally change, but that’s not a new comment from me.”

Perhaps, but it’s actually Telstra that has the most immediate structural headache. Until the June 22, Telstra2022 restructure plan was announced, Penn — and his predecessor David Thodey — continued to run Telstra on a cost base suited to a fixed network owner and operators collecting near monopoly margins.

This is despite the deal to sell off its ubiquitous copper network to the NBN — occurring five long years ago. So Telstra has increasingly been a reseller of NBN services for several years now. Sure, the government under-compensated Telstra with its $10 billion payment but management inaction has dramatically exacerbated the problem. And Telstra CFO Warwick Bray has been shown the door. The NBN is now more than 70% built with its 2020 finish now in sight — so more pain for Telstra (and Optus).

Only an hour after Penn’s doom and gloom, NBN CEO Bill Morrow demurred on any pricing issues, saying he didn’t see any problems and that NBN was “forcing a nation-wide churn event” — telecoms industry shorthand for customers shifting from one service provider to another — as he delivered a doubling of revenue in 12 months. He described this result, his last as CEO, as “fabulous”.

Asked if Telstra could ever return to its halcyon days of profits (and dividends), Penn could only say: “We believe we’ve got the right strategy, we believe we’re making the right investments, building the right capabilities.”

But he admitted that Telstra and the sector as a whole had failed, in the past, to take advantage of their position as the essential core of a networked, broadband-enabled world.

Whether he can reverse that trend is very much a wait-and-see game, but an accelerated, ruthless drive to restructure Telstra’s cost base should the first port in any industry storm, and his most urgent priority. Right now, the rest is just window dressing.

Peter Fray

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