Ash Wednesday for Telstra's shareholders

Ash Wednesday for Telstra's shareholders

Summary: Shareholders got a rude awakening this week as Stephen Conroy made good on industry calls to break up Telstra. Some argue the government has been duplicitous and should be held to account, but those who sit tight may find the new Telstra offers a far better value proposition with better long-term opportunities.

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Not long ago, I was verbally assaulted during school drop-off after doing a U-turn in the driveway of someone who lives three doors down from the school.

"You people do this all the time, using my driveway," the very cranky resident yelled at me, rubbish bin in tow and bathrobe flailing in the wind. "I'm sorry, but I'm sure the school was here when you moved into the house," I replied. "This really can't be unexpected."

I had similar feelings as Telstra shareholders went into a rapid panic this week after Stephen Conroy's stunning reversal of Australia's failed telecommunications policy. While the response to Conroy's announcement was overwhelmingly positive, a surprising undercurrent was the annoyance of shareholders — and Liberal politicians — who responded to the announcement as though the Rudd Government has some implicit obligation to Telstra's shareholders simply because they are voters.

Conroy's decision to force the separation of Telstra — done in suitably circumspect style to avoid potential liability for forced acquisition of private assets — was long-overdue. It was also, in some respects, the inevitable conclusion of a legislative review process over which the prospect of separation had hung like the proverbial sword of Damocles ever since the RFC process began in earnest early this year.

Telstra shares are not government bonds, a lesson that is being harshly learned by those who bought them believing they would provide long-term benefits with no risks.

Whether Conroy was already determined to separate Telstra, as everybody knew he needed to, or whether the idea only firmed itself after industry response was overwhelmingly in favour, is not yet clear. After all, Labor is hardly a stranger to making major and seemingly spontaneous policy reversals (cf Opel, the first NBN tender, etc).

Regardless of how it happened, the rather significant sell-off of shares on Tuesday left no questions as to the overriding sentiment amongst Telstra's shareholders. Even the government-backed Future Fund was bailing on Telstra, ditching shares in a major move that in retrospect seems too conveniently timed to have been just another of the coincidences that lately seem oh so common in this industry.

While their reaction was hardly surprising, it did highlight one of the very significant implications of Conroy's policy changes. Namely, Telstra can no longer claim the mandates of a private company whilst enjoying the benefits of the government-backed monopoly it inherited. Private companies should by design compete on a level playing field when selling identical services, and structural separation of Telstra — while politically unsavoury — was the only way to set things right.

There may be emotive substance in the argument that the government is reneging on an implicit promise it made by spruiking the Telstra float to shareholders all those years ago. The Australian Shareholders' Association, for one, has come out slamming Conroy's plan as "a giant kick in the teeth" for shareholders.

Savvy shareholders really should have seen it coming a long time ago. And — at the risk of sounding unsympathetic, which I am not — less-savvy shareholders should have really worked to understand the market before investing their hard-earned. Telstra shares are not government bonds, a lesson that is being harshly learned by those who bought them believing they would provide long-term benefits with no risks.

The real risks of Telstra's position were apparent long ago — namely, that its house of cards could collapse if its vestigial monopoly position were eroded by policy changes. Now that Conroy has loosed the legislative hounds, Telstra simply cannot continue as it has continued. The resigned and conciliatory response of David Thodey this week suggests that this is no surprise to anybody. I'm sure Telstra already has a strategy in place to deal with this contingency.

While Telstra has been able to beg, borrow and steal its way to deliver a steady flow of dividends for shareholders, its lumbering, heavily-integrated design and contradictory management style have prevented it from innovating in the way a more competitive market would demand. Its slow innovation cycle and combative executive strategies were perpetuated in the knowledge that governmental inertia and a toothless ACCC could do little to touch it. Competition, and customers, suffered as a result.

Conroy's edict ... will force Telstra to innovate, invest and expand its business rather than simply functioning as a massive ATM for shareholders

Conroy's edict — should it play out the way he seems to want it to — will break up that situation and force Telstra to work harder for the custom it has taken for granted. It will force Telstra to innovate, invest and expand its business rather than simply functioning as a massive ATM for shareholders.

Structural inefficiencies tend to mute the effectiveness of any monolithic company, and there's little doubt that Telstra's history of internal cross-subsidisation was obscuring significant declines in some lines of business. In the long term, separation will bring these issues out in the open and force Telstra to do the soul-searching it needs to truly capitalise on its real strengths — the technical skills of its people, its strong brand, and a robust wired and wireless infrastructure that is steadily expanding to meet the increasing demands of the current market.

Telstra has all the makings of a world-class telco, and will steadily find new footing as Conroy's ultimatum pulls it out from behind Trujillo's Great Wall of FUD. And while Conroy's proposal may worry shareholders in the short term, Wednesday's share surge suggests that even this shock may be short-lived as observers recognise the new opportunities a separated Telstra present for the market.

If Telstra can't innovate enough to keep itself in that leading position in Australia's telecommunications market, perhaps it shouldn't have been there in the first place.

Topics: NBN, Broadband, Government AU, Telcos, Telstra

About

Australia’s first-world economy relies on first-rate IT and telecommunications innovation. David Braue, an award-winning IT journalist and former Macworld editor, covers its challenges, successes and lessons learned as it uses ICT to assert its leadership in the developing Asia-Pacific region – and strengthen its reputation on the world stage.

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5 comments
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  • Did DBCDE's Announcement Go Too Far?

    DBCDE's announcement clearly stated "structurally separate or else [bad stuff]....

    There is a significant body of broker analysis and research on Telstra concluding that structural separation is worse for Telstra than any other form of separation- i.e. functional separation.

    The sticker shock in DBCDE's announcement was in the compulsion to undertake structural separation or else have the government impose functional separation, plus forced divestiture of Foxtel, plus divestiture of HFC plus a prohibition on participation in LTE spectrum auctions. This is "shocking" because the market was expecting an imposed / negotiated functional separation without any LTE type penalties.

    However, after making this announcement Senator Conroy has been interviewed saying he would be willing to accept enforceable undertakings from Telstra that achieve the objective of a wholesale equal access network, without imposing the [bad stuff]. This could be achieved "in a number of ways" i.e. not necessarily requiring structural separation.

    While it is apparent that many government press releases may be misleading or deceptive generally; when it comes to ASX listed corporations - s1041E of the Market Misconduct provisions of the Corporations Act come into play. Anyone who knowingly or recklessly releases a statement that is false, misleading or deceptive that is likely to affect the share price of a listed corporation commits an offence.

    The question is: Is the DBCDE media release is misleading? Because its obvious it affected the price of Telstra shares.

    There is a possible a case for saying it is: If the government said voluntarily undertake to structurally separate; but really meant voluntarily undertake to functionally or structurally separate, or do anything we mutually agree solves �the problem�, then there is a problem for DBCDE re s1041E.

    Alternatively if the "number of ways" Senator Conroy is talking about are only different forms of structural separation then arguably there is no case to answer..... [unless his interviews are misleading]. However the overall flavour of what the Senator is saying seems to indicate that flexibility going beyond a strict choice between voluntary structural separation or imposed functional separation with the stated penalties seems to be on the table.

    ..... So..... arguably.... ASIC should take a look.....
    anonymous
  • Uturn in driveway?

    Surely a three point turn. ;)
    anonymous
  • @Uturn

    Uturn or 3 point turn, it makes no difference. (It was David's share holder analogy!), one can only hope Conroy doesn't do any sort of turn, left, right, uturn & let Telstra OFF the hook. Heaven forbid!
    I for one, hope he also sticks to his guns & makes Telstra divest itself of Foxtel as well. We pay throught the nose for the service and put up with interminable advertising, which is as bad as FTA.
    anonymous
  • @Uturn

    Yeah, that would be a smart move wouldn't it. Get them to stop the advertising and then expect to get a cheaper service from Foxtel. Are you nuts. Perhaps you think Conroy will subsidise it ?
    anonymous
  • Pedantics

    The pedantics of your argument won't change the result. I doubt that Telstra are able to come to the table & give Conroy what he wants. They will be separated as they should be. I doubt that the minuscule titbits you've offered the ASIC would make any great difference when talking about a monopoly that has disregarded the rules that brought from its very inception. Provide an equitable service across Australia, comes to mind.

    The fact that a fairly definite structural separation has been deemed to occur, a softer, easier option gives Telstra an opportunity that they will fail in fulfilling & they will be separated. Thus the reality of the initial argument is enforced.
    anonymous