Telstra singing right tune, in wrong key

Telstra singing right tune, in wrong key

Summary: David Thodey may have some good ideas about where Telstra needs to go, but his direction requires hard change — and more sacrifice than many shareholders seem willing to afford. Yet as Telstra's dividends-at-any-cost strategy nears its breaking point, can Thodey keep guiding the good ship Telstra through its hard U-turn without losing key passengers overboard?


Of all the sound bites from Telstra's marathon Investor Day presentation, the comment that stuck with me most was David Thodey's comment that "if you don't have a fixed broadband service, you can't sell a compelling IPTV solution".

He's right: given the importance of networked services, it's premature for anybody to totally give up on fixed broadband just because copper is hitting the wall. However, with analysts nearly unanimous in their "meh" reaction to the day, it seems Telstra's biggest problem is not its innovation, services or market position, but its continuing attempts to rationalise its business while mollifying vampiric investors with cash bribes disguised as dividends.

Investors want one thing from Telstra, but how long can Thodey keep supplying it?
(Screenshot by David Braue/ZDNet Australia)

It's hardly contentious to argue that Telstra is a company in crisis. Increasing competition has put it on the defensive, forcing it to retreat from unapologetic premium pricing even as a shift from fixed-line phones has sucked revenues dry. The company faces looming competition from NBN Co, regulatory uncertainty that's being drawn out by the Coalition's new culture of opposition-at-any-cost, and is beating a path away from speculative investments such as its SouFun Chinese venture.

These things are understandable, and Telstra is to be commended for its attempt to innovate its way around competitors and into the future. Its Next G network, Next IP backbone project, and even novel customer lock-in strategies like its T-Box and T-Hub all represent more innovation than Telstra's competitors have been able to muster (although even that is rapidly changing as Foxtel, FetchTV and others mount new challenges).

Yet good ideas only go so far; all this innovation counts for nothing when key executives promise investors to maintain arbitrary dividends — representing an increasing percentage of the company's languishing share price. These dividends are being supported not by profits alone, but by dipping into the cash the company keeps under its mattress. This makes them less of a reward for good performance than a bribe to stick around for the next, presumably-better, act.

Eventually, the pool of resources from which Telstra can draw these incentives is going to run dry. That could be sooner rather than later, and Thodey knows it: "sustaining of shareholder returns is only possible if we make the transition in 2011," he said. "Telstra's performance could be better if we did not change strategies, but the benefits would be short-lived. We will simplify our business and grow new revenue streams to offset the PSTN impact."

I recently re-watched the film Jerry Maguire, in which Tom Cruise's mid-life crisis sports-agent protagonist struggles to explain to star client Rod Tidwell why he isn't securing megabucks contracts. These things are complicated, Maguire explains, but Tidwell isn't interested in the whys and wherefores: "I hear that you hear what I'm saying," he says to the manager who will do anything not to lose his star client, "but do you truly hear what I'm saying?" The classic "show me the money" scene ensues, but Maguire is exasperated when he hangs up the phone because he knows it's all a lot of hot air.

Dividends are being supported not by profits alone, but by dipping into the cash the company keeps under its mattress. This makes them less of a reward for good performance than a bribe to stick around for the next, presumably-better, act.

Substitute Thodey for Jerry Maguire, and Telstra's collective investor base for Tidwell, and you have a pretty good assessment of the company's current situation. Thodey is playing along with the investors by showing them the money — and, in some measure, he has to so as to avoid a massive flight of capital from the company. Yet at the same time, he knows things have to fundamentally change for the company to reshape itself effectively. He's clearly someone with a lot of ideas about what this future might look like, but his entreaties are falling on deaf ears because investors are only interested in numbers — and Telstra's are shifting with tectonic certainty.

But if this is how Telstra's shares are performing even with artificial dividends in place, how would it go if those props were removed? The mind boggles.

It's worth noting here the success of Apple, which is an undeniable innovator and market success, but does not pay any dividends to its shareholders. Investors are none too happy about this, mind you, but they keep funnelling money into the company. The value for Apple investors is not in getting cash handouts, but in owning an ever-appreciating piece of a company that has developed a sure-fire strategy for printing money. Apple has tens of billions in the bank, the goodwill of the investor community and an innovative product pipeline that is running rings around its competitors. People want to be part of the revolution Apple is perpetuating because Apple is creating new value — not just rearranging deck chairs on the Titanic so everybody can get a nicer view of the water.

Telstra is also an innovative company and it is rightfully trying to innovate its way out of the hole it's in. There's no reason Telstra can't sustain a strong market presence as a fixed-fibre player (as opposed to its previous fixed-copper monopoly): you will never, as Thodey pointed out, be able to deliver pay TV or other high-bandwidth services over wireless. But Telstra can supply both, and build its strategy around that dual-delivery model.

But it can't do this without both fundamentally shifting its models — and investing heavily, both here and in fast-growing overseas markets. Telstra is, simply put, a blue-chip share that needs to innovate like a dotcom to survive in the dog-eat-dog telecoms market. Is this really possible by throwing good money after bad and laying off employees in their thousands while executives let investors suck the company's coffers dry with unsustainable dividends?

Telstra is walking a fine line between harsh realities and necessary compromises to mollify a self-interested group of investors that isn't interested in the Telstra That Could Be, but is baying for maintenance of the Telstra that the Howard Government created when it priced Telstra shares well out of their sustainable range. Instead of shouting "show me the money", these investors should be shouting "show me the execution" and allow their share-market darling to be judged on its own merits, as Apple has. Dividends may follow later, but for now that money should really be going to help deliver the change Telstra needs — and, perhaps, even keep a few people actually working for the company.

In the end, Telstra's current strategy will leave it a shell of a company with lots of great ideas but nobody to execute them, and no investors willing to fund them because they've become so accustomed to Telstra-the-cash-cow that they have no interest in Telstra-the-telecoms-innovator. Thodey may sing the praises of Project New and the company's push to improve customer service like it's some sort of revelation, but he's simply singing in the wrong key until the company can muster the will to make some very hard, very necessary decisions.

What did you think of Investor Day? Is Telstra singing the right tune? And can it turn itself around while keeping all of its stakeholders happy?

Topics: Telcos, Emerging Tech, Telstra


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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  • David your ideas are interesting and I would hope that they have been considered by those in control at Telstra. While your suggestions would change the mix overall, the counterbalance that would occur as the shareholder value changed with dividend removal by the consequential share price fall would not be a good look for the company.

    I think that if the dividend was abandoned and the money used to buy back shares held in the Future Fund and then cancelled the shareholder value would be maintained with the share price rise that would result. Probably the best result for Telstra would be for the NBN to proceed thereby automatically eliminating the retail business of the Telstra NBN and hopefully ending the vile dominance of Telstra by the ACCC.
  • Sorry David, of course I did mean the "WHOLESALE" business of Telstra would be eliminated.
  • Hey Sydney, a few lines in the last paragraph's really interesting, especially:

    "-interested group of investors that isn't interested in the Telstra "

    "no investors willing to fund them because they've become so accustomed to Telstra-the-cash-cow that they have no interest in Telstra-the-telecoms-innovator. "

    So true isn't it?
    Salami Chujillo
  • sorry i stopped reading after your incorrect claim that telstra is funding its dividends by using funds under the matress.
    SPECIFICALLY which part of their latest profit result leads you to this conclusion? Or are you just repeating someone elses drivel.
    Back it up with real figures, and DYOR
  • Hi Salami, truth is in the eye of the believer and is an opinion that may or may not be the truth. However, it is terrific that ideas and beliefs are presented which may result in problem solving solutions.

    The report in the Australian Financial Review (4/10/2010) which expresses the Telstra plan to create a highly competitive and attractive Company to Australian consumers is interesting and I am sure every decent Australian will wish Telstra well.
  • DB,
    You use the emotive term 'artificial dividends' in reference to Telstra payments to its shareholders, I suppose these are distinct from 'real dividends' the likes of SingTel or iiNet pay its shareholders, want to compare the dividend rate between all three communications companies? - I guess it's not best to go there.

    Investors put their money into corporations for all sorts of reasons, one of them is of course dividend payments, if Telstra can manage to sustain its dividend rate because it has excellent cash flow then good on them, I don't know why you keep waffling on on about it as if it has some 'profound' significance in the grand scheme of things related to Telstra's future, at least it is not coming from borrowings anymore!

    What is interesting at the moment is the continued dominance of Telstra Wholesale as the key player in the fixed line BB game, here we are in the last months of 2010 after 13 years of ACCC regulated access and pricing control of the Telstra last mile to the exchange and we still have ISP's queued up at the ACCC whining about Telstra Wholesale ADSL2+ pricing, or more specifically what they don't really like is BigPond competing with them on value.
    Latest reports indicate Telstra has stemmed the bleed of BigPond fixed line customers to other ISP's by providing better value plans, that has to hurt ISP's really hard because in a virtual saturated fixed line BB market new customers are hard to come by, and lets face it, BigPond with its really crap value BB plans was easy to get customers from.

    Telstra is well placed with its NextG network with the highest speeds and coverage in Australia (still!) to pick up increasing share of the booming wireless data market, this is where the revenue is increasing coming from, have a look at SingTels and Telstra's financials to see where the $$ are coming from in the communications game.

    Your concern for Telstra's future is misplaced and tainted with more than a fair share of bias, don't worry Telstra will do ok, I would be more concerned about your favourite baby the NBN rollout, this is looming to be one of the biggest multi billion dollar infrastructure projects with the label 'white elephant' stuck all over it in big flashing letters Australia has ever seen.

    The taxpayer will never see any dividends from that company - EVER!
  • Those comments seem fair enough to me 'advocate'. Especially on the aspect of bias and the NBN. Let us now see what DB has to say as a response !
  • Hi Salami. Your vindictive attitude toward Telstra and its shareholders, is so apparent and never waivers. What really is your problem ?
  • advocate you can be my advocate anytime and it was refreshing to read your logic. It will be interesting to see the reaction from the Anti Telstra Circus as Telstra gears up to provide intense competition for opponents especially when the old "Telstra terrible monopoly" charade is finished and exposed.
  • A Telstra fanboi, who is threatened by the NBN - who would ever have thunk it eh?

    Embrace the change and your shares will flourish...
  • Wow, there's a reference worth printing and!
  • If I may cut in, please Salami...?

    I think, like me, Salami doesn't have a vindictive attitude towards "all" TLS shareholders...

    Just the HOGS (handful of greedy shareholders) who believe Australia's comms should revolve around their TLS shares...

    For the record - I am in fact a TLS shareholder again, LOL... 28c div. fully franked for a share that's trading at $2.64! Where else can you get 10%+ and have the tax paid for you too? So I thought WTH..!

    But rest assured, I "will never" come here to say God Bless Saint Telstra and flip-flop from one position to the complete opposite like the HOGS do, just to suit my TLS shares...!
  • "Every decent Australian will wish Telstra well"... you say?

    Does that make those disgruntled, 10 000 Telsta employees made redundant by Sol and the 6000 more to be let go by the "nice guy", indecent, lala?
  • How about this,Telsrta should tell the Govt. to go to NBN hell, and build there own FTTH network,last mile and all,(a great deal of IEN already exists),then see if their competion survives or share holders keep complaining,and getting their bribe(dividend) and Telstra goes broke and the Aust public end up with TELECOM re-incarnate.If its all about the dollar then then shareholders should agree with any plan to re-dominate the fixed line market for the forseeable future.Including IPTV and regaining lost PSTN services.
  • The 6000 figure is speculative.

    But like most of your posts don't let the facts get in the way of a good beat up eh?
  • Ah speculative... your favourite word as your entire nonsense argument is based around it, LOL!!!

    Ok if the 6000 is speculative, I will stand corrected. Simple... But, that was the initial report, Mr. FUD. In fact it was actually claimed to be in excess of 6000.

    Interestingly even your URL states that Telstra aren't sure how many it will SACK, so you apparently know, even better than Telstra... wow!!!!

    Perhaps that's what you are alluding to, that it will be more than 6000, so I see.

  • I also note you were quick to find something to support you, re: the 6000 (even if vague as, and opposed to 95% of the other reports) but are still unable to supply anything at all, to back your nonsense claims and prove the NBN, not to be a wise investment for the nation and future...

    I await yet A G A I N for somethin, anything...!!!