Ash Wednesday for Telstra's shareholders

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.
Written by David Braue, Contributor

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.

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