Five years in the hot seat - Q and A with Paul Reynolds

Telecom's departing boss Paul Reynolds looks back on the past five years as head of New Zealand's largest telco

When Paul Reynolds was appointed CEO of Telecom in 2007 the company was required to open up its access network to competitors and to operationally separate into three divisions. The following year the National government was elected, promising to fund a fibre to the home network. Telecom was pitted against the lines companies for the contracts, and was told it had to structurally separate if it wanted to take part. Late last year, following shareholder approval, the company was split and Chorus listed on the NZX. Having announced he will be leaving the company, Reynolds has been staying on until a successor is appointed. He talks to Sarah Putt about his five years as the boss of Telecom.

We know that you’re going to be here until the end of June, is that correct?

I’m going to be here until... my commitment to the company is to hand over to a new CEO, it's not to work to a specific date. The board are going through the process of selecting a CEO and whenever we’ve got that person and we know their start date, we’ll agree when my last day is.

Where does that leave you now, if you’re waiting for the hand over?

I’m running the company. There’s an enormous amount of work going on in the company, adjusting to a new operating environment, delivering our commitments to shareholders and I’ve been leading that process. So there is no waiting around. There is a lot of work to be done. We’re one of the few telcos on the world that are showing share growth at the moment. That’s because of an enormous amount of work focused on Vision 2013 over the past couple of years.

There are 7000 people employed in Telecom – do you see this as a sustainable number of people in the future? You’ve lost the access network, and if you compare Telecom with Vodafone NZ, it appears Telecom has twice as many staff.

Telecom is a much, much bigger company than Vodafone. We have a couple of thousand in Gen-i serving IT services for corporate and government. We have a huge set of assets in the company - fixed network assets as well as mobile network assets. We are huge suppliers to Vodafone. It was only that little bit of the access network that we demerged. The core of the asset base is still with Telecom.

A comparison with Vodafone is completely inappropriate. They are a branch of a UK conglomerate. We’re a full service telco in New Zealand and you need skills and expertise to do that.

That said, I do think we will become slimmer over time. We’ve probably lost, over the last year and a half, nearly 1000 jobs out of Telecom.

Where would the right number sit at do you think?

We don’t have a fixed number, we don’t focus on numbers of people, we focus on getting more efficient and effective on taking failure costs out of the company so we serve our customers better. And as you do that, you find that frees up and you need fewer jobs to do a better job for your customers.

Even after structural separation, Telecom is still a vertically integrated telco – you’ve got a national fibre network, a mobile network.

We don’t have an access network.

I guess you could have an access network to high value business customers.

Well of course, you can connect to high value business customers, but that’s a relatively small number of connections.

You came in to enact operational separation and you’ve ended up leaving with structural separation. Does that mean that op sep failed?

The only reason we’ve been able to do structural separation is because we had done operational separation. The cost in the hard yards operationally was in the period 2008 – 2010 when we carved out Chorus from the rest of the business, and operationally separated the rest of our business.

How long before you think everything will be untangled between the two companies?

Most of the untangling took place between 2008 and 2010, and the creation of Chorus within Telecom. [However] there are a number of systems, which we both use. Some of them will go to Chorus, some will go to Telecom and we’re in the middle of separating those right now. That’s part of the detailed agreements and commitments that were part of the demerger. And that will all be done within a little less than three years.

Would you have wanted structural separation – do you think it was forced upon you?

No.

You fought it, there were public comments from you (during the process) saying there has been no economic rationalisation for the UFB.

We negotiated to get something that was economically rational. There were lots of points in the process when what was on the table made no sense at all. No one is going to sign up for no sense at all.

I think that in negotiation we achieved something very strong for Telecom and I think the government achieved something very strong for New Zealand.

Is that because all the debt was loaded on Chorus?

It has a debt structure that is fairly appropriate for the utility company that it is. It’s not got all of the debt; it’s got some of the debt. Telecom has a lot of debt too.

The point is that when you set up a company of that nature you set up a debt structure that’s appropriate to it. The debt already pre-existed, that had no bearing at all for the commercial justification for... it came from being able to receive government funds to build fibre. Being able to negotiate a de-regulatory situation, the first telco in the world to achieve substantial de-regulation.

And to take that overhang of public policy and regulation off the table, such that investors can invest in both companies with confidence. That’s what the negotiation was about. That wasn’t always on the table during the process. So at various points in the process, I would have said I’m not signing up for what I’m seeing right now.

Mobile – that’s been a mixed experience. When you came on board, the plans, the contracts for the XT network had mostly been decided.

When I joined we were about to build a 2G network and one of the first things was to say that that would be short sighted – we need to build a 3G network. We changed the plans to be a 3G network, which I think is absolutely right. If we’d built a 2G network we’d have found the transition onto 3G and 4G quite difficult, given the availability of spectrum.

I think what’s been surprising is that New Zealand has not taken to smart phones and data networks as we expected.

Do you think that’s because it’s quite expensive?

I think there are a variety of reasons. I think partly it’s affordability. We often compare ourselves to Australia, to the UK, where people have more disposable income and they spend more of their income on communications and those markets have certainly taken to bigger ARPUs (Average Revenue Per User), bigger usage of their mobile phones than New Zealand.

Maybe it’s because New Zealanders are paying too much for phone calls and texts. According to the Commerce Commission $2.4 billion is spent on mobile services in this country every year. That’s a lot of money.

The ARPUs in New Zealand would be a third of those in Australia.

So what’s an ARPU there?

It’s nearly $100 Australian, it’s about a third of that here. $2 billion is a big amount of money, but what I’m saying to you is Kiwis proportionally use their phones much less then other countries that we often compare ourselves to.

An ARPU on the XT network would be about $30?

An ARPU across NZ would be that.

XT was a mixed experience because you launched very strongly and then you had the outages six months later.

I think that was really tough. We felt bad at the time, still feel bad because no one likes to go through an experience like that. But from time to time that happens, I’ve been in the network business for 25 years, these things do happen from time to time. Mobile networks in other countries do the same sorts of things. The question is what you do about it when it happens.

And keeps happening.

It happened over a short period of time. We were very determined to focus on our customers. I think we gave levels of compensation that had never been seen anywhere in the world. We were very open, very clear, and I think taking an approach of integrity and honesty with our customers stood us in reasonable stead.

It did taint the brand though, didn’t it?

There’s no question that if you have a problem you have get over the problem and rebuild trust and confidence. You better get on with that straight away by treating your customers as best you can in the circumstances.

Things you would have done differently with XT – did you go to market too soon?

Not at all.

In part two of this Q and A, Paul Reynolds continues the discussion about XT mobile and looks ahead to life after Telecom.

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