Fry Up: Out to lunch

Invitation to breakfast

It appears that Telecom is on a charm offensive. Fry Up has been told that influential groups and media commentators are being lunched and breakfasted by top executives.

As we await our invitation, Fry Up, is preparing its small talk. Our theme is 'The History of Telecom New Zealand in Recent Times'.

It will be delivered over three courses (thanks to HP, whose menu for the lunch time launch of its limited-edition designer PC skins we’ve shamelessly lifted).

Entree

As we tuck into yellow fin tuna with crispy baby squid, pickled radish and saffron (wine match Dada Sauvignon Blanc), our conversation starter will be on the topic of investment.

At the Tel.Con 11 event in Auckland on Wednesday Telecom CEO Paul Reynolds said:

“If you are running a business where your key lines are open to all your competitors, this inevitably means loss of market share. Where at the same time you double, or indeed in some cases treble investments compared to historic averages it is a pretty tough sell to your shareholders.”

The key word is “historic”. What were the levels of investment like before operational separation came into effect on March 31, 2007?

Fry Up will counter that according to the OECD Communications Outlook in 2007 NZ telco investment was among the lowest in the developed world, while the percentage of national income spent on telco services was the highest.

“According to the OECD, telecommunications revenue in New Zealand is 5.39 percent of GDP,” wrote Ernie Newman, then TUANZ CEO, in a press release on July 12, 2007. “The OECD average is around 3%."

“Meanwhile Telecom NZ is among the world’s most profitable telecommunications companies with its dividend having traditionally been around four times the industry average...

“But despite all that, the same OECD report shows an extremely low level of investment. Across the developed world the sector reinvests 15.3% of the revenue, but New Zealand is third lowest at just 8.7%”

Is it possible Telecom has had to double, even treble, investment in recent times because the telco underinvested for so long?

Main

Always tricky to choose between the fish and steak, but given the conversation, Fry Up will opt for red meat. Over the braised wagu beef in red wine with smoked potato puree and ash baked celeriac (wine match Kemp Road Cabernet), Telecom’s share price will be the logical follow-up topic.

Reynolds at Tel.Con11: “Telecom NZ share price is probably about the cheapest in the world because of the perceived risks of this business.”

As we tuck into the wagu Fry Up will enquire – is this the risk of network duplication? of regulation? of failure to gain significant market share for the XT mobile network in Auckland? Or is it the risk that Telecom will make another dodgy investment in an overseas market it doesn’t understand?

Reynolds at the conference said the company’s forward looking strategy Vision 2013 (so much for five-year plans) is about simplifying the business. So it has gotten rid of its shares in iiNet and Macquarie Telecom, and the telco is reviewing the international voice business too because it's become so commoditised its "almost impossible to return shareholder funds".

Fry Up is not expecting much of an answer because we really do know that Reynolds is talking about regulatory risk. So it will probably be the right time for a musical interlude.

Dessert

For some dessert is the highlight of the meal and certainly the valrona chocolate pave, roasted pineapple ice-cream and macadamia (wine match Destiny Bay, late harvest) will be impossible for Fry Up to resist. Equally tempting will be the final topic - regulation. To participate in the new fibre network Telecom is pledging to spend up to $6 billion (presumably over the 10 years it will be rolled out), and it will structurally separate into retail and network (Chorus2) companies.

The Telecommunications (TSO, Broadband, and Other Matters) Amendment Bill, currently before Parliament will enable the structural separation. Some commentators note it may also enable government to invest in the new Chorus2 and, enable Chorus2 to invest in Local Fibre Cos.

There are all sorts of other goodies on the table too, the chief of which is a 10-year regulatory forbearance period. That means no Telecommunications Commissioner poking his nose in for 10 years. Telecom’s competitors don’t like it. Telecom is unfazed by their dissent.

At Tel.Con 11 Reynolds was asked if he would give up the regulatory forbearance period in order to placate Telecom’s “industry partners”. He said no.

Fry Up will finish the last delicious mouthful of roasted pineapple ice cream, before handing over a letter dated 5 May, 2004 from then Telecom CEO Theresa Gattung to then ICT Minister Paul Swain, in which she argued that regulating the copper network would result in less investment and a tumbling share price. (The letter was obtained at the time by the Dominion Post through the use of the Official Information Act).

“Paul can I be Frank. I understand that officials are seriously considering the option of sending back the Commerce Commission recommendation for more consideration. This would be a lost opportunity for New Zealand,”Gattung wrote.

Fry Up will suggest that while Telecom won the battle to stave off regulation in 2004, the telco eventually had to face LLU and Operational Separation and at the time everyone thought the company had lost the war. But it appears that the Telecommunications Amendment Act 2006 was just another battle.

A new front line will open up if the Telecommunications (TSO, Broadband, and Other Matters) Amendment Bill is passed in its present form.

Coffee

Fry Up will politely refuse coffee, but we will say to Telecom, we are not against your company participating in the UFB; we just don’t want to see the battles of yesteryear being fought all over again.

Joyce defends UFB regulatory holiday at telco conference

Telecom's FTTN rollout gives it the advantage in UFB: Freeth

Fry Up breakfast

Breakfast with Fry Up in Christchurch is back on. The debate had been scheduled for early March, but due to circumstances beyond our control (big earthquake) it will now take place on Tuesday 10 May at The George Hotel.

The moot has changed to: “Politics has no business in telecommunications”

Clarus MD Edwin Dando along with REANNZ CEO Donald Clark is arguing that it does. Telecommunications Carriers Forum CEO David Stone and Jade Chief Innovation Officer John Ascroft are on the opposing team

Entry is free for everyone in the ICT community, but you need to register so that we know how many cooked tomatoes to prepare.

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