Every Tuesday I go down to my local Lotto shop and buy a Big Wednesday ticket. I know, the odds of winning are long, but there’s something about the thought of a Porsche and a nice bach that makes me go back week after week. I don’t expect to win, but I like dreaming about retiring to the Coromandel.
Big Wednesday will take on a whole new meaning from now on, though. It’s the day Telecom got the biggest shock of its corporate life, and the fastest-moving industry around was caught napping by a government.
Cabinet meeting in the morning; announcement in time for the six o’clock news, and, so far (and I’m writing this late on Wednesday night), industry reaction has been “golly” and other more earthy words and phrases.
Telecom’s share price has plummeted as a result — as Telecom warned the government it would. This is the second piece of good news the industry has had. More on this shortly.
Actually, Telecom should be happy about what has happened. But it won’t be. And, having half its executive team on the plane to Sydney for an analyst briefing as all this happened won’t have helped Telecom’s temper. But the reforms are still good news for the company.
Last week, in a fit of prescience, I interviewed John Third, managing director of consultancy Guinness Gallagher, about the ins and outs of breaking up companies like Telecom. Third does this sort of thing for a living, so he knows a good outcome when he sees it — and how to go about getting one.
Third said, quite rightly, that Telecom’s current model is destroying shareholder value. There are two halves to Telecom’s business — the network arm and the retail. The network division would love to build the network out as far as it can; it wants to improve services and to upgrade its technology to offer new and innovative services to wholesale customers.
The retail arm doesn’t want a bar of this. It wants to retain its monopoly position; it wants to bundle services together; it wants to play the regulator off against Telecom’s competitors, so as to have the market where it wants it to be.
The two do not sit well together. Now they won’t have to.
While unbundling will steal most of the headlines, it’s accounting separation that should make us sit up, because it is the start of a very special journey for Telecom. It’s a journey that will take it from being an incumbent with a monopoly position to becoming a commercial player, with commercial imperatives. It will see Telecom being forced to account for its wholesale services as a separate business. Finally, we will get to see just how much it costs to deliver broadband, as well as how much it costs to service the rural sector. And, also, how much it really costs to make a phone call on Telecom’s network.
Once Telecom gets used to this idea, it’ll soon learn that networks are expensive to run, have a low rate of return and take years to make money. That’s not a business every investor want to be in. But pension funds do — the Cullen fund (Kiwi Saver) and all those government departments, like the ACC, which all have money invested in Telecom, will love a stable, slow-growth network company.
In contrast, the fast-paced, high-return, high-risk retail company will have to stand up and duke it out with the other ISPs and telcos. You’ve seen the ads — do you think Xtra’s up to it? I do. I’m sure the commercially minded folk at Xtra will relish being cut loose and being given the opportunity to be independent of the network boffins. They’ll be coming up with innovative ways to sell products and new ways of delivering services, and we’ll all be better off for it. If you don’t believe me, take a look at the way Telecom’s T3G service has been positioned against Vodafone. Kevin Kenrick, the new-minted chief operating officer of Telecom’s consumer business, is a clever guy, and when he sets his sights on a market niche, grab the popcorn and settle back and watch the fireworks. If he’s put in charge of a consumer company, built around Xtra and the mobile broadband network, it’ll be competitive. And, more importantly, it’ll be exciting.
That’s why Telecom’s share-price plunge is a good thing. Investors will be sizing-up which company to put their money into, and when they chose they’ll get it at a discount rate.
However, I fear it might well spell the end for Woosh. Between this announcement and Vodafone’s new speeds, there really isn’t much room for Woosh.
Most excitingly, the Cabinet briefing paper also includes a line about broadband investment from competitors should this regime be brought into effect. Someone is talking about fibre to the home and I, for one, can’t wait.
In the 1950s, television’s Mickey Mouse Club used to have a day of the week theme. Wednesday’s was “anything can happen day”.
Never have truer words been said.