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Telecom's reverse Midas touch

Telecom's reverse Midas touch

Chief executive Paul Reynolds may be facing up to the failure of the XT network, but it was his predecessors who did the damage.

Everyone is ripping into Telecom over the XT network failure, but why the surprise? This is a company with the reverse Midas touch, where a succession of management has left the family gold to tarnish in the harsh New Zealand climes.

In the scheme of things the systematic failure of the XT Network is not so big from a shareholders' point of view. Seriously.

Sure, the brand name "Telecom" is on a par with the Ford Edsel, but in terms of hard numbers this fiasco will probably just delay the XT network winning some share and increasing the average revenue sucked out of clients by 18 months (under the heroic assumption that it is fixed soon). Oh yes, and a bit of short-term compensation - but even that is debatable.

Once the network proves reliable for a year or more all will be forgiven and corporate New Zealand will once again examine the merits of shifting to what is theoretically a technically superior beast to the Vodafone equivalent.

Who remembers the Yahoo!Xtra Bubble "upgrade" fiasco? As one who lost several emails into the ether, Chalkie can recall the red-hot rage at the time. Telecom, if your columnist's ageing memory is accurate, even gave away some free service time as it is doing with XT. Xtra seems to have recovered today.

There is also a suggestion that the controversial system installer, Alcatel Lucent, is to blame for the failures seen to date. If so, Chalkie imagines Telecom will receive a very sizeable cheque to not only compensate for lost revenue but to shut down the possibility of a damaging public spat and court battle.

The fact that the top man globally of Alcatel Lucent, Ben Verwaayen, is apparently giving the New Zealand problem his full attention and that the New Zealand manager has resigned is a fairly good sign that Telecom will get serious compensation to make up for the short-term pain it is bestowing upon XT customers and probably the long-term NPV (net present value) cost of the false start with the network. No, the big value loss to Telecom has not occurred in the last two months of XT embarrassment, but in the decade previous when a succession of poor decisions in this vital business area saw the company go from clear market leadership to a desperate second.

When most telcos around the world report their numbers these days it's a story of declining revenue in traditional lines and calling businesses, offset by growth in broadband and mobile. Unfortunately, past Telecom management has severely dented the company's prospects in these two vital growth areas which is hurting shareholders today and will hurt them more in the future.

Mobile is a significant growth engine for most telcos, not because more people are buying handsets (penetration is now pretty saturated in most developed countries) but due to all the other services, such as mobile broadband power that are being hung off the back of the network.

Telecom's loss of market share in mobile over the past decade has been hugely damaging. The option value inherent in having market leadership in mobile was huge.

Chalkie cannot think of any other incumbent telco globally that has given away market leadership so meekly, so quickly.

In Chalkie's interpretation of history the genesis for this market share loss started when Roderick Deane was in charge (Gattung took over officially in October 1999, but with Deane hanging around as chairman one could argue the case that it was many years before she ran the business unimpeded).

Deane loved his cash flow, hefting dividends and returns of capital on to shareholders like an ATM machine in free flow. On the flipside, there is a suspicion he under-invested in the business.

There was a period when Telecom delayed the replacement of its initial 025 (AMPs) network. The story told at the time was that by delaying the capital expenditure Telecom was able to skip a generation and save cash. But for several years Vodafone had the texting game to itself and sucked the majority of the growth out of the market with its prepaid offering.

Telecom's decision to go with the US-centric CDMA technology for the second (027) network has been well- chewed over as a disaster. Supposedly, the company's big American shareholder was a factor in this decision. The system gave only limited roaming internationally which was a big turn-off for the lucrative business market.

Chalkie understands Telecom never had the spectrum to put in a Vodafone-like GSM network at the time, so maybe the mistake was in not buying said spectrum earlier?

During its life cycle the CDMA network was upgraded to 3G. Chalkie's technical mate tells us this was a mistake - the CDMA network should have been replaced earlier. Certainly, Vodaphone was talking of upgrades to do something similar to the Telecom XT network as early as 2006.

One could argue that if Telecom had moved to GSM earlier and also taken the bold decision to bring prices down it may not now be facing a very potent competitor in 2degrees. The new player, with 22 cents a minute calling, is going to inflict serious damage on both incumbent players.

Telecom can probably rip Chalkie's assertions to shreds one by one, but it is indisputable that Vodafone, since buying the network off Bell South in 1998, has taken Telecom to pieces. Vodafone went from 14 per cent market share in 1997 to 55 per cent by 2004, about the period Telecom was fiddling around with its second network.

Undoubtedly, XT customers should be mad at Telecom for the latest problems, but shareholders should spread their rage over a longer time period and a different set of managers.

The other Telecom long-term "stuff up" which is yet to really play out comes down to the company's arrogance.

Chalkie is a committed Telecom broadband customer despite many years earlier swearing to never use the company for anything but a basic line (this, after a Telecom sales rep put a toll bar on your columnist's home business phone in retribution for Chalkie complaining to her supervisor).

The reason Chalkie is a customer illustrates why the company will get its come-uppance one day. Chalkie was a relatively happy ihug customer using the tricky satellite service, but when broadband arrived on your columnist's street every problem with the line was batted away by Telecom with instructions to ring ihug, which was obviously powerless to fix the ageing copper. Upon pragmatically switching to the evil empire, Chalkie had the technician up about four times over the course of a month and (in the technician's words) "completely rebuild the line all the way from the exchange".

Telecom's underhanded ways with competitors and its arrogance towards the regulatory authorities now mean it is universally hated in government circles. Chalkie will bet his life savings that the government plans to build a national broadband network will not include Telecom at any meaningful point. Thus, in a decade's time Telecom will face the real competitive threat of a superior parallel network to a reasonably large portion of its client base. The growth engine of broadband and the uber- profitable area of line rental will go backwards, making Telecom's experience in mobile look comparatively successful. If Reynolds is still around he will not be particularly popular with shareholders, but the damage was done by his predecessors.

The Independent Financial Review

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