Will it be third time lucky for Telstra?

Over the last few weeks  I have reported on the restructuring of Telstra. The proposed restructuring is exciting new challenge for the company. It will now all depend on the direction the execution will take.

This is the third significant opportunity for Telstra to reinvent itself.

The first time was in the late 1990s when the digital companies started to enter the market. At that time Telstra had the Yellow Pages, the BigPond internet service and a 50 per cent share in Foxtel. In my market assessments I suggested that if these assets were combined, Telstra had the potential to build a national digital company.

However, infighting between the three divisions about their own importance to Telstra and the organisation focus on vertical integration (it controlled the infrastructure, wholesale, retail and the services) to protect their monopoly, nothing eventuated. This opportunity passed by and the individual value of these assets started to shrivel away.

The next opportunity started to arrive when broadband became an important development in the early 2000s. There was clearly an interest in a National Broadband Network (NBN). However, Telstra at that time refused to structurally separate itself. If they would have launched an Infra Co at that time, they most likely would have become the builders of the NBN. They again preferred to defend their vertical integrated structure (in 2006 Peter Gerrand wrote an interesting paper on the topic of the key elements of structural separation).

They also missed this opportunity and so NBN Co was born, building the nation’s access broadband network.

It is rather ironic that now nearly two decades later, the pressure from NBN Co on Telstra is now such that it is forcing them to look at structural separation again and it is interesting that they are now looking at buying the NBN once it gets privatised.

Telstra has indeed concluded that its infrastructure is underutilised and that it can attract more revenue by selling its infrastructure services separately. For this to be successful, they will need to also have an access network, hence their interest in the NBN.

As most national telecommunications operators, Telstra has so far relied on the vertical integrated structure of the national telecoms operator to maximise short-term gains. They tried to become a technology company achieving similar levels of valuations of the international digital companies, but their vertical integrated structure was never going to be the right business model for that.

While they had the opportunity to establish a technical company and to be the NBN builder, they missed those opportunities. The digital market has moved on. But the infrastructure opportunity could still be a possibility. Now, 15 years later, they have recognised the value of infrastructure assets and therefore are now interested in buying the NBN.

This is another fork in the road for the company: will they be making the right decision this time? Their track record is not all that fantastic.

Nevertheless, they have bitten the bullet and are getting ready for structural separation. It will be interesting to see how they will execute this. I see great opportunities for the three companies, but the reality is that each of them will be operating in a competitive market.

These are markets where the best will win, not those who are mediocre. When you are a vertically integrated company you basically provide services at the level of the lowest common denominator. I am not saying that Telstra operates at that level.

However, they are coming from a culture where that was the case. In each of these three new companies they must become either the best or highly specialised in a niche market to compete with the other players in each of these markets.

If the new companies are hampered in this by rigid directions from Telstra Group, then they will not be able to successfully compete with the best in these markets and all three companies (and the holding company as well) will suffer.

For the restructuring to work, they will need to provide the three companies with full independence to go for the business opportunities that are in front of them.

If this fails, there will be no vertical integrated safety net for the company to fall back into. It will be very interesting to see what direction the company will take.

The investment market will follow the restructuring with great interest. Telstra has of course enormously changed since the monopolistic days of Sol Trujillo. They now have all the opportunities to get it right and create indeed three companies with increased value. This will be a massive task and the future of the company is clearly at stake.

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