It is worthwhile to analyse what is behind Telstra’s recent announcements that it will both cut its dividend and sell $5bn in future NBN revenue.
These announcements drowned out the rather solid earnings for the previous financial year and an interesting program of capital investments in its existing network.
While the NBN deals negotiated by Telstra under David Thodey were largely seen as a massive subsidy for the dominant telecoms company, the underlying telecommunications market and industry situation remained very much the same. Telstra, in its core, largely continues to be a utilities company that has seen ongoing declining margins because of fierce competition of a range of its, in general, ‘vanilla’ products. This was again evident when Telstra indicated it will increase its competition – in particular with TPG – meaning that it will offer more price competitive products; and this in turn means lower margins. It will do this through a further investment in its low-cost mobile brand Belong.
This utilities based nature of the industry was also reflected in the massive write down of Vocus and the huge slide of TPG’s share price earlier this year should also be viewed in that context. The second rate NBN is also not going to open opportunities for high value new services, so it is basic back to basics for the industry.
Putting all of this in context the generous NBN pay-outs to Telstra are also not what they looked like. As I have been saying for the last two decades, the reality is that the underlying structure of the organisation will continue to be focussed on the utilities-based nature of the company. This means that margins will continue to be driven down, and this will need to be compensated for by cost-cutting, rather than by higher value new revenue streams. There is nothing wrong with that in principle, if the company keeps a clear focus on this in every part of its organisation.
However in the past we have seen dozens and dozens of new (ad)ventures from Telstra, trying to tap into new products and services with higher margins; but the company has very little to show for those decades of billion dollar investments. It looks as though, under Andy Penn, the company is at least concentrating on its core business.
Perhaps not all that sexy, but very effective.
If the company would like to move into other areas the only way out would be its structural separation, with independent divisions that are then able to focus on the core business of each of these sections. But to date there has been very little appetite for that.
We have highlighted the missed opportunity to do this with their digital media assets (Foxtel, White- and Yellow Pages and its broadband content) also here more reality as Telstra is finally diluting its uneasy investment in Foxtel, from now on simply concentrating on providing the delivery infrastructure for the service.
In this light we also have to look at the cutting of dividend and the sale of future revenue. Given the true nature of the company, and in comparison with dividends that are paid out by similar companies, Telstra was positioned as a technology company, of course they still are but much more on a basic infrastructure level rather than on perceived high value opportunities. Weaning shareholders off those generous high dividends will always be painful, but its slashing does reflect the reality.
The future sale of NBN revenue is an interesting one, but again it is an admission of the utilities-based nature of the company and the need to keep debt down and create money for capital investment. I am still somewhat worried, as it also looks like a clear sign of weakness that this money needs to be found rather than being generated through the business.
If this sale is approved we might see for the first time a more serious entry of superannuation companies as investors in the telecoms infrastructure business. I am a long-term advocate and promoter of their involvement in the telecoms infrastructure market, and if successful this might be a first step, with many more to follow (eg, think privatising the NBN).
This also might create more opportunities for the smart city movement, where massive infrastructure investments are needed at local council levels. Perhaps that is wishful thinking at this stage, but I see a glimpse of hope for the future of telecoms infrastructure investments.