Wednesday, August 15, 2007

Telecom New Zealand Hangs Up.

Telecom New Zealand's [TEL.NZ] profit announcement last week reveals a company in gradual decline.

There are many reasons for this, not the least of them being the fact that management have always had a siege mentality to competition, that is, they tended to respond to rivals in a reactive rather than a proactive way. Their customers suffered on monetary and service levels simply because Telecom's monopoly position allowed them to do so.

When Government moved to untangle their monopoly their shortcomings were revealed to a greater extent than we already knew. Overwhelming arrogance seemed to be the order of the day.

Underspending in infrastructure over the last 18 years has left the company in a position where it now would have to spend multi billions just to get their networks and infrastructure up to speed to present day technology so they could offer their customers anything close to high speed broadband or mobile technologies that allow modern fast content.

The shortsightedness of the past seems to pervade Telecom's culture to the core. I say this because the companies answer to falling profits and revenue in the fixed line business was to sell the Yellow Pages unit to a Canadian Pension Fund for NZ$ 2.2B earlier this year. Roughly half of the proceeds will be dispersed to shareholders.

The Yellow Pages unit was one of Telecoms most profitable divisions, contributing over $200M in before tax profit and set to increase revenue and profit in years to come. The new owners have increased their own advertising for their product and are concentrating on growing their online presence.

As a business owner myself I would be ditching declining businesses rather than flogging off the most profitable.

To be sure $2.2 B is a nice little wedge of moola but it is a short sighted of management not to look towards its future in a more considered manner.

Most of Telecoms other businesses are either mature or near maturity. Fixed line is in decline, Mobile is reaching saturation and "Broadband" or what Telecom call broadband is constrained by their 19th century copper wire outlook in a 21st century world.

Lessons that should have been learned in the 1990s: lack of investing back in the business, slow to respond to competition etc, still haven't reached managements brain stems and look unlikely to do so unless coerced by Government intervention.

Management even suggested last week that Taxpayers should fund the badly needed infrastructure needed if New Zealanders "...wanted broadband quicker...".

For a communications company, Telecom New Zealand are not communicating the right message. Its customers continue to get an engaged signal and its clear message to the public at large is that they just don't care.

Telecom NZ @ Share Investor

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