Chris Barton: Ringing the changes

Confusion has long been a legitimate marketing tactic in the telecommunications market, but customers are catching on to the trick.

Telecom chief executive Theresa Gattung blithely explained this to a group of sharemarket analysts and investors in March this year: "Think about pricing. What has every telco in the world done in the past? It's used confusion as its chief marketing tool, and that's fine."

From a consumer's point of view, it's not fine at all. About five years ago I asked Gattung and several of her top management team about confusion in relation to my Telecom bill.

Why was it so difficult to figure out exactly what I was being charged for? Why did my broadband service have three components - all on different parts of the bill? And why wasn't it clear that customers don't need to pay the $2 a month wiring maintenance charge?

"Wasn't this all part of a plan - along with an array of other piecemeal charges - to confuse and bewilder the customer?" I asked.

Gattung and her managers went on the attack and strongly rejected the suggestion.

So it was more than surprising to find that what she denied so vigorously then, Gattung now admits to be true. Confused? Clearly, now we know, we're meant to be.

"You could argue that's [confusion] helped all of us keep calling prices up and get those revenues, high-margin businesses, keeping going for a lot longer than would have been the case," Gattung told her audience. "But at some level, whether they consciously articulate it or not, customers know that's what the game has been. They know we're not being straight up."

To those who have had dealings with Gattung, the nature of these comments isn't particularly unusual. Gattung is well known for saying what she thinks - at times sprinkled with the vernacular.

When she enters a room, she fills it, loudly, always in an expensive, albeit slightly rumpled, power jacket and heavy duty makeup. She comes across as both forceful and down-to-earth.

What is surprising is the public nature of the gaffe. Usually when Gattung blurts, it's in the safety of private, or off-the-record conversation, and certainly not in a speech published on the company's own website.

It's as though after years of arrogantly maintaining that black is white, Gattung and her usually eagle-eyed PR team now believe their fiction is acceptable.

But Gattung's candour has always been startling. In 2002 I asked her what might happen if local loop unbundling did go ahead and Telecom faced real competition in the residential market. She said that about 20 per cent of her customers would stay loyal no matter what.

Another 20 per cent hated Telecom so much they would move to a competitor. And the battleground for market share would be among the remaining 60 per cent.

On another occasion Gattung brightly told me that many people thought that she was the person in the Telecom ad featuring a middle-aged executive having her toenails painted by her partner while she videoconferenced to her team from the Jenny Gibbs house atop a ridge at Piha.

The next generation

To put in context her comments about not being straight up with customers, Gattung went on to say that it was a "business model" that would eventually die - largely because of the much ballyhooed "next generation" network. That's a network not unlike the internet that delivers voice calls and other services at a fraction of today's costs and allows customers to make international calls for next to nothing.

Therein lies an enormous challenge. How to replace a business model that has relied on duping customers through expensive complexity with one that's cheaper, simpler and honest.

Gattung admitted to the analysts that it was a problem far from being sussed out: "The bit we haven't figured out yet is: If you replace your whole front-end model in terms of the pricing and the offers, can you be sure - after you've done the lower costs and changed your pricing paradigm - if you'll end up with the same profit pool, a bigger profit pool or a lesser profit pool? We're actually really trying to nail that right now."

But time may be running out rapidly for Gattung and her team. Last week the Government signalled that its patience with Telecom had expired and it would be instituting a much stricter regulatory regime to allow competitors to buy access to Telecom's network.

After years of government dithering, unbundling is finally going to happen. Gattung never saw it coming - telling the same group of analysts in March that it considered the regulatory threat overblown: "Personally, my view would be that the Government is way too smart to do anything dumb here."

Bravado and posturing for the analysts' benefit? Maybe. But from a Government point of view, taking on Telecom at this time looks like a very smart move.

As well as providing a platform to show leadership for Prime Minister Helen Clark, the issue of cheaper, faster broadband fits with long-term government aims to transform the economy.

Remember the Knowledge Wave and similar talkfests that the government has been proselytising about for years, but making little real progress?

Taking on Telecom also deflects attention away from other infrastructure disasters such as roading and electricity supply - both of which require considerable government spending to fix.

The issue is also likely to gain strong support from minor parties New Zealand First and the Greens.

Even National, despite the naysaying of communications spokesman Maurice Williamson, has given unbundling its cautious support.

Telecom's only friends appear to be Act and the Business Roundtable. And with anti-Telecom sentiment building among consumers and competitors, taking down a monopoly is hardly likely to be a vote-loser. Shareholders must now be asking just how prepared Telecom is for the new world order and if it's time for a cleanout.

That's not to say Gattung and her team - notably head of government and industry relations Bruce Parkes, and public and government relations manager John Goulter - haven't been successful.

On the contrary, they've battled and held at bay government regulation for nearly a decade. As Direct Broking's May 2005 newsletter put it: "Added to the armoury is a superb management team who successfully block, stall or mitigate every regulatory threat." And since 1999, when Gattung became New Zealand's first woman chief executive of a major company at the age of 37, Telecom has consistently shown strong profits and good dividends. She has been well rewarded for her hard work, earning $2,905,000 last year.

But if Gattung has been a superb leader of fortress Telecom, does she have the ability to lead a company that has to compete for business that it has been accustomed to receiving on a plate? Can she reorganise Telecom to unlock innovation and open revenue streams in other parts of the company? Parts of the company - such as its IT arm, gen-i - which are constrained at the moment because of the objective of maximising market power with high prices in the local residential loop.

It will be clear to many that to operate in a newly regulated world Telecom's impervious mentality will need to change. Simply proposing to operate under a Telecom-designed "wholesale charter" won't cut the mustard.

From what Gattung was telling analysts in March, such a change was unthinkable. But yesterday, the architect of the present regime, chairman Rod Deane, said "the new environment will require a different approach from Telecom".

Many will doubt whether Deane and his protege Gattung are capable of making the change. While Gattung is clearly grappling with the issue of how Telecom's business will operate with a next generation network, she is woefully lacking in answers.

Winning hearts and minds

Some will say that a telco that had plenty of time, while it reaps the benefits of monopoly power, to think about such matters should be more advanced with plan B. But as Gattung demonstrated to the analysts, she is not without awareness.

She knows that many see Telecom's regularly strong quarters as a sign of not playing fair, and how important that is to the New Zealand psyche. "There's a whole world out there predisposed to thinking it's because we're not playing fair and its because we've got a structural advantage that needs to be dealt to."

Gattung said it was critical for Telecom to "re-engage with the hearts and minds of ordinary New Zealanders".

Difficult when you've been confusing them for so long. Gattung maintained the company had "to win the debate at that level". To which she added: "If there is anything that I think I have really not done as well as I really wanted to do in the last five years it would be that."

A road to Damascus revelation? Or an admission that's too little too late?