Scotsman's telco move looks like a mean feat

There must have been times over the past couple of years when Telecom's Scottish chief executive Paul Reynolds wondered what he was doing on the far side of the world battling to save a company laid low by regulators and under attack on all sides from slick, retail-focused rivals.

Meanwhile his old employer - British incumbent BT - was raking in the pounds back home.

But not now. Tonight Reynolds can crack open a Steinlager and relax in front of the Super 14 secure in the knowledge that his antipodean business suddenly looks a lot rosier than its counterpart in the UK.

BT has got itself in a right old pickle and is fast becoming another unwitting victim of the credit crunch.

On Thursday morning (UK time) BT announced it had made its first loss in more than a decade. For the year to March 31, the group reported a pre-tax loss of 134 million ($346 million), compared with the previous year's profit of nearly 2 billion.

It also "fessed up" to shedding 15,000 workers during the financial year - some 5000 more than the market was aware of - and said it plans to shed about 15,000 more in the next 12 months. That's about 20 per cent of its workforce. It cut its final dividend by about 60 per cent.

The big problem for BT is not the slow death of its fixed line business or increasing competition in the mobile and internet markets. It isn't a problem with the wholesale division - which was once headed up by Reynolds.

The problem is the very business that was supposed to provide the way forward for the company.

BT has thrown its hopes for the future into a business called Global Services. It is (sort of) the equivalent of Telecom's Gen-I business - a division that aims to provide complete IT and telecommunications services to corporations. BT is banking on being one of the biggest players in this field. Global Services now accounts for 40 per cent of its total revenue.

Trouble is, spending on fancy IT and phone services is exactly the kind of thing big business is deferring this year as the global downturn bites.

Post-credit crunch, BT's valuation of Global Services' contracts has been exposed as hopelessly optimistic. The company said this week it was writing down 1.3 billion. It had already written down 336 million.

In the strange mirror world that the financial crisis has created, companies like BT are being hammered precisely because they were in such good shape prior to September that they dared to expand. Conversely, companies like Telecom NZ - still in lousy shape last year after losing the regulatory battle and writing down the remains of its tech wreckage - now find themselves ahead of the game in moving to a more conservative model.

If a company is lucky enough to still have its knitting, now is the time to stick to it.

There is no doubt that the fixed-line business model is dying. But it is a slow, slow death and it will remain a safe revenue stream through this economic cycle and probably a lot longer. As Telecom's third-quarter results showed, any profit is good profit right now. Investors can live with incremental falls in earnings as long as they are predictable and cyclical.

OK, Telecom is very excited by the mobile offensive it is launching with its shiny new 3G network. But the XT launch is not a dramatic or risky strategy. It is just doing what had to be done on the technology front.

If Telecom can win back a few points in the mobile marketing battle, then well and good. Overall its business model looks fashionably boring.

The luxury that relatively boring and stable business offers Reynolds, his management team and his board of directors is that it affords them some time to devote to strategic thinking.

Meanwhile, for BT's 44-year-old chief executive Ian Livingston it looks like nothing but trouble for the foreseeable future. As well as the cost cutting and the writedowns, BT faces a nightmarish scenario in the shape of its employee pension plan. The company accepts it is now in deficit to the tune of 2.9 billion - analysts say that could blow out to as much as 11 billion (more than BT's market cap).

"BT is a badly run hedge fund, which just so happens to own a phone network," pensions expert John Ralfe told the Telegraph.

Livingston - who took on the top job less than a year ago - has apologised to investors for the poor result and the dire predicament the company finds itself in.

All the bad news helped bump BT's share price to its lowest level since it was privatised in 1984.

That's the kind of grim stock market statistic Telecom NZ shareholders have become resigned to over the past two years. But, if they've been smart enough to write down their own losses, then perhaps they can look forward to a brighter future as the company makes the most of being stuck in the wrong place at just the right time.

Liam Dann is in the UK on the Newspaper Association's Cardiff Fellowship, with support from the British High Commission and Air New Zealand.