Telecom's Australian challenge

By PETER GRIFFIN

On the phone from AAPT tower in the heart of Sydney's business district, where she spends one week in four, Telecom chief executive Theresa Gattung isn't feeling very charitable - the $9 billion business she runs is under more pressure from competitors and regulators than ever before.

Gattung says the flurry of telecoms activity in the last couple of weeks - the rural connection debacle, the debate over the size of Telecom's Kiwi Share burden, TelstraClear's various applications to the Commerce Commission - highlight the dilemma Telecom faces. Everyone thinks her company is a charity.

"There is huge conflict between Telecom being a big public company answerable to its shareholders and the public perception that there is still some social overhang, as a result of telephones being seen as a social service or because of our former Government ownership," says Gattung.

She cheerfully sums up her argument in one curt sentence.

"Telecom's not a social service!"

Telecom's Kiwi Share Obligation, a legacy of its Government-owned roots, requires the company to provide basic services to rural areas, and Gattung says it does more than any other carrier to service customers in the backblocks, obligations aside.

"If you see a Telstra van in rural New Zealand it's probably lost," she laughs.

Feeling embattled of late, Gattung is believed to have been advised by her public relations team to crank up the rhetoric in the face of tough talk from TelstraClear.

At this month's quarterly earnings briefing she came out swinging against her smaller rival.

On the other side of the Tasman, however, niggling issues at home fail to detract attention from what's seen as Telecom's main challenge - making its Australian investment work.

A barrage of bad press and pessimistic analyst reports this year point to a lack of confidence in AAPT ever becoming the shining light Telecom envisaged when it bought the telco for A$2 billion ($2.23 billion).

But the man on the Aussie frontline isn't feeling undue pressure.

David Bedford who took over the reins at AAPT about two years ago, says the Aussie press is nostalgic for the past when AAPT's flamboyant American chief executive Larry Williams regularly made headlines with tirades against Telstra and Optus and calls for a regulatory shake-up.

"The media here was used to having AAPT adverts splurged across the screen.

"They were used to having Larry Williams as a leader in the attack on Telstra and regulation.

"We don't do that any more because the business is moving into a different phase."

Australian analysts too have been sceptical about AAPT's prospects, but Bedford says they have short memories.

"Less than six months ago they were concerned that we weren't cashflow positive. We are now, but they're looking for the next phase."

A key focus for the analysts is AAPT's value, which this year was written down by $850 million. Some believe a further downgrade to the tune of several hundred million dollars is on the cards.

"Our targets for this year all support the current valuation and we're on target," says Bedford.

"Things have to improve over the next nine months, but we're confident that will happen."

Bedford's two main goals now are to stay cashflow positive and start to claw back a return on investment.

Those goals are being pursued with fewer customers in the fold.

Bedford said the last 18 months had been about thinning out the customer base that AAPT built up when it entered the consumer market in 1997.

"AAPT was positioned as a cheap and cheerful alternative to Telstra.

"There was a big push to get as many customers onto the AAPT network as possible."

The strategy has changed. Lower value customers have been edged out through price rises, something that has lowered the company's customer base from just under 600,000 to around 470,000.

Ideally, AAPT wants its consumer customers to sign up for local call access, but make lots of long distance calls, which are profitable for the company, and to bundle in mobile and internet access as well.

In the business market, where AAPT is strong in selling corporate data products and internet services through its Connect division, the key is to service as many customers as it can on its own network.

But as the numerous telcos that have buried fibre-optic cables under the streets of Auckland and Wellington have found, simply lighting up fibre and cherrypicking Telecom's corporate customers is no easy task.

Bedford says AAPT has fibre into about 400 buildings across Australia and owns its own switches and national fibre backbone.

But Telstra's strangle-hold on the last mile access to businesses and homes and its entrenched customer base form a formidable barrier.

The revenue and market share figures aren't spectacular but AAPT is no longer a drain on the parent company and is starting to support itself.

Bedford says revenue and customer numbers will begin to rise again in the first six months of next year.

Ian Martin, chief telecoms analyst at Maquarie Equities, says AAPT is the biggest of a handful of "third tier" carriers - Primus, Maquarie Corporate, Powertel and Uecomm among them - that have good potential but have yet to demonstrate it.

"Not all of those players are going to survive. At best only one of those third players can achieve that. The question is which one?" says Martin.

Analysts talk of a warming to Telecom among Australian fund managers in the run up to it delivering its profit warning.

ABN Amro investment analyst Mark Nathan said despite the first-quarter earnings shock Telecom was still seen as a good pick for investors.

"The domestic environment for Telecom New Zealand is better than it is for Telstra.

In New Zealand there are two mobile players not competing too vigorously. In Australia there are three players and not all of them are playing ball."

And despite sporadic articles in the Australian press throughout the year claiming that Gattung's job hangs in the balance, few can point to serious failings in her leadership.

One prominent Australian journalist covering the sector said the jabs are not part of some New Zealand-bashing conspiracy, they just go with the territory.

"The press Theresa has received is nothing on the press Ziggy Switkowski at Telstra or Chris Anderson at Optus have got over the years. They have been on the receiving end of some hefty punishment."

But Macquarie's Martin says it's not always clear who is running Telecom - Gattung or her mentor, former Telecom chief executive and current chairman Roderick Deane.

"He is still a key player and it will make it difficult for any chief executive while he's still chairman."

Martin points to former Telstra chief executive Frank Blunt who enjoyed a period of popularity in his latter years heading the company.

"He made a decision not to hang around on the board of Telstra, because it would cast a shadow on the new chief executive.

"Telecom has that issue to some extent," says Martin.

Some Aussie market watchers remember Telecom's failure entering Australia during the 90s with Pacific Star, which lost tens of millions of dollars before being wound up.

"Is Telecom going to depart Australia again?" asks one broker.

"When you're a monopolist enjoying a cosy life and suddenly things at home are starting to look a bit threatening, you've probably an inclination to retreat to fortress New Zealand."