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Are Telecom acting in the best interests of their shareholders?

06/08/05

Permalink 14:12:22, by matt Email , 933 words   English (NZ)
Categories: Social commentary, Telecommunications

Are Telecom acting in the best interests of their shareholders?

So we've seen another record profit, more dividends, generally a well-performing organisation.
Is its behaviour in the shareholders' best interests, though?

Sure, a company is expected to make money, maximise profits, etc etc. However, Telecom have made a terrible error. They've pissed off two very powerful groups: the Government and regulator; and their customers.
The customers may not know they're pissed off. They need to give the matter some contemplation, probably with a healthy dose of education about what's available overseas, to come to the conclusion that they're pissed off, but pissed off they are. They're being gouged, raped, shafted - between some of the most expensive telephony services in the world, and our stubborn presence in the bottom third (nearly bottom quarter) of the OECD in terms of broadband *choke* take-up, our tradition of strong use of leading-edge technology is falling away from us.
The Government, and Douggie, do know they're pissed off. Douggie definitely does, after his little rant about Telecom needing a change of attitude. His pissed off-ness has been festering for a while, boiling slowly, but now that it's boiling Douggie knows he's pissed off. By extension, David Cunliffe is pissed off. Mostly because Douggie is pissed off, but also because he knows that the customers - and not just Telecom's customers, but anyone who uses any kind of fixed-line service from any provider - are pissed off; even if they haven't realised it yet.

But why isn't Telecom's ever-increasing profit and status as an income-generating stock actually good for the shareholders?

Well, when you piss off the customers they'll look elsewhere. If there's competition, they're likely to use it. If there's not competition, when such becomes available they have an incentive to switch providers. Keeping one's customers happy is the number-one rule of business; ahead, even, of keeping the shareholders happy.
Part of keeping the customers happy is listening to what they want and offering them a product or service that fulfills that want. Part of it isn't dictating to your customers what they want, and then delivering them something that almost meets that level of service, but not quite. Ask the RIAA how successful they've been in dictating to their customers what those customers want. RIAA's customers still want portable music that they can play in any device they own, despite several years of RIAA telling them otherwise.

Pissing off the Government and the regulator is the fatal flaw. Whether this is achieved by pissing off customers, who complain to the regulator; pissing off competitors, who complain to the regulator; or just pissing off the regulator directly, it's a distinctly bad idea.
Why? Because the Government and the regulator can actually do things to force a company to play nicely. Those things are usually detrimental to the bottom line, and can even be detrimental to the company's continued existence.

If Telecom is re-nationalised (yes, I know, incredibly unlikely), the terms will not be favourable for Telecom's owners. The company was bought for a fraction of book value, and the Government can make a strong argument that much of what was bought is what will be bought back. Throw in the large profits, which have paid many times over for the purchase, and it's difficult to make a case for any kind of generous buy-back offer.

Alternatively, Telecom gets split in two: into a lines company and a services company, much like what happened in the electricity market. Those two companies will certainly lose their special, highly-profitable, relationships, since the enabling legislation will surely contain strong provisions for compliance monitoring. The loss of those relationships will affect profitability on both sides, but especially in services since Xtra will no longer have direct access to a customer's phone account or the ability to get preferential treatment on service delivery.
The other part of a corporate split will be rules about shareholdings. Current shareholders will have to pick one side or the other, they won't be able to straddle the fence with significant parcels. So now they're not only deprived of fairly substantial dividend income, they're not going to be in a position to have that income return any time in the near future. Lines is not a profitable business, unless you're a monopoly who abuses that position. Services are, but a shareholding will be diluted by a split, and the services arm will also cease to be as profitable once it has to really compete in the marketplace.

Even LLU would impact profitability. By no longer having to use Telecom's equipment, competing telcos would be in a position to offer more attractive packages to their customers, offerings with which Telecom would have to compete. Part of the attraction would be lower prices coupled with higher levels of service, not a pairing conducive to high margins.

Since it's almost a given that the wholesale targets for Telecom's UBS service won't be met, if Labour are returned in next month's election it could be a very bad time to be a Telecom shareholder.
If Labour take drastic action, which I think they will have to do if we're to have any hope of going places on the OECD rankings, I'd be a little concerned if I were a Telecom director. Were I a shareholder, I'd be seeking legal advice, with a view to bringing a lawsuit charging failure to act in the best interests of the shareholders.
Dividends are nice, yes, but they don't keep coming if the company is closed down or split up, and that termination of dividend payments definitely wouldn't be something I would consider to be in my best interests.

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Shocking as it may be, I think, and sometimes those thoughts are almost worthy of public contemplation. So, here are those some thoughts, with no guarantees as to their validity, worth, or utility to the cosmos. All thoughts are my own, representing only my thoughts, opinions and positions, unless explicitly otherwise stated. This blog is not an official or unofficial outlet for any company or government body, or for person other than myself.

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