Daddy, why do my Telstra shares keep dropping?

Stan Beer
Saturday, 30 October 2004 12:06

IT Industry - Development

As I was having my Saturday morning capuccino with my running buddies (you can keep your skinny lattes), one of the group asked me, "How is that Telstra announces a better than $4 billion profit and my shares just continue to go down?"

"Good question son," I answered (well he's almost young enough to be my son). "There's no simple answer to that one, but if you want it in a nutshell, the market is not satisfied with the company's growth prospects."

Let's face it, Australia is a fairly small market for telecommunications services and, up until relatively recently, Telstra has pretty much had it all to itself. All that copper in the ground, all those exchanges, all those payphones, initially paid for by Australian taxpayers, made the big carrier an essential port of call for anybody else who wanted to play in the telco space. However, the much vaunted Telstra monopoly on voice carriage and its domination of data carriage are slowly but surely being eroded.

In the first quarter of 2004/05, Telstra's bread and butter PSTN voice calls business went backwards by $77 million. To be sure, this was more than offset by growth in other business, such as mobile and internet services. However, those are areas in which Telstra does not have a monopoly and faces increasing competition.

It's true that if you want DSL broadband, Telstra still gets a piece of the action one way or the other. However, homes that don't have access to cable, can often avoid the DSL option through one of the increasingly diverse range of wireless broadband options. In fact, as reported in our news roundup section recently (28 Oct), in a year or two we may well see the emergence of broadband internet over power lines (BPL). If that occurs, Telstra's copper monopoly would be as good as dead because the national power grid is virtually ubiquitous and most homes have a power point in every room.

The end of the copper monopoly for broadband, coupled with the emergence of VoIP as a serious option to PSTN telephony for voice services may well turn out to be the nail in the coffin for the century old Telstra phone network.

As for mobile voice services, well we have three well funded GSM networks with greater than 90% coverage, including Telstra's, plus other options, such as the Orange and Telstra CDMA networks, the Hutchison 3G network and Vodafone's GPRS. However, with the emergence of VoIP and new higher bandwidth broadband wireless technologies covering major capitals, we may see increased competition to the mobile voice services from cheap VoIP solutions over capped broadband wireless internet product offerings. If you don't believe me, read the in-depth wireless article on this site by our resident technology evangelist, Alex Zaharov-Reutt - he's lived without a fixed line connection for some time.

Given the explosion of voice and data communications options that have recently become available for consumers, Telstra's attempts to buy into new non-telco market spaces by spending $1 billion on businesses like Kaz and The Trading Post take on a new perspective. These acquisitions are desperate attempts at diversification through the purchase of cash flow positive, profitable businesses. The problem is that Telstra has no expertise at running these types of businesses and, if past history is anything to go by, a probable outcome is that Telstra could ruin its new acquisitions by heavy handed interference. We have already witnessed Telstra take its first steps toward the transformation of Kaz.

So the next time someone asks you why their Telstra shares keep going down, perhaps the best answer you could give them is, "Look I could give you some ideas but how much time and patience have you got?"