TelstraClear offers more pie in the sky

By Rob Hosking

Friday 11th October 2002

TelstraClear is sticking to its ambitious financial targets despite considerable scepticism from industry observers.

The company expects to be in profit in two to three years' time, chief executive Rosemary Howard said.

The company, formed from the merger of TelstraSaturn and Clear Communications in December, lost $NZ132.5 million in its first seven months.

One report, by Deutsche Bank, suggested earlier this year that the company would be unprofitable for "years" and that an average loss of $180 million a year was likely for some time.

"Our view hasn't changed," Mrs Howard told The National Business Review this week.

"I'm not talking forward financials in detail, but we are sticking to our two- to three-year time frame."

The outcome of two separate discussions over the next few months is likely to be crucial to the company's future development.

The dispute between the company and Telecom over wholesale access will be decided by the Commerce Commission by the end of this month.

That issue is crucial to TelstraClear's business plan as it will determine how, and at what cost, the company gains access to the Auckland market.

TelstraClear has an extensive network of its own in Wellington and, to a lesser extent, in Christchurch. But in the country's largest city its infrastructure is more limited.

That wholesale access, which is provided for in the Telecommunications Act, would mean TelstraClear would not have to build its own network.

It is unlikely to build throughout Auckland in any case. While Telstra, which owns nearly 60% of TelstraClear, is one of the more fortunate survivors of the post-2000 "tech wreck" and has one of the strongest balance sheets in the telecommunications industry, it is still highly unlikely to stump up for the estimated $1 billion-plus such a network would cost.

Instead, the company is likely to target key areas of the region, building out from the network centres already established. The company has already sought resource consents in Auckland and Manukau.

There is still an extensive capital spending programme under way the company has already announced it expects to match last year's $200 million.

The other issue the company is pursuing is a more extensive deal with mobile network provider Vodafone. TelstraClear already has a reseller arrangement with Vodafone, but this has its limitations, Mrs Howard said.

"As a reseller the margins are not what they could be. But more importantly, we aren't able to offer the broader range of intelligent services that are becoming available now."

These include messaging, and easy switching between fixed and mobile services.

This tactic becoming a "virtual network operator" would mean TelstraClear would put its own features and tie-ins on top of the Vodafone network.

"To do that we need control of the intelligent layer within the network. That's what our negotiations with Vodafone are about."

While TelstraClear snapped up 3G spectrum in last year's auction, this was not part of any talks yet, she said.

"We don't even have the 2G network we want yet, 3G is still parked. We do have a couple of other options but we've made it clear we like the relationship with Vodafone and we believe it's the best option."

The company also recently appointed Telstra Mobile group general manager David Thody to its board.

"He's got that mobile acumen that we haven't had here. And he's a New Zealander as well."

Overall, Mrs Howard said, the company is positioning itself as a "brand that stands for those customers that want to be progressive users of communications, whether that be at work or at home."

The industry was a comparatively new one, she said, and some of its highly publicised mistakes over recent years was the result of its heritage. "We're only 18 years old as an industry before that, telecommunications was a government-run monopoly that built networks."

And that mentality had been reflected in some of the mistakes made internationally.

"If you look overseas, this industry has destroyed $US3 trillion of shareholder value over the past two years globally. And why? Because it's had a 'build it and they will come" approach. That attitude does not get people to understand what telecommunications can do that it is about business and lifestyle solutions, not communication products and price."

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