With his job on the line, Telstra chief rolls out a radical and risky plan

Andy Penn would have been well aware that his fate and the medium term future of Telstra hung on his strategy presentation today. Incremental change would save neither and so he has unveiled the most fundamental change program Telstra has embraced since the Sol Trujillo or Frank Blount eras.

He would have been disappointed, perhaps shocked, by the reflex response of the sharemarket to his presentation, although judgements might change once there has been time for its detail to be digested.

In outline the strategy isn’t radical. In detail, however, it will be challenging for an organisation that isn’t renowned for its ability to execute.

It will also be costly, painful and disruptive. It involves sacrificing $500 million of mobile revenues to regain competitiveness, $600 million of new restructuring charges and a net 8000 reduction in its headcount. There will also be $2 billion of asset sales of the next two years to shore up Telstra’s balance sheet while the strategy is implemented.

The market’s initial response was punitively negative, perhaps more focused on a lowering of the guidance for 2019 revenue and earnings even before inclusion of the restructuring costs than it was on the wider strategy. The revenue pool for the entire mobile sector is shrinking amid fierce and increasing competition and, as the largest and most profitable player, Telstra isn’t immune to the pressures.

The Penn strategy is in tune with the thinking of those in the market who believed that to arrest Telstra’s decline in a post-national broadband network environment Telstra needed to accelerate its cost-reduction programs, create a better demarcation between its infrastructure-heavy past and its mobile and retail future and improve both its service levels and competitiveness.

Telstra has been on a cost-cutting drive under Penn. Credit: Craig Sillietoe

That is essentially what Penn is planning.

The structural aspect of the strategy involves the creation of a new unit housing all Telstra’s infrastructure other than that which supports in mobile network. It will include fixed networks, data centres, non-mobile fibre, the HFC network, international sub-sea cables, exchanges, ducts, pipes, NBN-related revenues and relationships and Telstra Wholesale.

The ambition is to position Telstra InfraCo to be a standalone business by June 2019 and able, once the NBN roll-out has been completed early next decade, to either be de-merged or to attract a strategic investor.

As an infrastructure play InfraCo would be more highly valued by infrastructure investors than by Telstra investors today. It would contain assets of about $11 billion, revenue of about $5.5 billion and earnings before interest, tax, depreciation and amortisation of about $3 billion.

The concept of separating its network assets (other than its mobile network) from its retail businesses has been a constant in internal and external discussions about Telstra long before Kevin Rudd and Stephen Conroy announced the 2009 plan to build the NBN and destroy Telstra unless it co-operated.

While it might be the clearest structural element of the strategy, in the longer term the creation of InfraCo may not, however, be seen as the most important.

Telstra’s future post-NBN will be heavily reliant on its ability to maintain its leadership in mobile telecommunications and transfer its dominance into the 5G, ‘’internet-of-things,’’ environment looming within the time-horizon of the ‘’Telstra2022’’ strategy.

With its rivals, including late-comer TPG, scrambling to attract its customers as the NBN undermines the dominance that Telstra’s legacy fixed line networks once gave it, Telstra’s market share, revenues and premium pricing are under threat.

Penn’s response is a brave – and costly – but pragmatic one. Telstra is going to sacrifice about $500 million of revenue over the next three years to make its offerings more competitive, including eliminating excess data charges from its contracts.

That’s a headline and unavoidable element of the strategy, given the alternative was to allow the mobile business to become increasingly uncompetitive in an attempt to maintain short-term profitability.

Beneath it is an attempt to leverage the $3 billion investment in digitising its platforms it has been making to fundamentally change its retail offer, the way it interacts with its customers and the way it is itself structured.

Under Telstra2022 all Telstra’s 1800 consumer and small business plans are going to be ‘’retired,’’ replaced by 20 core plans sitting on digital platforms. If it can execute Telstra would vastly simplify the complexity of its products and its processes, improving the customer experience and lowering its own costs in the process.

Telstra has been engaged in a continuous cost-reduction program throughout Penn’s tenure, with its current ‘’productivity program’’ targeting $1.5 billion over three years to offset the impact of the NBN on its fixed line revenues. Penn has lifted that target by $1 billion to $2.5 billion by 2012-22.

That’s where the job losses – including the wiping out of two to four layers of management -- stem from.

If the group can deliver on its ambition it will be a flatter, simpler and more agile organisation with a lower cost base, but the process of getting there is going to be complex, challenging, risky and costly.

The strategy doesn’t specifically answer the question of where Telstra’s growth might come from but, if it can execute effectively, it could create a better and more effective business and a platform for growth in an exciting 5G environment whose boundaries are yet to be defined.