Rethink pricing or the NBN is worthless, Penn warns

Calls for rethink on NBN and high wholesale pricing gets louder.

Telstra CEO Andrew Penn. Picture: Bloomberg

The call from Telstra chief executive Andy Penn for the government to rethink its position on the NBN and its high wholesale pricing is getting louder.

If it does not, he warns, the major telcos will not be able to make enough return on capital, vital investment will fall, customers will lose out and the NBN could even be rendered worthless.

The profits of Telstra, Optus, Vodafone, TPG and others have been squeezed by the NBN’s point-blank refusal to lower wholesale prices. Last week new Communications Minister Paul Fletcher ruled out any change.

Speaking just ahead of his annual results blackout, Penn is firing back.

“Unfortunately, because of where wholesale broadband prices have gone, basically all operators are losing money reselling the NBN, and therefore some — and they’ve said it publicly — are looking at 5G to bypass the NBN,” he says.

“And that’s not necessarily a good thing. Unless we get the pricing structure right, we’re going to create this unnatural dynamic in the market which biases technology for reasons other than what’s the best technology for the customer.”

When Fletcher was appointed in May, Penn welcomed him as a very experienced telco executive (formerly Optus head of regulation) and one who understands the importance of getting policy right.

The NBN, however, is unfinished business for Penn.

“We’ve got to try and create a policy and regulatory framework that doesn’t influence one technology over another.

“And if wholesale pricing structures don’t change, that is what is going to happen.

“Unless the whole ecosystem is viable, then no one part of it can be viable either, and so candidly, unless the pricing structure is changed and operators can actually make a return on capital which shareholders are prepared to invest in, then NBN is worthless anyway.”

These are strong words and Penn may be right. A pricing that skews the market and shifts traffic off the NBN to wireless could hurt the mighty broadband investment, already a political off-budget nightmare and long overdue for a writedown. But clearly, the current settings are also hurting Telstra.

The annual results on August 15 will no doubt reveal ongoing pain from the NBN relationship, but Penn’s flagship three-year T22 strategy, a $2.5 billion cost-out program, is ahead of schedule.

So will Penn now announce something further?

“We’re coming up to results, so I don’t want to pre-empt anything that I’m going to say there, but this gives us further confidence that we’ll deliver against our cost-out program rather than necessarily change our cost-out program. We are still in the thick of the transition to the NBN, so we still have a lot of headwind to face into as we progress through FY20, 21, through to FY22 which is when we expect the NBN to be fully rolled out.”

Shareholders know the history well: the river of Telstra dividends has been pared back because customer migration to the NBN changed the business.

Penn says a third to a half of profit will have disappeared to the NBN over the rollout period.

Where, then, was the cogent growth story? For Not Happy Jan investors, T22 seemed little more than a cost-cutting exercise. The shares more than halved from $6.70 from 2015 to 2018 and Penn was under pressure.

Remarkably, this year shares are up 39 per cent. Penn will not buy into speculation that the board is finished with dividend cuts, but miserable returns on bank deposits have pushed investors to take a fresh look at Telstra.

In June Penn was reported as planning to become the company’s longest-serving CEO, mutterings of 10 years at the helm followed — rather cocky when growth story questions linger.

“Let me respond on the 10 year thing. I said my current plans are that I’m committed to our T22 program and I have no alternative plans. Somehow that got converted into me apparently asserting that I’m going to be the longest-serving Telstra CEO.

“I would never be as arrogant and presumptuous to say something like that. But I’d also argue this isn’t about cost-cutting. The more material part of our program is about investing in the capabilities for the future.”

5G, the new internet of things network, is at the core of Penn’s growth pitch. Telstra has first mover advantage in 5G, the big threat of Huawei is dialled out of Australia thanks to government intervention, and the ACCC’s blocking of the TPG Vodafone merger has set back two of its three big competitors. Penn talks enthusiastically about remote mining and logistics. “We’re connecting all of Linfox’s trucks around the country, providing information to help them improve the operational efficiency of that. We probably connect 70-80 per cent of cars that are connected in that way.”

Whatever the 5G upside, the message Andy Penn keeps hammering is that the telecoms framework — read the NBN — has to be right.

Ironically, just a decade ago, it was Telstra under fire for its network pricing to other telcos.

But the game has flipped.

“While lower prices are good for customers, return on invested capital is now around 7 per cent across the industry, which is lower than the weighted cost of capital of all of the operators.”

Ticky Fullerton is the business editor of Sky News and host of Business Weekend on Sundays at 11am