Telcos cry foul against government monopoly NBN

Telcos’ favourite villain used to be the monopoly infrastructure owner Telstra; now it is the NBN.

NBN’s Bill Morrow. Illustration: Sturt Krygsman.

As the NBN becomes more of a reality with over 1.3 million users the reality of dealing with the monopoly business is hitting home with some self-serving cries of pain from some obvious quarters like TPG, Telstra and Optus.

Given Telstra will be receiving something like $98 billion in taxpayer-funded payments over the next couple of decades, its complaints should be understandably muted.

The fourth-ranked player Vocus has no complaints on the access charges to the network because it is a straight reseller of other people’s equipment and consequently isn’t facing the same margin erosion.

The big three have their own equipment provided albeit inferior service but higher margin access, which explains why they are bleating.

The whole industry complains about the so-called CVC charge, which is the bandwidth charge they must buy to ensure customers have access to service at the nominated speeds.

The industry doesn’t like the uncertainty of bidding for access when you don’t know how much people want. But come to think of it, this is exactly the dilemma faced by BHP when it is digging up iron ore or Target when it is importing the latest fashion item.

The NBN has to make a return on investment of at least 2.4 per cent (it now makes 3.3 per cent) or the government is required to put the $49 billion network on its books as debt, which would obviously blow the budget figures.

That explains why the NBN is charging the bandwidth fee, which has fallen from $21 per user to $15.50 and is slated to fall to $10 the more people use the network.

TPG wants the fee down to $8 per user and says at that level it could sell unlimited bandwidth, while Geoff Horth at Vocus would prefer the certainty of the loss-making New Zealand service where you simply pay the access charge so you know what you are getting.

That is where the debate lies. Whereas in days past Telstra was the industry’s favourite villain as the monopoly infrastructure owner and retail competitor, now it’s the government monopoly, the NBN.

The government’s $29.5 billion in equity runs out this year so next financial year NBN will have to be self-financing.

It is this reality plus the rules surrounding return levels explain why the industry talk will fall on deaf ears when it comes to NBN chief Bill Morrow.

Morrow is delivering to plan and cutting charges as promised; it’s just no business likes to face uncertainty at the hands of a government monopoly.

Those who argue the business case is unsustainable are spending too much time listening to self-serving claims by users who could always offset their costs like every business by lifting retail prices. That would risk losing market share to a competitor, which is an anathema to any business.

The question which is yet to be answered now the NBN rollout is stampeding to its target of 8 million users is whether it is a net positive for competition in the industry, and so far the answer is a definite not yet.

That after all was the raison d’etre for the whole project.

Smiggle a star

The way Solly Lew and Mark McInnes at Premier look at Brexit’s impact on their gun Smiggle stationary stores in Britsin is, if anything, it will be a net beneficiary because they will get better deals from landlords.

McInnes earns $50 million from his 64 stores in Britain, part of the division’s $188m sales from 239 stores in Asia and Australia. After reviewing the likely impact on his business, McInnes has put his foot firmly on the accelerator and is looking at 200 stores and $200 million in sales over the next three years.

Smiggle and Peter Alexander are the stars of the business, which grew net profits to a record $103.9m on over $1bn in sales.

In short, the business is in cracking form in contrast to the negative reaction from the market because the result came in below estimates and the stock was marked down by 2.3 per cent to $16.12 a share.

The reaction on the back of a 25 per cent gain in the stock this year is perhaps not surprising, but it is worth noting there is a franking pool of some $200m and the company did note capital management was probable. This suggests an imminent stock buyback.

This week the OECD cut its forecasts for Britain back to 1 per cent growth next year from 1.8 per cent now. When asked about the fate of Bunning’s John Gillam’s British expansion, Solly said it would do just fine.

He said the devaluation of the pound meant more people were staying home and in any case Brexit wasn’t going to happen for a few years and in the meantime the country was enjoying a massive increase in tourism.

Sales growth for the group slowed in the second half consistent with the message from other retailers and the airlines, but McInnes said there was more strength in the fourth quarter.

Trump a hurdle

A Donald Trump victory in November’s US presidential election is one hurdle to what seems like a certain US Fed rate hike in ­December.

As expected, the Fed last night sat on its hands leaving short-term rates on hold, but was more hawkish in its commentary suggesting that, assuming the data remains positive, a 25 basis point rate hike in December is almost certain.

The latest opinion polls suggest Trump has closed the gap on Hillary Clinton and, albeit unlikely, an election victory would almost certainly upset financial markets on fear of the unknown. A Clinton victory would be seen as continuing on much the same path as Obama and hence would not worry the market so much.

What the Fed does is important in Australia because an expected rate hike would support the US dollar, which would weaken the Australian dollar. The latest Fed readings show 14 of the 17 regional Feds expect another rate hike. But the survey also shows only two increases are expected next year.

This means, the Fed would have short-term rates at just 1 per cent at the end of next year, which is hardly a level that should create much fear on global markets.

A move to raise rates is important because it signals the Fed is seeing some growth and strength in the US economy. This would tend to push bond prices down and yields higher, which means for the first time since the GFC stocks and bonds would revert to more normal trading conditions.

This too would be positive for the Australian market.

Wesfarmers share sale

Further to yesterday’s note on share sales by Wesfarmers executives, the Perth-based company noted some of the stated sales were due to allotments which didn’t pass hurdle rates and so were withdrawn.

These accounted for all the 16,074 shares attributed to John Gillam. It accounted for 35,000 of the 219,643 of the shares sold by Richard Goyder and 20,000 of the 143,086 sold by Terry Bowen.

This still meant Goyder offloaded $8.1m worth of shares and Bowen some $5.4m.

It also didn’t explain why Goyder received a $1.1m bonus in a year when dividends were cut, when profits fell from $2.4bn to $407m and when earnings were restated at Target after governance snafu.