Changing Telecom will need more than a name change

Today, Telecom becomes Spark. But as Hamish Fletcher of the New Zealand Herald reports, transforming the phone company is going to require much more than a name change.

Simon Moutter today hoists a new flag up Telecom's mast, marking its tack away from two decades as New Zealand's safe and stodgy telecommunications provider.

For the managing director, it's a signal of the company's new direction, towards a bright digital horizon of revenue growth and new services such as internet television.

Moutter's flag, bearing the new company name Spark, aims to jettison Telecom's past identity and chart a course towards becoming a competitive provider of communications, entertainment and cloud computing services.

Moutter revealed this new direction to investors 15 months ago, facing up to the company's uncompetitively high costs and a revenue structure heavily reliant on a declining landline business.

His attempt to reach more bountiful shores is expected to take three to four years, and has involved some tough decisions.

The most public of these was when the company axed more than 1000 staff last year in an effort to reduce costs.

It also pulled back from the Australian market, selling the rest of a poor-performing telco business there, left the Cook Islands and returned its focus to the local market.

Even as it slims down, Spark is still one of the largest companies on the New Zealand stockmarket, with revenue of about $4.2 billion in its most recent annual result, 6600 employees at the middle of last year, and is one of the country's biggest investors in technology.

While more cost-cutting is expected, Moutter is adamant that he didn't come back to Telecom to "manage a slow decline", by just taking a knife to the business.

Moutter worked at Telecom until 2008, leaving to become chief executive at Auckland International Airport. He returned in 2012.

With Moutter at the helm, Telecom has also bought businesses, started new ventures and invested in assets such as an extra block of 4G spectrum.

It has also stemmed the loss of market share in the broadband business, and won more mobile customers.

Spark has a lot more to do "to achieve its ambitions", but Moutter says he is pleased with the way the company is working through its plans.

"This executional excellence is why the time is right to make the brand change," he says.

He may be upbeat, but analysts -- the weathermen of the sharemarket -- say it's too early to tell if the company's strategy will succeed.

"You don't turn a ship around like Telecom straight away," says First NZ Capital's Greg Main.

"You can make some easy gains, but the key question is can they really re-orientate their systems and processes internally to be a lot more agile and without any hiccups along the way?"

And there are still dangers ahead.

At IDC -- which studies industries such as telecoms and IT -- associate research director Peter Wise says Spark is operating in a shrinking industry.

"IDC is forecasting NZ fixed voice, broadband and mobile revenues to decline by 2.5 per cent a year over the next 5 years ... Spark and the rest of the telco industry have a tough road ahead."

Harbour Asset Management's Andrew Bascand sees no sales growth at the company in the next three years.

Forsyth Barr senior equity analyst Blair Galpin believes it will be two years before it becomes clear whether Moutter's strategy has succeeded.

"For me, 2016 is the point where we can start making a call on how well Telecom has done," he says.

"2016 is the year when you'll start to have bedded down the cost savings that Simon and Telecom have been working through, plus you start to see the benefits of that investment and start to see real benefit of a higher market share than they would have otherwise got."

There are, however, already signs of change.

Asked if Telecom is meeting its own milestones, Galpin says the company had indicated 18 months ago that it wanted to reduce staff levels and save on costs.

"We've seen that, so they get a tick mark for that," he says.

"Things like even the Spark rebrand being quite quick, the decision to do [internet television service] Lightbox and then launching it relatively quickly for Telecom, these are the sort of things to me that are signs of a company that is changing."

Craigs Investment Partners research analyst Arie Dekker says the company can be judged "reasonably well" on its moves to hold broadband market share and attract mobile customers.

"Broadband market share and fixed market share declines have definitely slowed or stopped," Dekker says.

"In mobile, which is an area where they've underperformed, they've looked to add customers and add revenue growth."

First NZ Capital's Main also believes the company has performed in both these areas.

"They seemed to have held market share in broadband and that's what they really needed to do," he says.

IDC's Wise says Telecom has been aggressively competing in broadband and mobile.

"Incumbents can either employ a defensive strategy where they don't do much and rely on the inertia of customers not moving, or they can compete and match or even lead the market," he says.

"I'd say Telecom has moved to proactively leading or at least very quickly matching the broadband market, not only on price but also technology ...

"Telecom was six months quicker to market with [faster copper broadband] VDSL than Vodafone, even though Vodafone is in theory the more attacking No 2 fixed player."

Moutter has also invested in new businesses and ventures.

These have included buying two cloud-computing businesses, Revera and Appserv, as well as starting internet television service Lightbox and data analytics unit Qrious.

Moutter says Spark still has some other "ideas up its sleeve".

"We wouldn't rule anything out -- one thing I can say is that we are not going to stand still."

While the prospect of competition in the pay-TV market has aroused public interest, the company's two cloud-computing acquisitions are more likely to deliver results to shareholders.

They are also viewed as a much smarter investment by fund managers such as Bascand, who is disparaging about Spark going into internet television.

"The jury is entirely out on their approach to media and the way they're spending money in terms of kicking off their media offering," he says.

"I don't want to be too dismissive, because it's quite uncertain as to how in a couple of years we will be thinking about media and how we're viewing things, but I don't think a $20 million or $30 million investment is going to get them over the line. If you really want to do this, you spend $300 million to $400 million."

And although Moutter has big ambitions for these new businesses, fund managers are still focused on cost-cutting measures as a way of the company sustaining its dividend payment -- and that's where they will fix their attention when the company reveals its full-year results in a fortnight.

 

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