Trujillo: Telstra’s saviour or spoiler?

Solomon Trujillo’s tenure at the helm of Australia’s dominant telecoms firm Telstra will be defined by a single deed – his loss of the contract to build the new national broadband network (NBN).

But it may be too early to say how history will judge the mercurial chief executive, who late last week disclosed he was leaving Telstra at the end of June.

The proposed $A10 billion NBN is the largest infrastructure project in Australian history. The government plans to put up $A4.7 billion for a planned public-private partnership that will deliver a new fibre optic network to the gates of Australia’s homes and businesses.

Its objective is cheap fast internet access for all.

Telstra was in pole position to build the network as its already ubiquitous network and expertise gave it an ability to deliver the new network for a cost that its competitors would struggle to match.

The US-born Trujillo employed a high-stakes strategy to use this advantage over the other bidders as leverage to extract the maximum number of regulatory concessions.

This culminated in Telstra submitting an almost derisory 13-page proposal, which amounted to an offer to extend its network using the government money in exchange for what it declared “regulatory certainty.” Meanwhile, its competitors’ bids ran to as much as 1000 pages of tightly packed technical detail.

The proposal was vintage Trujillo, who since his arrival at Telstra in 2005 had waged a no-holds-barred fight with the government over regulation – even to the point of challenging the government’s authority to unbundle the local loop.

Just before Christmas communications minister Stephen Conroy called Telstra’s bluff, declaring that Telstra’s bid was not compliant with the terms of the government’s request for proposal and was excluded from the bidding.

Telstra was now faced with a formidable competitor – one that was well funded and would have a technical advantage as well.

Investors took the exclusion as an unequivocal negative and in some measure this is a difficult conclusion to avoid. It is an exercise in retrospect of course but it is fair to ask if Trujillo had taken a conciliatory line with the government, whether he could have protected Telstra’s near monopoly?

Measured on the share price alone Trujillo has not delivered. When he started, Telstra’s shares were trading at $A5.07 but after the rout of the last couple of weeks they now stand at just over $A3.37.

This performance is better than most on the ASX, but given the economic turmoil this was near guaranteed by Telstra’s dominant position.

The most pessimistic believe Trujillo’s tactics have not only exposed Telstra to new competition, but the antipathy will also embolden the Rudd government to impose the “operational separation” that the New Zealand and UK governments have imposed on Telecom and BT.

The less pessimistic view is that Trujillo’s actions may well spark a détente between Telstra and the regulators. A ubiquitous, government funded competitor may well represent the best of all controls on Telstra’s dominance.

If that is the case, Telstra’s exclusion from the NBN may well be judged as the action that preserved it as a robust and viable force and Trujillo may be seen as the leader who did not sell the firm down the river.

As the NBN episode represents a watershed in Australian telecoms infrastructure, it is rightly the yardstick against which Trujillo is judged. But he also notched up significant operational achievements.

He has made an undeniable success of Telstra’s mobile network. Proof of this was delivered last week at its half-year result, which were somewhat overshadowed by Trujillo’s resignation.

Telstra retains a 42% share of the market, only slightly lower than the 44% held at the start of 2007 and over the last couple of quarters its share of new subscribers has risen sharply.

It has established a market leading position in mobile broadband. This is despite facing a formidable competitor in Hutchison Whampoa, which had staked its participation in the market on the new service offering.

Telstra now has well over 800,000 subscribers to the service against the 526,000 mustered by Hutchison Whampoa. Margins are also expanding.
A similar performance is evident in the fixed-line broadband market, while Trujillo has taken a knife to costs in the business.

Soon after his arrival he promised to look deep into the business and this culminated in a programme to migrate Telstra to a new $A12 billion technology platform and cut as many as 12,000 jobs from the business.

Progress on the technology platform has been mixed but the cost control now delivering tangible benefits helped to drive free cashflow from about $A2.5 billion to as high as $A5.3 billion in 2011.

All of these achievements are in sharp contrast to the performance of the incumbent operator on this side of the Tasman.

Richard Inder is an investment adviser at Macquarie Private Wealth. His disclosure statement is free and is available on request. Clients may hold shares in the firms mentioned. Comments, think differently? Write to richard.inder@macquarie.com