John Howard’s blistering attack on Telstra management is an example of why I’ve always regarded partial privatisation as the worst of both worlds. Although I’m unimpressed by Trujillo’s performance so far, I have some sympathy with his position as CEO of a company 51 per cent owned by the Australian government. To whom is he supposed to be responsible? The private minority shareholders? The Australian public as majority shareholders? The government? The shareholding ministers? The Liberal Party?
Particularly when his friend and neighbour Richard Alston was minister, Ziggy Switkowski appeared to assume it was some combination of the latter two. I’m not sure what Trujillo thinks, but he clearly doesn’t regard himself as bound by the views of the majority shareholder. In most private companies and in any wholly owned government enterprise, a dispute between the majority shareholder and the CEO would lead to the rapid departure of the latter, but there’s no sign of this as yet.
At this point, it appears a serious possibility that the whole process of privatisation will be derailed by this dispute (though some sort of messy and costly compromise still seems more likely). If so, perhaps we will finally be able to look at the only sensible policy option still available to us, namely selling off the peripheral bits of Telstra (Foxtel, Bigpond and perhaps the mobile network) and renationalising the rest.
John Quiggin 
I have to agree with you John, with an elected government as its main shareholder Telstra is neither fish nor fowl and its primary function could be impeded and obscured by the politics.
Trujillo seems to be playing a clever game here. He knows that Howard is politically invested in privatisation and is taking advantage of it.
I think he is blackmailing the government. He is in effect saying “Give Telstra less regulation or we will talk down the share price until it is so low that you cannot privatise”.
He is betting that John Howard is so committed to privatisation that he will quietly de-regulate via the backdoor to get the share price back up to reasonable levels. Trujillo believes Howard will have to cave in or privatisation will be off the agenda because the price will be too low.
It is unlikely Trujillo will succeed because as has probably miscalculated how much room Howard has to move on regulation because he does not realise that Telstra privatisation is far too much in the public eye for any de-regulation deal to be quietly slipped through.
You can’t blame Trujillo for these tactics though. He is supposed to increase long term share holder value and a deliberate temporary tactical drop in the share price is not contradictory to that objective.
Since when has it been the role of company executives to talk up the price of these shares? There role is to report accurately on the financial situation of the business. J.H. is plainly wrong,again.
On a lighter note, I was amused at one executives comments that he would not recommend Telstra to his grandmother. If he did, wouldnt he be guilty of insider trading?
The full quotation is “neither flesh nor fowl nor good fresh fish”. Is JQ’s preferred option also a no go?
John,
I think you are entitled to a big gloating “I told you so”! And not only that, but you have told’em both often and best. In fact, the power of your arguments are indicated by being ignored in favour of obfuscation and sophistry.
On the role and obligations of the CEO, these are incontrovertibly clear. One must act in the best interests of the company.
Notwithstanding the problems of partial governemnt ownership that you highlight, I think the particular problem is that the government has not used its ownership and control effectively, both in its board appointments and its controlling shareholding in general meetings. For instance, Telstra lost billions in chasing “growth” in Asian markets. Billions that could have been spent in OZ to give us better services and which should have been the primary focus of the shareholders and management. After all the private shareholders bought shares in a company that was clearly the national carrier.
I don’t buy the “access to capital” arguments for full privatization, although I’m not sure how strong they are in fact. Surely if capital raising is necessary for investment, the government could increase its stake pari passu on the basis it considers the investments worthwhile? Is this correct? I also seem to remember that Telstra did, or wanted to, return capital.
Trujilo would have been sacked already for his behaviour if he was head of any other company. But I doubt he cares.
One of the problems with parachuting in foreign execs is they have little to lose: big payouts if they’re fired and no real impact on their future employment prospects because it’s just that lil’ old aussie telco.
“I was amused at one executives comments that he would not recommend Telstra to his grandmother. If he did, wouldnt he be guilty of insider trading? ”
Well, no. Not unless he made the recommendation on the basis of price-sensitive information not yet released to the market/general public.
And unless the bugger has an AFSL he could be in the poo for nto being licensed to give investment advice!!!
Gotta love that regulation stuff!!
Mind you, I notice that Labor communications shadow minister Stephen Conroy IS claiming that a leaked briefing document – titled The Path Forward – contained price sensitive information. If Telstra executive Burgess’s suggestion that he wouldn’t recommend the company’s shares to his grandmother was based on that document, then it might potentially be insider-trading (at least if grannie had owned Telstra shares and sold them on the basis of Burgess’s tipoff).
Thanks, Ken, for clearing that up.
It was tongue in cheek.
Mind you suggestions are being made that some price-sensitive information has been delivered to the majority shareholders.
The general public, through our representative government.
Less info to the ‘mums and dads’.
What a minefield of conflicting interests.
The “three amigos” are secretly on the payroll of a bunch of yankee carpetbaggers who will move in and pick up a major Telco at a rock-bottom price as soon as it is privatised. Telstra has been deliberately forced to its knees by a slavish 52nd-state government that has “starved the beast” for the past decade and passed a massive bribe to the rural socialists to enable privatisation against the wishes of 80% of the electorate. What’s wrong with this story?
PrQ,
Just one note about the process – to divest the sections renationalisation should come first so that current shareholders do not suffer. I would then argue that the infrastructure component should then be sold off and heavily regulated until the time comes when it is no longer a monopoly – which should not be long as the wireless technologies take over. This process will be accelerated by the divestments as this will give the remaining infrastructure component a strong incentive to innovate – not something that is common in nationalised industries.
Good post John. And when will the ALP, I wonder, come out with a more complete alternative policy than simply “we won’t sell it”?
I reckon swio has it right about what Trujillo’s trying to do, and why it won’t work (quite apart from the fact that our PM has a very long memory for those who’ve crossed him – he’s likely in the fullness of time to find a way of payback even if the tactical ploy succeeds).
Thera’s a great cartoon making just this point in today’s Canberra Times (unfortunately not available online yet).
“To whom is he [Sol] supposed to be responsible?”
There is a judicial answer to this question.
But Sol knows that company law doesn’t really apply to him, for reasons alluded to by others in this thread.
He was “supposed” by the majority shareholder, whose mouthpiece is Howard, to find several million bigger mugs to buy the remaining 51% at a price higher than would have been commercially prudent and to take on the liabilities extorted out of the present majority shareholder by Bush Interests.
Minority shareholders, on the other hand, who are people with far more in common with the bigger mugs whom Howard wanted Sol to con, are more interested in long-term commercial viability freed from the extortionate demands of Australia’s Empty three-quarters.
Were Howard to sack Sol, it’d send a very loud message to the market, resulting in further erosion of the share price and a further delay in the float of the final tranche.
If Howard sacked Sol, it would prove almost impossible for him to be replaced with anyone with credibility. The only possible replacements are another Sol or a Howard cat’s paw whose appointment would signal a rush by minority shareholders to the exit door–a million voters with vengance on their mind.
Howard is in zugszwang.
I wonder how they ended up with Trujillo. The government is after all the majority share holder and should be basically be able to appoint whoever they want, or at least veto any choice. Were they asleep at the wheel or have some other player’s in the Telstra game been outplaying them?
Ha!
Talking down the share price is all upside for the three amigos. They’ll get a better strike price on their options, there’ll be more headroom for share-price-increase-determined executive bonuses post-sale, and it’ll be easier for their pals to seize a big chunk of the company. Plus, they come from a culture of FCC 10k and 8k reporting, where some quite astonishing talking down of a company’s prospects is the norm (I advise curious readers to have a look at a few for any big name company they choose). Howard is being strong-armed to some extent, given the political capital he’s invested in privitisation, but he’s probably winning in the tabloids, and that’s what counts.
-pete
I read in the paper today that the core to the agenda being pushed by Trujilo is that he wants a wholesale price of a flat $30 per month for each ULL (ie copper without dial tone). This is instead of the $13 in the CBD and $100 in the bush that Telstra previously asked the regulators for (still pending approval).
Trujilo wants this change because it makes it harder for competitors (ie Telstras wholesale customers) in the CBD markets which are the most strategically important to Telstra.
Of course the irony is that he is in effect arguing that the city should be charged the same as the bush. Which means he should be able to find common cause with Barnaby if they work at it.
Strange bed fellows indeed.
Personally I think that the core asset of Telstra (ie copper) is on the skids. Mobile phones are canabalising the tranditional phone services. Soon WiMax will start to canabalise the ADSL over copper options.
The government should have diversified out of this asset a long time ago. I must say I feel pretty smug about the fact that I did not invest in T1 or T2. However I am a bit annoyed that my share of public ownership was not sold earlier.
Sell, sell, sell.
Hi, I hope you’ll excuse a link to my more lengthy discussion, which all evolves from “the part that is most interesting to me today is the complete and utter disregard that the majority shareholder has had for the principal of full, fair and timely disclosure”. With your indulgence, I’d refer you to: http://guambatstew.blogspot.com/2005/09/full-fair-and-timely-disclosure.html
Thanks.
“I must say I feel pretty smug about the fact that I did not invest in T1 or T2. However I am a bit annoyed that my share of public ownership was not sold earlier.”
Not so smug Terje. You would have been even smugger if you realised T1 was a licence to print money, by taking up the opportunity to buy an initial grubstake in a MDC, principal Telco, that lots of institutionals would need a slice of, to balance their portfolios. Once having established the market price of Telstra shares, T2 was never attractive and wisely avoided after pocketing your capital gain from T1. Agreed on flogging our public shares of course and all the lefty obstructionists are responsible for that drop in value now. All their/our crankiness with Telstra management and practices, could have been avoided by now, if they/we didn’t own a potential Kodak. Still it’s fun fighting noble, rearguard actions with taxpayer equity, even though most of us couldn’t think of a single reason why a government would want to own a bank or an airline nowadays.
But Observa, Howard has a workable majority in both Houses. What on earth have the ALP got to do with Howard’s inability to sell Telstra on a basis that’s commercially attractive?
Or are you saying:
1. That the ALP should join with the Libs to stick it to the Hicks? Do you think that Howard would actually accept ALP support now?
or
2. Sol Trujillo is in fact a raving Leftie in disguise? El Zorro, scourge of the Latifundistas!
Observa,
I was taking an investors perspective on T1 rather than a traders or a speculators. However a fair point.
Regards,
Terje.
“But Observa, Howard has a workable majority in both Houses. What on earth have the ALP got to do with Howard’s inability to sell Telstra on a basis that’s commercially attractive?”
We should have had legislation up and running years ago to enable the further sale of Telstra shares at the most opportune time for public shareholders. Which political parties are responsible for missing the boat here? No good whinging now that the shares have dropped in value nearly a dollar recently.
Maybe, if a solid guarantee(joke), could be got from politicians that the funds from Telstra were put into the re- nationalisation of more basic essentials like electricity,gas and most importantly water, it would be acceptable.
The “mixed economy” was a great idea, but has been destroyed. There is a place for government.
Trouble is,politicians, want to pass off all responsibilty to citizens and blessed are the wealth creators. Meanwhile ,they maintain they are doing it hard, compared to the blokes that they have sold the basic infrastracture .
Catastrophic Incompetence and Insousiance
Thanks to Christopher Hitchens for the pithy phrase, but I’m not talking about the Bush administration. Rather, I think that, as Kim argued in her post on Telstra, the Howard government’s hamfisted response to the Telstra hole it’s d…
“We should have had legislation up and running years ago to enable the further sale of Telstra shares at the most opportune time for public shareholders.”
Public shareholders?
Are you referrring to the majority shareholders — the Commonwealth government in the name of the people of Australia?
Or are you referring to the minority shareholders, mainly mums and dads?
If the former, then there is no better time than now to sell because the ASX is at near record levels.
If the latter, then they’d prefer a bargain, like the T1 offering.
As you can see, the public interest and the private interest are in conflict on this point.
The annoying thing for Howard, usually with the nose of a truffle-hog for the marginal vote, his olfactory talents have failed him on this one.
Andrew,
I’m not sure that renationalisation is necessary – spin-off the Foxtel, Sensis and Telstra mobile businesses and possibly also the fixed-line retail business into separate floats; offer existing shareholders the option of an in-specie swap of their existing Telstra shares for shares in the spin-offs or of a cash buy-back of their Tesltra shares.
The government would emerge as the majority owner of the fixed-line wholesale business which is at the heart of Telstra’s monopoly and could move to mop-up the remaining shareholders.
Reach seems to be a total dog and probably needs to be put down.
Ian Says: The government would emerge as the majority owner of the fixed-line wholesale business which is at the heart of Telstra’s monopoly and could move to mop-up the remaining shareholders.
Response:The bit you want kept is quickly becoming more and more irrelevant. Mobiles are displacing fixed line calls. WiMax will eat into broadband. There is some good argument that the insitu ducting is of high value but the copper will soon be just one of many alternative access technologies. It is still a valuable asset but its monopoly status is no more.
Terje,
I think it’s more accurate to say that in a few years it will be no more – which is why it’s important to ensure that Telstra doesn’t use those few years to extend its dominance into new areas.
The parallel hybrid fibre roll-outs from Telstra and Optus demonstrated the capacity of an entrenched monopolist to crush even a relatively large and well-resourced competitor.
Katz—the Commonwealth government in the name of the people of Australia?
joe2 (see post 24), there is no place for government in business other than the place it has made untenable for anyone else. That’s not the same as saying that the abdication was done right, for it did not undo the necessity that was artificially created. Nevertheless, the fact that what we have now is falling between two stools doesn’t mean that the stool we were last on – a mixed economy – is better than a true free market, only that the simple destruction didn’t lead to that but to crony corporate capitalism of the worst sort.
“If I were you, I wouldn’t start from here”.
Terje,
ADSL2+ Broadband is now at 15-20Mbit/s for most metro users (with enabled exchanges). That will support 1, maybe 2 HDTV channels over the existing copper infrastructure. WiMax doesn’t come close to that (theoretical peak raw throughput of WiMax is 70Mbit/s but all proposals I have seen have that shared amongst up to 100 subscribers).
IPTV (TV over the internet) is likely to see huge demand. With IPTV you get to watch any show you want, whenever you want, because it is delivered over your ADSL personal bandwidth (not shared like cable or broadcast like satellite or free-to-air).
IPTV needs at least 1 HDTV channel (2 or more is best because then the same household can watch multiple shows simultaneously on different TVs). High Definition is not essential now, but demand for HD is growing so it will be a big differentiator in future (at any rate, WiMax won’t support even a single SD channel at the proposed sharing ratios).
So, the monopoly over those access ducts with the copper in them may be pretty valuable for some time to come. If I was Telstra I’d be pushing high-definition TV, then ultra-high-definition, and so on, and as many sets as possible in each home, to ensure bandwidth demand stays ahead of what the alternative technologies can provide.
Terje Petersen,
Wireless networks performance just are simply not up to matching what can be done with coppers wires running ADSL2+. And for the reasons GDP outlines we will start demand the 15-20Mbit/s that cannot be delivered via wireless, and probably even faster speeds again. As applications like extremely high quality video conferencing become the norm for home use we’ll probably demand even higher speeds. For example, 15-20Bbit/s is not fast enough to simultaneously handle
2 HDTV channels
2 high quality video conference calls
A dozen high speed Peer 2 Peer downloads
Yet that sort of scenario will probably be fairly common within 5 years. The wireless networks can theoretically run extremely fast but in practice they are not very good at extremely high speed broadband as they never consistently run at even near their theoretical speeds.
Telephones will go wireless, but unless we want to be left behind by the rest of the world when it comes to high speed internet access (or fall even further behind Asia) then we still need to rely on the copper network.
ADSL2+ will be impressive and it should not be dismissed lightly.
However once the analogue TV broadcasts get switched off we will have a lot more wireless bandwidth to play with. Even ignoring this the potential bandwidth from wireless is largely dependent on how often you recycle the frequencies. With more base stations you get higher recycling.
The potential amount of wireless bandwidth is near infinite. The range extends from 0Hz to infinity. The current limits are mostly to do with the speed of electronics and they continue to improving rapidly. We have not even really touched the Terrahertz range yet.
Wireless broadband access will also be very impressive. And it will be mobile.
In practice I think we will use both. But each will keep the other honest on price.
Governments, both State and Federal, have been requiring corporatised entities to pay “dividends” back to the Government for years. In addition, budget supported agencies have had their operations budget gradually reduced by a small percentage (1-1.5 per cent) each year. Governments have also refused to fully fund wage and salary increases, instead demanding that agencies and departments fund these from savings elsewhere. And last, capital outlays have been reduced where possible, a strategy related in part to this ridiculous proposition that debt is bad.
Why is anybody surprised at the situation that Telstra is in as a result of this kind of intervention? And why is anyone surprised at the views being espoused by the Telstra executives? Recent articles, including one in the latest Dissent, tell us what Trujillo is like. But he does have experience in government regulated telcos.
Any study comparing government and private agencies finds the latter more effective for one main reason (not related to profit): the relative lack of intervention by government. Therefore Howard is both right and wrong in his assertions about Telstra. The stupidity is that he and his Ministers including that Finance Minister Minchin have failed to notice this financial interference before.
“I don’t buy the “access to capitalâ€? arguments for full privatization, although I’m not sure how strong they are in fact. Surely if capital raising is necessary for investment, the government could increase its stake pari passu on the basis it considers the investments worthwhile? Is this correct? I also seem to remember that Telstra did, or wanted to, return capital.
I would have thought that Telstra could stop paying dividends out of reserves and so I understand from one commentator last night, borrowings. That should leave some cash in hand to buy a few things.
Additionally the SE is not the only way to raise capital. There are many choices for companies.
Finally I cannot believe the whining from the shareholders who have bought shares in Telstra. Rule one of investing in shares is don’t use money that you can’t afford to lose. Second is that there is no immutable law that says you must make a profit out of investing in shares and third is that in the very long run the overall value of the stock market rises in line with the value of the economy.
The fundamental tradeoff in wireless comms is that while higher frequency gives you greater bandwidth, the range reduces as the frequency goes up.
So if you operate at lower frequencies (eg newly available analog TV frequencies), you need lots of basestations to recycle the limited frequency ranges available. If you operate at higher frequencies, you need lots of basestations because of the range problems.
So however you do it, you’ll need a pretty dense basestation network to get several independent channels of HDTV into each home over wireless. Given the outcry that surrounds erection of new mobile phone towers (which are sparser due to lower operating frequencies and bandwidth requirements for voice), I can’t see the requisite network being built anytime soon (we’ll have WiMax, just not at ADSL2+ competitive speeds).
So with the wired infrastructure under its control, Telstra can potentially monopolize delivery of TV over the internet for some time, which because of the programming freedom is how everyone is going to want to get their TV in future.
Now, that has given me an interesting idea: what if we have “neighbourhood wireless” – ie each of us transmits and redceives through equipment in our own homes. You can imagine then a situation where you mount the mega-high-frequency antennas on the existing mobile phone towers, but only transmit at that bandwidth to the very nearby houses. Those houses have “repeaters” that further transmit to the surrounding houses. And so on. That would get around the problem of having to build a dense basestation network (essentially, you use the subscribers as mini-basestations) and potentially would allow huge bandwidth to be delivered wirelessly.
As Sir Isaac Bickerstaff relates in New Matilda, at least Simpson and his Turkish Donkey agree with my story (posted above):
“Simmo’s maudlin mood improved markedly when he next launched into an uproarious fable about a knight-errant called Solomon (‘Wiseguy’) Trujillo and his merry band of Zapatista freedom fighters liberating a fair damsel named Telstra from the clutches of a malevolent dragon called Public Ownership. It seems this posse of jolly pranksters secured the damsel’s release by first telling everyone she was worthless, and then chopping her up into very small pieces and offering these shares up for sale to their mothers, cousins and maiden aunts.”
The full quotation is “neither flesh nor fowl nor good fresh fish�.
I thought it was “neithr fish nor fowl nor good red herring”?
Ian,
I do not doubt that Telstra could sell off these peripheral businesses through the market – but I do not think it would be in the interests of the current shareholders to do so. The effective market control they give can (and is) being exploited by Telstra to dominate the other business lines. For the government to use their control as majority shareholder to the detriment of the minorities would be oppressive (and illegal).
To do what should be done the whole thing would need to be re-nationalised, then broken up and sold off again. While I believe this to be the ideal, I think it politically unlikely. The next best option would be to sell off the remainder and then regulate properly – not something they can do at the moment.
Michale Pascoe writes in Crikey today that “if Sol and his three amigos are telling the truth, they have effectively trashed the reputations of Donald McGauchie (Telstra director for 7 years), John Fletcher (5 years), John Stocker (9 years), Catherine Livingstone (5 years), Charles Macek (4 years), and Belinda Hutchinson (4 years)”.
“If, as Sol implies, the company’s strategy has been fundamentally flawed for years, that it has been pandering to its majority shareholder at the expense of its viability, that dipping into reserves to pay some of the dividend is a capital offence (it’s not in certain circumstances), and it’s guilty of wilful neglect – well, what’s the board’s excuse for going along with it all for so long?”
“But let’s get back to those two key non-American executives: the present chief financial officer, John Stanhope, and his predecessor and current general manager consumer and marketing, David Moffatt. As CFOs and candidates for the CEO’s job, both Stanhope and Moffatt, had intimate knowledge of Telstra’s strengths and weaknesses. If it’s as bad as Sol suggests, they should be sacked as they would stand as co-conspirators with the previous CEO and chairman in severely damaging the company.
“On the other hand, one of them could replace Sol if he’s just been spinning with so little regard for shareholders.
“Even before Telstra sank into political nonsense this week, Stanhope and Moffatt must have been in interesting positions, deciding whether to go or stay in the hope that the cowboys won’t last.
“And finally, talking of the cowboys, I wonder if any of Crikey’s head-hunter readers would like to venture an opinion, based on the three amigos’ published CVs, as to whether any of the them would even have been offered an interview if they had applied through normal channels for the positions they now hold?”
This should be widely disseminated – perhaps copies to all National MPs and senators for starters?
GDP:“Now, that has given me an interesting idea: what if we have “neighbourhood wirelessâ€? – ie each of us transmits and redceives through equipment in our own homes. ”
Terje: Yes a nice idea. You might even make a half decent libertarian with that type of decentralised thinking. Just beware the telecommunications act.
There has already been some work done on peer-to-peer phone netwroks – eliminate the fixed towers and swap packets between individual phones.
Unfortunately so far it only works in areas with lots of phones or in proximity to a wi-fi hot-spot.
Actually, once the world is riddled with VNMs (Von Neumann Machines), they will probably provide peer to peer services among themselves to keep down the level of AI needed by each individual component. Decentralised stuff will be everywhere – only, it will be mediated by the programming of the VNMs.
In case anyone is interested, I’m currently reading Tony Ballantyne’s “Recursion”, which gets all dystopian about this sort of thing (among others).