INTERVIEW: Telstra's John Stanhope

Telstra's outgoing CFO says the NBN is here to stay and the telco is working to build a better connection with its customers.

Telstra's long-serving and departing CFO John Stanhope tells Business Spectator's Alan Kohler, Robert Gottliebsen and Stephen Bartholomeusz:

 

Alan Kohler: John, do you leave the job with any misgivings about the NBN deal at all?

John Stanhope: No. Not at all. I feel good about the outcome for the shareholders. It was a negotiation that started from the premise that shareholders must be kept whole, and dealing in the best interests of the shareholders was my own from the start. So, from a Telstra perspective certainly I don’t have any issues with the NBN at all.

AK: What about when you take off your Telstra hat and put on your taxpayer’s hat? How do you feel?

JS: Well, governments have options for policy and I remind people that all those decades ago it was a government that built the copper network to the home. And there are times in the life of a country where infrastructure needs to be paid for by governments – or, in your terms, taxpayers – and having made a policy statement to go straight to fibre to the home, then it’s a legitimate policy stance to fund it from the government coffers, because private enterprise wouldn’t fund it.

Robert Gottliebsen: John, wouldn’t it have been better for Telstra if you’d done a deal with the old Howard government rather than wait around for the change of government?

JS: Well, it was a different sort of proposition. We would have kept ownership of the network, but had an open access. Obviously we realised, while we might have kept ownership of a high speed broadband network, it would have required open access otherwise nobody would have agreed to that. So, it was a different structural arrangement. I’ve said before that there were fundamentally two approaches. You could have chosen to go to a blended technology approach and allowed demand – demand for speed, demand for applications – to pull through eventually the requirement to fibre to the home, because I think you get there in the end anyway. Or, you jump straight to fibre to the home which is what this government chose to do. So, fundamentally they were the two options. We were suggesting that, back then where you’re referencing; a blended approach and particularly a fibre to the node approach, but fibre to the premises in some places and the continuation of broadband over copper in some cases, but it was a very different sort of offer. It wasn’t a separation offer. It was: we’ll build this much, you build that much and we’ll provide ours as an open access. So, it was a different sort of deal.

Stephen Bartholomeusz: John, the deal that you have done tends to be looked at relative to what Steven Conroy would have done to you if you hadn’t done it. If you take away that circumstance – the threats that were made to you if you didn’t do the deal – is it possible to say this is a good deal anyway?

JS: Well, I think it’s a good deal anyway. I mean the other elements of the deal that are non-quantifiable are some nasty things that might have happened to Telstra have now been avoided, but also, on the positive side, there are ten years of regulatory certainty now ahead with the SSU. Now, I’m jumping to the conclusion that the regulator’s minded to accept. But let’s say that’s the case, then you know for the first time for a long time there is a higher degree of regulatory certainty for the company to operate in. And, for that matter, the other carriers.

AK: But wasn’t the biggest mistake when Sol Trujillo refused or failed to put in a compliant bid for the $4.7 billion equity subsidy for the fibre to the node?

JS: Look, I don’t know. You know, was that a mistake or wasn’t it a mistake? I mean we thought we were compliant and so on, but…

AK: No. But as you look back now?

JS: Yeah. Looking back at it, I… let’s say we had to put it in. It was still with this particular government, and they were still getting advice that maybe this wasn’t the right way to go anyway, so I’m not sure that we wouldn’t have had the same outcome. Because remember back to the expert panel and all that…

AK: But the thing is if you were building the fibre to the node, the problem of the compensation to Telstra of $20 billion plus wouldn’t have occurred I presume?

JS: Well, yeah. Yeah.

AK: But the expert panel, that’s what led them to end up going fibre all the way to the home, was that compensation problem.

JS: No. Probably the better deal was back in the days of the first deal reference, which was when Helen Coonan was the minister, and that was the deal that almost got up which was the one I described. That it was quite a different deal. It was us building and providing open access and so on.

SB: John, are Telstra shareholders better served by this deal obviously getting ticked off and running its full course over the next several decades and you’re getting the $11 billion of MPV, or would it be better served if the Coalition came in and halted the rollout?

JS: Would they be better served? No. Look, I think this is a very good deal for the shareholders and they’re getting two elements here and I’ve described them a number of times. Or probably three. They’re getting the payment for the decommissioning, which is really payment for structurally separating, which put another way is compensation for the possible share loss that will occur. Because remember, the risk is losing some share in fixed line consumer because there is a disruptive event. Everybody in Australia will have to decide which carrier they’re going to go with on fibre, so that is a disruptive event; or many disruptive events if you like because they happen by fibre service area over a 10-year period. But, as shareholders, they get paid compensation for that, so that’s the decommissioning payment. And they’re getting a cashflow stream from leasing of infrastructure at NBN Co they would not otherwise have received. And then, the third element on the government side is that they have been funding the universal service obligation and getting paid a levy that’s been far less than the cost of providing it for many, many years. And now, part of this deal is that the government will pay Telstra to conduct the universal service obligation. So, how good is that for shareholders?

RG: Do you think this will mean that, in the absence of some huge adverse event, Telstra will be able to maintain its dividend?

JS: Oh well, certainly I’ve said this helps with certainty of cashflow for the company for quite some time, and with how we see mobile continuing to grow and some other growth areas in the business. This company should certainly have the level of cashflow that makes it capable to maintain that level of dividend.

RG: What? Five years, ten years?

JS: Oh well, you know, five, maybe ten, yeah.

RG: That makes Telstra a very rare company on the Australian list.

JS: Well, it does in that it’s now got a certain cashflow stream. Now, we all know that of course the certainty of that cashflow stream can be interrupted and it can be interrupted by a change of government and a different deal being put in place or a different policy. That could interrupt that, but failing that interruption, yeah it’s in a pretty good place.

RG: The shares are still on a very high yield as the market doesn’t seem to think it’ll be able to maintain the dividend.

JS: Well, you know, companies don’t make too long term dividend statements and we’ve given some certainty of dividend. I mean the chairman said fiscal year 2013 would be 28 cents, fully franked. It’s quite a rare event, as you would know, that people come out and talk about their dividend that far in advance. But your question is well, is the market really convinced that the cashflows will continue beyond that. Are we seeing that in the share price? Probably not yet, but you know what share markets are like. ‘We’ll believe it when we see it’ sort of thing.

RG: If Tony Abbott gets to power, or the Coalition gets to power, could they really change this and be quite harmful to the company?

JS: Well, it would be difficult to unwind. There are elements of compensation and payments that must continue that are in the deal and they’re aware of that. Then of course there are a lot of contracts that I guess that NBN have entered into. I would say that if you have to repeal the legislation, or you want to, you’ve got to get it through the Upper House. Even if you got elected and you had the power in the Lower House, you still may not have it in the Senate, which again may make it difficult. So, I don’t think it’s all that easy.

SB: John, if this deal does run its course over the course of a decade or two, Telstra is going to have to transition from being a sort of a regulated network-dominated business to being a pure consumer business. Is the organisation today capable of making that transition?

JS: Let me clarify your statement a little. We will still be a network business. We’ll still have a wireless network and let’s face it every mobile call goes through a fixed network somewhere and that’ll be ours, so our fibre, our Ethernet network that carries all our mobile traffic will still be ours and run by us. The IP network, so the point-to-point fibre we have today – which we believe is world class and it’s why we’ve got a higher market share in the enterprise in government market – will still be ours and we’ll still run that, so let’s not forget that. But, to your point, we’ll have to be a sharp retailer, sharper than we are today. And it is why David Thodey has a strategic focus on improving the customer experience, making it more a sales and marketing company than it ever has. Having said that, one of the things the company in my view must keep is its technical competence – because let’s remember this NBN is layer two, which is just split fibre, and on the top of it you’ve got to add layer three, four, five, whatever they are. You know, layer three might be security and redundancy and so on and then you start to get into the applications that run on fibre and you get to the applications that you actually need the speeds that fibre provides and so on. But Telstra has the technical competence to be able to do that, so it’s going to be a combination of applying that technical competence and then very sharp sales and marketing skills and then having the service capability and the customer experience that people want to use Telstra and never want to use anybody else. As I did my retail road shows pre AGM, explaining NBN to people and so on, and I know they’re sort of mini-AGMs and the age bracket is above 50s mostly, they said to me repeatedly: all we want is whatever we’ve got in our homes today and we don’t care what it works over, but if it’s fibre, make sure they keep working and they work the same way and you don’t trample down my flower patches as you fix it up or as you put it on. Give me a good customer experience or give me a seamless changeover is what they’re looking for. And those who do that the best will win.

AK: What do you think David Thodey’s greatest challenge is?

JS: I think changing the culture of a company to have customers being the promoters of your services. So not just saying ‘yeah we’re satisfied’ or ‘it was okay’, but to actually have Alan Kohler and Stephen Bartholomeusz and Robert Gottliebsen going out and saying: ‘look, you should go nowhere else, my experience with Telstra was magnificent’.

AK: That’s a massive challenge.

JS: That’s where we’ve got to go, you and many millions of others. That’s a fair challenge and that’s where he wants to go. That’s where we need to go, particularly in this new NBN world where retail services competition will be far more intense than it is today. So, that’s his biggest challenge and it’s a cultural challenge and it’s a challenge of simplification of what we provide. We’ve got work underway and you’ve heard us talk about it many times, but it doesn’t happen overnight and we’re only just improving customer satisfaction, let alone reaching the point of having people as advocates. We have some, but I mean lots of people as advocates.

AK: John, you mentioned trampling on the flowers. Actually the company that does that is NBN Co; they’re the ones who have to connect up.

JS: Well, that is true. They’ll connect the basic service, but somebody coming in to put your applications into place in the house and so on, you want that service to be good as well. I mean they’ll put the service to the barge board.

AK: That’s right, but what I was going to say was your problem is that you’ll be coming in after that. And if they have trampled on people’s flowers, it’s not going to be a pleasant experience. So, in a sense Telstra’s customer experience is to some extent in the hands of the NBN and how they handle this transition.

JS: It is very true. And I think there’s some sorting out to be done there. For example, you don’t really want two visits, do you? I mean you don’t want NBN to come, put the line on to the barge board and then your retail service provider come along and put the box on the inside and get the applications working and so on.

AK: But you’re going to get half a dozen retail providers coming and trying to flog you something.

JS: You’ll get half a dozen trying to flog you something, but then you’ll at least get two people doing the work, right? You’ll get NBN to the barge board and you’ll get another to do the work.

AK: And what do you think is going to happen if somebody says: listen I don’t want this bloody NBN, I want to stick with copper?

JS: Well, according to the current rules and policy position, the dial tone will go dead.

AK: So, don’t you think we’re heading for a bit of a problem here? There could be quite a lot of people whose dial tones go dead.

JS: Yeah. Or they make the decision that I’m happy enough living in a wireless world.

AK: Well, yes, but as long as they’ve made that decision.

SB: That wireless world, John, there are people who say wireless isn’t a substitute for fixed line broadband, because of the congestion and the speeds. Can you see that kind of limit on wireless as a competitor being lifted any time in the next decade?

JS: Look, I don’t think so. I mean it’s just the physics of radio. There will always be contention or there’ll be speed variation with radio. I’m not a radio physicist, but the radio engineers tell me that they don’t see that radio physics can be changed to take away that possibility. The question really is, you know, today it doesn’t matter much. It’s when applications come along where it does really matter, that speed change does matter. I mean people don’t use wireless to watch flat screen television because they don’t like pixilation occurring and so on, and so that’s why television is not delivered that way. So, I don’t think we’ll ever get to that total wireless world.

RG: John, during your time at Telstra, what change or changes at the company generated the most improvement in productivity?

JS: I think we had some huge changes in the communication consultancy area. We would have gone from people putting on four telephones a day to six to eight to ten. That sort of productivity level increase is enormous. And it’s been driven by better work methods and better scheduling, but it’s also been driven by incentives. People are properly rewarded for higher levels of performance.

RG: Was some of that productivity improvement to you by contracting out?

JS: Yeah. Some of it. But, by the way, you are able to get lower contracting prices because you also have the productivity in the contractor and the contractor productivity is driven by some of the things we’ve done, like the scheduling. Obviously the contractors in a sense aren’t employees, but there are things we’ve done that, and there was a time when we were more regulatory driven. There was a time when we would drive past a house; we’ve got the customer service guarantee of doing an install in two days. We’d drive past a house to do it, well, you know, that’s not all that productive. You know, you should do the house on the way and then go. We sort of had not the right drivers of scheduling the field force. Those things apply to whether it’s a contractor or it’s our own people. That’s certainly large areas. Look, the front of house is getting better. Productivity in the front of house as well. When you think about it, in Sol’s time here, you know, 12,000 fewer people in the company. I mean, I hate to tell you this, but I remember when Telecom Australia and OTC joined we had nearly 100,000 people.

AK: Wow.

JS: That’s an enormous number and what’s happened over the years is the business has got more complex and we’re running it with 35,000-40,000.

RG: Very briefly, what did you like most about the Sol Trujillo era and what annoyed you most?

JS: [Laughter] Good question. Look, Sol did some very good things for the company. His focus when he got here and said look we need to change up the network, the fixed and the wireless network, to be far more competitive, well to give ourselves some competitive advantage. And you’ll remember him saying all we’re competing in mobile is price, and we all have the same handsets on the walls of our shops, and there’s no differentiation in the networks. So what he did in the network area and set up the new network in 10 months on the 850 spectrum band was terrific. The IP network was similar, again – that’s why we have good share and lead the way in the enterprise area, the big point-to-point stuff.

RG: And on the bad side?

JS: You know, he probably misread the politics in Australia – in other words, the level of possible intrusiveness of government and their power to set policy – and grossly underestimated his capability to be able to change that. As a result, the relationship as we all know soured and I’m sorry that that actually happened because we were going quite well in all the other areas.

SB: After forty odd years within Telstra and its predecessors, is there life after Telstra and what’s it going to look like?

JS: I’ll keep busy. I’m still on the AGL board and if other companies are interested in my talent at that NED level, I’d be happy to do that and, Stephen, as you would fully understand, more Geelong premierships would be great.

SB: Agree absolutely. Thanks very much indeed, John.

AK: Thanks, John. Good luck.

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