KGB Interview: David Thodey

Telstra's CEO David Thodey outlines Telstra's ambitions in the post-NBN world and says that the telco is ready for protracted negotiations with a Coalition government, if and when it comes to power.

Business Spectator

In an interview with Business Spectator’s Alan Kohler, Robert Gottliebsen and Stephen Bartholomeusz, Telstra’s CEO David Thodey reveals his ambitions for Australia’s largest telco.

Alan Kohler: Well David, welcome to Business Spectator again. It’s great to see you.

David Thodey: It’s great to be here, as always.

AK: Now, is Telstra an income company or a growth company?

DT: Alan, it’s both. It is definitely a very strong cash generating company and within that there is enormous capital requirement, so we run it as a cash generating company, but it’s also a growth company because we’re really continuing to grow and invest in new areas. But I think your question is more about the market.

AK: Is it really possible to be both? I mean…

DT: Well, it is because we do do it, because if you look at my business today, there's bits that are utility like and there's bits that are very high technology like, however, your question is more about how the market perceives us and I would agree. We’re probably more a yield, utility like company today, but I think in the future we need to continue to look at how Telstra will be positioned post NBN and where we need to move to be able to really compete in new areas. So, therein lies the challenge for the company.

Stephen Bartholomeusz: So, in a decade’s time will you be an income stock, a growth stock or a combination of both?

DT: I would like to think that we’ll be a growth stock by then, but I need to work through this period where we will generate a lot of cash because in effect we’re selling the copper network. It’s not quite as severe as that because we’re not actually selling an asset, but we’re definitely closing the copper network where our shareholders realise a lot of cash which we then have to make a decision on what we do with that.

AK: If the coalition wins the next election and they go ahead with the fibre to the node plan, will you actually be selling the copper network to the home? Will the NBN, or whatever the Coalition calls it, have to buy your copper then?

DT: Well, we haven’t worked that through yet, Alan. If there was a change of government and if that government decides to do fibre to the node, you are right to raise the issue about who owns the copper from the node or the head of the street to the house and that would be subject to another negotiation with the government. But let me be clear, I only have approval from my shareholders for the transaction that’s been done for eleven billion dollars, so in many ways as we enter into any revision, which there is opportunity to do, my starting point is what we’ve already got on the table. But I’d be flexible.

SB: So, you wouldn’t mind a second bite of the cherry, David?

DT: I will always try to maximise value for shareholders, Stephen, but I think that as you look at different configuration designs which we already have done a lot of, what we’ll need to do is just to make sure that we stay true to the principles which we negotiate the NBN transaction on.

AK: It would be wonderful for you, wouldn’t it, if you’re negotiating with someone who’s had an election promise to buy your copper, right? They’ve actually gone to an election, won the election on that promise. You’ll be in a fantastic position, won’t you?

DT: Well, I think we’re in a fantastic position now because I’m truly, in the interest of shareholders, I don’t mind whether the NBN is built or not built because if it’s built, we get the cash; if I retain the customer on the copper, I’m still getting the revenues for that. So, I think we’ve got ultimate flexibility at the moment. But yes, you’re right. Should there be a change of government, there would be a need for a negotiation and I’m sure that they’re very clever and they’ll be thinking that through.

Robert Gottliebsen: You’re going to have this cash. Your shareholders, particularly the brokers and institutions, say give it to me.

DT: Correct.

RG: You’re not going to do that, are you? You’re going to spend that money on growth. You just told us that.

DT: No, I didn’t say that, Robert. What I said was that we do want to become a growth company. One of the things if you look at our capital management framework, everything we look at we also put it through the sieve of returning that to shareholders. We’ll compare a buyback to doing investment. We’ll look at our dividend policy. So no, that’s always a key consideration for us as we look at any investment to make sure that if we do the investment, it’s a better outcome for our shareholders do that than to give them the money back.

RG: To some extent the position you’re in today, leaving aside the NBN for the minute and going to mobiles, is a reflection of what Ziggy and Sol did, the previous CEOs, and they put money into the network and then the other guys fell over and you had the network and took enormous advantage. What are you going to do for your contribution to that? How are you going to maintain that share or increase it?

DT: Okay. Can I answer that in two parts? Yeah look, Ziggy and Sol made some very astute investment decisions, which was really great. Now, I would like to think that we also made some big decisions when we put a billion dollars into the market to grow market share. That was a very hotly debated issue at the board. Remember, at that time revenues were coming off and to put a billion dollars in, to grow market share, and yes competition wasn’t quite as strong as we had anticipated, but still we’d made the decision. And then also we’ve decided through our LT put in another half a billion dollars just recently which is over and above where we were before. So, we are making very real decisions to keep investing and to keep technology leadership. So, it’s an ongoing series of decisions.

Now, the second part of your question is well David what will you stand for? Well, I trust that it will be a little bit of both. I’ve always said that customer service is fundamental to Telstra’s future and there’s no question in terms of serving your customers at 70 per cent market share in some areas. If you don’t get your service right, people will not stay with you and so, I trust that that will be a small part of the legacy I leave. But I also do hope that the decisions that we’re making now and will be making we set out the company out for the next eight, nine years because we need to make some big decisions really now and the next 12, 24r months about what the company will look like in eight years’ time.

AK: What’s the thinking that’s informing those decisions? I mean obviously what that then turns into is a decision to spend money. Where are you going to invest your capital?

DT: Well, it does.

AK: How do you think about the company in the year 2020 for what’s going to look like?

DT: Well, in many ways the NBN is doing that for us because by 2018 we will have, what out of eight million fixed line customers, we’ll probably only have two million still on the copper – hopefully we’ve picked up a lot on the NBN as well. So that’s the moment of truth. That’s saying okay, well that happens and you realise the asset and the cash you’ve got; you’ve either given it back to shareholders or you’ve made another decision. So, we are thinking about what the company looks like out in 2018, ’19, ’20. Now, you say well that means you’re going to go and spend money. Yes, but it’s also a natural extension of what we’re doing today. Could you grow that faster and even better than you’re doing now? We talked about cloud computing. We talked about managing big, complex networks getting into differentiated services.

There are things we could do that both here in Australia and in Asia. But yes it could involve M and A and we will consider that. But we’ve always been very disciplined in the last three years about where we invest and what returns we need to get, so it would have to be better than, you know, giving it back to shareholders through a buyback, so that’s the discipline we put on ourselves. We are not sitting here with lots of cash in our pocket feeling like we’ve got to go spend it.

AK: No, but if you think about yourself as a utility, an income company, then you’d go and buy another utility perhaps to expand on your utility capabilities.

DT: Yeah. You could.

AK: Or if you thought you saw yourself as a growth company in the content field and so you might go and buy a content business.

DT: You could. Or you could…

AK: And those are two different ways of being that.

DT: Two different ways or you could go and buy an international, over the top specialist company and take the company international. You could go and, this is all speculation. You could go and look at other big Asian operators. Could you partner with them? You could go to Europe. I don’t think we’re going to go to Europe, but you could. And there are many different options.

AK: Europe’s a buy at the moment. Europe’s a buy at the moment.

RG: Hey, but what you are doing is setting up a cloud network in Asia.

DT: Yes.

RG: You’re using your cable system, which has a fascinating history, but forget that. Explain to our viewers what is your Asian ambition?

DT: Right. Well, as you know, Robert, what we’ve done in the last eighteen months, or two years ago now, is thatwe've brought all our international assets, all the undersea cable and satellite back into the country. That was the old overseas telecommunications company, a very successful company. 65 years ago we were in Asia, so we did that. With that comes one of the best international networks in Asia and we now own that 100 per cent.

The fascinating thing that’s happening in international connectivity is that people are using it more and more for both data and voice, but also to do computing around the world. So, what we’ve done is build a big cloud infrastructure here in Sydney and Melbourne. We’ll be building one in Singapore and one in Hong Kong, so we can serve customers from Asia. So a Hong Kong customer can be using the service there, but if it needs some extra capacity,it can come and use the capacity here in Australia. Because we own the connectivity, it doesn’t matter where it is in the world. It's no different to American Express. It's a little bit different in implementation – all their computing capabilities are in the US, so if you ever ring American Express, it’s in Texas somewhere. It’s a global network. So we’re investing significantly and we’re seeing a lot of demand for this cloud computing.

RG: How big is this going to be in Telstra by 2020? Is this going to be ten per cent of your business? 15 per cent?

DT: Well, I can’t tell you exactly that because I actually don’t know the number in 2020, but I do know we’re investing roughly $650 million. So, if I’m investing $650 million over three years, it would have to be a multibillion dollar business for me to get the returns. I think if you said in excess of $2 billion, that’s what I would like to think it would be. Now, obviously that investment profile is based on our success, but that’s what we’re planning for.

RG: But that’s a growth investment, isn’t it?

DT: Absolutely it’s a growth investment, yes. But it’s not acquiring another company. It’s actually investing in technology, which is a natural extension to what I do today. Therein lies the difference. Because a lot of commentators and analysts will say, you know, Telstra you’re off to buy another asset in Asia. And that’s not what we’re saying at all. To go off and, you know, buy a mobile operation in Cambodia, for example, I mean why would I do that? 

RG: But what’s to stop you saying instead of investing $600 million in this, I’ll invest $2 billion – and really be a big player in the whole thing?

DT: If I’m getting the right returns, there’s nothing stopping me at all – if it passes all those investment tests that we put it through. I’d love to think that that is the case, but at the moment we think about $600 million is a good investment and that’s what we’re going to go with.

SB: The cloud’s interesting, David, because it’s a way of adding value to what’s fundamentally your core commodity business. Are there any other opportunities to add value to what is a commodity business?

DT: Well, it’s interesting. I quite like commodities. You can get very good margins out of commodities. Look, there are other additions to the core network we can do and you’ve seen us sort of move into that in Australia. I know it’s not a very good term, but there are cloud applications where we’re doing the small and medium business. 

We’ve just put a new product into the market here called Digital Business that actually provides all the services which we charge for around the edge. There’s no reason we couldn’t take that into Asia as well. In terms of what we’re doing in media, we are quite good at aggregating content and distributing the T-Box could be something we take into Asia as well. 

So, when you actually start to look at some of the things we’ve done in the last two years, there’s a natural extension to take them even further. And I think that we will, but we’ve just got to get the foundations here, learn, and then move forward from there.

RG: Can I sell you Channel Nine or Channel Ten?

DT: Not today, thanks, Robert. Actually perhaps only today. It depends what happened there today.

RG: You almost bought Nine and you could have bought Fairfax way back. In your boardroom discussions, are these things seriously talked about now?

DT: The short answer is they are always talked about. Are they seriously considered? No, because we currently don’t believe that we’re a free to air operator. What we are is a network operator that can move to value added services – and we like aggregating content. But actually running a media company? I mean that’s not our core capability. 

RG: You’ve close to it at Foxtel.

DT: Yeah, but remember why we are in Foxtel. Because we built the cable network and that was the deal. We got 50 per cent of the company because we built the cable network, not because we had great entertainment media skills. So yes, we’ve built some over time, but when we start the media division it’s more about how we leverage content; for example, AFL content rights, we’ve been able to render those onto the iPad very easily. So the value creation is that it’s not the content creation, it’s about how we get it on the iPad to give people an experience on a multi spring environment. Quite hard to do. So that’s where we see the value creation opportunity, not in, you know, managing sports commentators and doing Home and Away or whatever.

AK: David, the government’s got $2-3 billion dollars in this year’s budget for spectrum auctions, so are you going to give part of your $11 billion back to the government in return for spectrum?

DT: I hadn’t quite thought of it that way. Look, the spectrum’s very important to us as we see the future of wireless. But as you would be aware that spectrum is not available until out to 2016, 2017, so in effect we’re buying for the future and the 702.4 gigahertz is very important because to get wireless networks going quickly, you need them to go. You need spectrum. So yes, we’ll be bidding and it’s very important and yes in effect I will be giving the money back, but I see it as an investment for the future.

AK: Well, but if you win the auction, you will, of course?

DT: Yes. That’s true. But I think I have to go to the auction.

AK: No, but do you think you have to win the auction?

DT: Yes. Look, well, remember there’s enough spectrum for for three operators and probably one more, so there’s enough spectrum for us all to get what we need, so it’s not like win and lose, it’s about how we share it. It’s more about getting access to the right spectrum. It’s a bit technical, but each one of us runs our network slightly differently and in general I don’t think there’ll be a lot of competition. There’ll be a bit, but it’ll be more about if one person takes the price up, they’ll expect everyone to go up to that price.

RG: You’re going to help solve the budget deficit problem, aren’t you?

DT: Well, I understand that there’s a bit of a challenge now.

RG: But you’ve got to pay by June 30?

DT: We do.

RG: Yes.

DT: Pay by June 30. And it is in forward estimates as well.

SB: David, on wireless, progressively as the fixed line network becomes less and less ongoing part of Telstra. The wireless becomes pivotal to your future.

DT: It does.

SB: A couple of years ago when iPhone 4 was released, that window between iPhone 4 and iPhone 5, last week, you put on a huge number of new customers, a lot of them taken off Vodafone, but Optus didn’t actually grow its customer base much in that period either. They’re all now starting to progressively come off contract. How do you expect Optus and Voda to respond? Do you expect a price war in wireless that undermines those nice margins and volumes that you’ve had?

DT: Well, I mean I can only go on what’s in the market today and the pricing has been rational, so if you look at the price points between Voda, Telstra and Optus today, we’re slightly more expensive, but not significantly. It’s about $4, $5 dollars. So, I think every operator around the world is trying to make sure that they get the right return on the capital invested for their network. So, I think we are all very conscious about charging a fair price and not letting it become a price war, however, I don’t know what either of my competitors will do next week, but at the moment it’s a pretty rational market. Now, all the data we’ve ever looked at around the world says three operating markets are very rational from a pricing perspective. Once you get to four and five is when you start to get behaviour that can be aberrant in terms of shareholder value.

RG: Are you keeping those people?

DT: Yes, we are. Yeah. There’s no question.

RG: So, they’re not getting it back?

DT: Sorry.

RG: They’re not taking it back off you?

DT: No. No. No. No.

RG: That’s when you can get very irrational.

DT: Our business is travelling well.

SB: Do you get a price premium? I notice mostly in marketing you stress the network quality and coverage as much as the pricing.

DT: Yeah, we do and I think. We want to be a differentiated player. We don’t want to just compete on price. We want to be competitive, but not just compete on price. And the network is different. I mean it’s the biggest 4G network in Australia. It’s covering now 40 per cent of the country. We’ve taken it to 60 per cent of the country. The actual core network itself is twice as big as our nearest competitor. So, it is a very good network. Back to Robert’s point, it’s a legacy I inherited, but I’m trying to maintain as I go forward. So, we think it deserves the premium, but also our service has got to be good as well and that’s, as you know, part of what we do.

AK: David, we’ve been talking for 20 minutes without mentioning Sensis . Now, there was a time when Sensis was important for Telstra and you get the feeling that it’s not important anymore. In fact, does it have a place in the future of Telstra? I mean, is it just a matter of milking it for revenue while it runs down as a business or what?

DT: Alan, Sensis is important to us, but if you ask that question a little bit differently and if someone had offered me six or seven times EBITDA for it, I would have said thank you very much, you can have it because it’s not core to our future, however, it is now because we’ve got to get it going back to where we need it to be.

AK: Yeah, but is that even possible though?

DT: We think so. Yeah, we do. We do.

AK: We’ll leave it there. Thanks very much, David.

DT: Thanks, Alan.

SB: Thanks, David.

DT: Good to see you.

See the full video inteview here.

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