The true cost of communication

The telecommunications giant announced six-month revenues of $9.6 billion and a record half-year after tax profit of $2.1 billion. What those numbers do not indicate is that a massive shift is occurring in telecommunications, with the carrier revealing that for the first time ever the majority of its revenues came from "non-traditional business" including mobiles, data, text and the Internet.

Australians love to communicate.

In that half-year, the number of local calls made rose 1.6 per cent to 5.645 billion calls, or just over 300 calls for every Australian. Even faster growth in international calls shows we are increasingly communicating with the rest of the world. The number of international outgoing minutes soared 33 per cent to 451 million minutes and the international incoming minutes also rose, 26.1 per cent to 502 million minutes. But even more than yakking to mates down the road, and across the world, Australians like to talk to mates on the move. During those six months, the time spent on mobile phone calls soared 35.1 per cent to 2.123 billion minutes.

Telstra has 3.76 million mobile phone customers, so, according to the statistics, each one of them spent, on average, nine and a half hours on a mobile phone during the six-month period. Not surprisingly, this demand led to a significant hike in Telstra's revenues from mobiles, which increased 17.2 per cent to $1.45 billion, and now represents more than 15 per cent of Telstra's revenues. However, the margins on mobiles in this fiercely competed sector are under immense pressure.

The changing economics of telecommunications meant that even a 33 per cent increase in the amount of time Australians spent on the telephone to overseas could not arrest a slide in revenues from this activity. Telstra reported a 19 per cent plunge in international call revenue, to $483 million. It is in large part a side effect of telecommunications competition.

The remedy which Telstra has chosen to arrest any further impact on the bottom line is to cut costs in order to be able to compete more vigorously and, as CEO Dr Ziggy Switkowski puts it, to "transition from a phone company to a 21st century electronic information services company."

As part of that, Telstra plans to slice $650 million off its costs each year. This will in part be achieved by shedding 10,000 jobs through retrenchment; it will also strip 220 executives from its management layers; and if successful in selling off the so-called "pit and pipe" operations of Network Design Construction, another 6000 jobs will go. This was necessary, according to Dr Switkowski, to ensure that productivity and cost structures are efficient and in line with domestic and global benchmarks.

"Telstra's history in cost management is good, but the task is ongoing and a sharper urgency has emerged in the face of the deep price discounting evident in our market. Margin pressures in the traditional businesses are expected to continue as the new businesses mature. Major cost reductions will be necessary during this period of transition if Telstra is to achieve similar earnings growth as in recent years," said Dr Switkowski.

It is that last sentence which perhaps gives a clue to the ulterior motive behind the cuts - satisfying the shareholders, rather than delighting the customers.

Telecommunications analyst Paul Budde already believes Telstra is pushed to achieve its 21st century ambitions. In a research paper published earlier this year, he maintained that a slowdown in network investment when Frank Blount was Telstra's chief executive - as the company prepared its balance sheet for privatisation - means that even with the re-energising of the network development programme from mid-1999, it would take four years until Telstra's network is thoroughly prepared for the so-called "new age services".

With one in five Telstra employees now facing the axe, even 2004 seems optimistic.

Like many Australians, I am a shareholder in Telstra; I am also a customer of many of their services. Let me assure Dr Switkowski that delighting me as a customer is more important than satisfying me as a shareholder.

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