In February 2004 we announced a $365 million profit for the second half of 2003, and a lift in the dividend from 5 cents to 7.5 cents a quarter. (These days, a few short years later, Telecom doesn’t make much more profit than this in a whole year.) The financial result was 21 per cent up on the previous corresponding period and was buoyed by a $28 million part-payment from the sale of Telecom’s 12 per cent stake in SKY Television. Broadband (Jetstream) customers had nearly doubled, to 90,000 from 54,000 the year before, and the rate of people converting from dial-up internet to broadband was also doubling.
The share price rocketed up all year, helped by the Commerce Commission’s decision not to recommend unbundling to the government. We and our competitors then spent the early part of 2004 lobbying the government, especially the then Minister of Communications, Paul Swain, to make a decision on actioning the Commission’s recommendation.
I personally spent hours on this. I met with the minister to see if there was any way that we could get official or unofficial government to be drawn. He felt it was improper for the government to look anything other than ‘hands off’ in the matter. Given that the review of unbundling had become about how to get broadband out to more people more quickly, although the original focus had been more about fostering competition, I also wrote to the minister setting out our commitment to a goal of 250,000 households with broadband by the end of 2005, along with our view that a third of our projected growth in broadband would come from other players acting as wholesalers or resellers of Telecom’s products.
However, the Ministry of Economic Development officials who advise the minister did not agree with Douglas Webb’s recommendation not to unbundle and wanted to send the matter back for review. We discussed the issue with Treasury officials and officials in the Prime Minister’s department and got the feeling from Treasury that they believed the right thing to do was to support the Commission. However, it was very hard to read where the Prime Minister’s department had landed. I widely canvassed many cabinet ministers on the topic. I believed that Paul Swain himself supported his officials’ view that the matter should be sent back for review but it went to Cabinet, and after some debate the government adopted the Commerce Commission’s recommendation. At no stage did the government respond to my letter to Paul Swain about the broadband target, directly or indirectly.
We put in place marketing programmes to try to lift our broadband take-up rate so that we could achieve the 250,000 household target. Many people in the company were uncomfortable with what seemed like such an audacious target given our current broadband customer base, and felt that we would be strongly criticised if we did not reach it. On the other hand, many saw it as a challenge and found it motivating and invigorating. As at January 2004 we had achieved 85 per cent broadband coverage of New Zealand, and through our deal with BCL had a goal of 95 per cent by January 2005.
Throughout this period when the government was deliberating and deciding what to do, we could not believe some of the commentary from financial analysts: ‘Regulator in your pocket — upgrade to buy’, screamed one report.18 Did these people think that officials, regulators and ministers didn’t read this stuff, only offshore investors?
As part of the intense lobbying by all sides, in early February 2004, TelstraClear, Slingshot and ihug got going on the ‘Call For Change’ campaign in favour of greater regulation of Telecom. I thought that TelstraClear’s regulatory doublespeak was breathtaking, as at the same time its parent company Telstra, across the ditch in Australia, dropped its retail broadband prices below the wholesale levels it charged its competitors, such as AAPT. The Australian media talked about the oestrogen-charged world of New Zealand telcos and called Rosemary Howard ‘Thelma’ to my ‘Louise’. Indeed, between Rosemary, myself and Annette Presley, the co-owner and figurehead for Call Plus/Slingshot, I guess it was pretty oestrogen heavy! As part of TelstraClear’s lobbying, Rosemary said that if the government had adopted local-loop unbundling Telstra would have spent hundreds of millions of dollars extending its existing broadband network in New Zealand. (A few years later the government did implement unbundling, and have we seen hundreds of millions of dollars of extra investment from Telstra in New Zealand? Of course not.)
I think ultimately the government decided that if they’d sent the Commerce Commission’s recommendation back for review there would have been further delay, and that some ministers were concerned to be seen to be supporting the Commission. After all, it had been investigating the subject rigorously for the previous 12 months. Indeed, one commentator who endorsed the government’s decision asked why it would have a regulator to conduct reviews if it was going to ignore its recommendations, and that to have rejected Douglas’s recommendation would have undermined the standing of the Commerce Commission in future regulatory decisions.
There was much to-do some time later about lobbying by Telecom when the letter I’d written to Paul Swain was made public. This rather overlooked the fact that all the telcos had been lobbying the minister at that time, and that there had long been bilateral communication and commitment between the government and Telecom. Indeed, the Kiwi Share had never been enshrined in legislation: it had always been a bilateral agreement between the Crown and Telecom, which we had agreed to update in 2000 to include basic internet access. My letter may have had some effect on the final decision, although I think that the bigger picture was that the government was keen to get momentum on broadband. They had appointed an expert to make a recommendation, and he’d made it. The arguments for and against unbundling by the various submitters were pretty evenly balanced, and they didn’t want to send the matter back for another six months’ review. It was time to get on with it.
About this same time, along with our partner BCL, we picked up several regions as part of the government’s regional broadband project Probe. The focus of Probe was delivering broadband access to all of the country’s 2700 schools, and thus their local communities, by the second quarter of 2005. Ultimately Telecom was awarded 11 out of 14 of the regions, with smaller players winning the other three. (TelstraClear didn’t bid for any of the regions.) At the time we were pleased about this, but it probably contributed to the perspective that there wasn’t enough competition in the broadband market.
Early in 2004 I decided it was time to do something Telecom hadn’t done for a long time: stage a roadshow for retail investors around New Zealand. We spent a lot of time talking to fund managers and potential new institutional investors overseas, and I had long been of the view that it was a real problem that only 25 per cent of Telecom was owned by New Zealanders. I felt there weren’t enough New Zealanders with a stake in the company’s strong financial performance compared to the situation with the more broad-based sale of tranches of Telstra stock in Australia. So I hopped in a car with Mark Flesher, head of investor relations, and John Goulter, head of communications, and we drove from north to south telling the Telecom story.
It was great fun. I’ve always loved getting out and about around New Zealand. Every part of the country has its own charm, from the beautiful beaches of the North Island to the majestic mountains of the South. And it reminded me again that people who live in different parts of New Zealand do see things differently. The roadshow itself, however, was mainly preaching to the converted, i.e. people who already had shares in the company. It didn’t make a material difference to getting more local investment in the company.
I also had many interactions with ministers during those months, either formally or informally, some due to being on the government’s Growth and Innovation Advisory Board, some due to functions I hosted or attended, and some due to Telecom specifically requesting meetings. There were plenty of opportunities for ministers to give me any direct messages had they so desired.
It was in March 2004 that I first met John Key, then National Party communications spokesperson. I was immediately struck by his grasp of the issues, his appreciation of where a normal, non-technical person would come from, and his easy and relaxed manner — all hallmarks which would play out on the national stage in New Zealand over the following few years.
Also in March I made a quick trip to Hong Kong to present at a huge Credit Suisse First Boston investor conference. Those conferences were always hard work — sitting in a small conference room all day meeting different groups of investors, one after another, but my message that we would be focused on managing the business as it was, rather than aggressively trying to grow, was well received.
An area where we did see potential to both grow and to support our customers better was the IT market. In June 2004 we bought the IT integration company Gen-i and, in July, Computerland. Pip Greenwood, a partner at law firm Russell McVeagh and part of the team acting for us on the purchase, called me late on the night of the negotiations to say she thought Gen-i was closer to doing a deal with another party than to doing one with us. I immediately instructed the Telecom team to finalise the transaction as soon as possible and we completed the deal. We combined the businesses with the existing Telecom IT division (Telecom Advanced Solutions) under the Gen-i name.
At the time, the team in Telecom Advanced Solutions assumed that when we’d bought Gen-i and Computerland we would absorb them and go forward under the Telecom brand name. However, I believed it would be much more powerful to retain the Gen-i brand. I felt some people might struggle to give their telecommunications and IT business to one organisation, and I thought a separate brand would aid the perception of Telecom’s reach spreading into IT, and also make that team feel like they were pursuing a new frontier.
Over time this came to be seen as the right call. It was a tricky balance though, because Telecom New Zealand wasn’t the only telco that believed the future lay in the IT space. Other telcos around the world had tried and largely failed to make that shift, with some very spectacular failures, such as the AT& T–BT Concert alliance.
It is hard to merge the culture of a telco sales force with an IT services company. For customers, telecommunications is all about total reliability, while IT is all about flexibility. Customers expect a telecommunications company running IT services to have that same high degree of reliability but still be able to customise — quite a hard balance to achieve. It was quite a painful birth, but one aided by the committed leadership of both Mark Ratcliffe as chief information officer and chief operating officer Simon Moutter, who together role-modelled the need to have a culture shift that brought together the best of both the telco sales perspective and the IT services perspective.
Industry commentators were sceptical when we bought Gen-i and Computerland, but by 2006 we were the number one IT player in New Zealand as measured by the IDC Asia Pacific IT Services Tracker survey, a position that has been maintained since. Interestingly, it was never much commented upon that Telecom went on to secure some of the biggest customer wins in New Zealand in the IT space.
During this period we were running a process of appointing two more directors for the Telecom board, both of whom could potentially be chairman when Roderick Deane decided to finish. I was with a colleague early in 2004 when they were called by Wayne Boyd about matters to do with Auckland International Airport, of which he was chair. I’d never met Wayne, so I checked with Mark Verbiest, Telecom’s group general counsel, who knew him and regarded him highly. At that stage he wasn’t on the list of names that the recruiter had prepared for the board so I asked that he be added to the list. He made the shortlist, became a director and the rest, as they say, is history. When Roderick left Telecom in June 2006, Wayne became chairman, after having been on the board for the previous couple of years. A lawyer by training, Wayne had a background in both law and merchant banking and was a professional company director. At the time he became chairman of Telecom he was also chairman of Meridian Energy, Freightways and Auckland International Airport.
Given the high, and rising, proportion of Australian investors in Telecom, we’d started doing at least one results announcement a year in Sydney. Having a stronger presence in Australia, positive momentum, and the sheer novelty of a female CEO meant that Telecom got lots of coverage in the Australian media, largely positive. With the exception of Gail Kelly, then chief executive of St George Bank, hardly any Australian women headed up large publicly listed companies, but interestingly the media, especially the Australian Financial Review, often covered matters to do with corporate women. I received a fair amount of coverage, overwhelmingly positive, and was often asked to speak to businesswomen’s groups in Australia. Over the years I was also a very regular speaker at Trans-Tasman Business Circle lunches in Sydney and Melbourne.
We presented our results for the quarter to March in Australia in May 2004, and one analyst from Macquarie’s reported that revenue performance was so good it was hard to believe. Acquisitions were by now clearly on the back burner. I believe that grand acquisitions often lead to grand write-downs and said so. The quarterly result of a 17.8 per cent increase in tax-paid profits to $232 million was better than most analysts had predicted, and there’s no doubt at that point that we were riding a real high. Being a CEO is a stimulating, interesting job and there’s no greater feeling than when your company is going well.
Also in May 2004 I attended the first trans-Tasman Leadership Forum at Government House in Wellington. A high-powered group of Australian and New Zealand businesspeople and politicians gathered to generate a shared agenda to both countries’ mutual benefit. This first forum made only modest steps towards this, although some progress has been made since.
On a lighter note, in July 2004 I hosted Helen Clark at the opening of the Telecom-sponsored International Film Festival in Auckland. The film was The Motorcycle Diaries, the story of a trip by Che Guevara and Alberto Granado through Latin America in 1952. A little piece in the Herald19 noted that it would be hard to imagine a person less likely to flirt with political revolutionary chic than me, which made me laugh because it was probably true.