Telstra Takes Aim

Sydney Morning Herald

Saturday October 27, 2007

Matt O'Sullivan

The telco's amigos are playing a high stakes game with the Federal Government on regulation but, as Matt O'Sullivan reports, the strategy could backfire spectacularly.

'What are my friends Sol and Phil doing now?" quips Tom Friedberg in a jocular American twang almost as soon as he hears a foreign accent on the other end of the phoneline.

The ex-United States telecom director turned consultant is referring to Sol Trujillo, the maverick chief executive guiding Telstra through its biggest upheaval, and his external headkicker and mouthpiece, Phil Burgess.

The best pals have astounded everyone since arriving in Australia almost in tandem more than two years ago. Not so much for their plans to transform Telstra from a branch of the public service, but for the unrelenting - and often personal - attacks aimed at changing the rules governing telecommunications. No one has been spared the Americans' spray, be they rival executives, competition regulators, senior politicians, industry chieftains or journalists.

The high-risk strategy has come at a cost. The lines between the ex-boss of the regional telecom US West and the Federal Government have been severed, leaving even senior Telstra confidants dumbfounded by the American management's desire to wage a political campaign right up to polling day.

"For someone whose tenure was predicated on political astuteness to get to the top of US West, it seems that he and his retainers are politically tone deaf," says Friedberg, a director at US West's cellular division in the early '90s who worked alongside Bill Stewart, another of Trujillo's mates ensconced at Telstra. "He might be fundamentally right from an investment point of view but he has played it wrong. And Phil is the sort of guy who likes throwing napalm on the misfire - it's almost like a Mad Max movie."

Telstra's multi-pronged fight to preserve its near monopoly is unprecedented in Australian corporate history - and, for that matter, almost unheard of in the US. Trujillo has given Burgess free rein to use almost any means at his disposal to rally shareholders and customers to Telstra's cause.

But where's the success? Telstra might have scored brownie points in elevating broadband to be a big irritant for the Government ahead of polling day, but it has failed in almost every regard to foist change upon it. Instead, it has left investors wondering what tools it has remaining to leverage deals in Canberra.

And should Labor win on November 24, will a Rudd government alter legislation to be more favourable to Telstra and its 1.6 million shareholders at the expense of 20 million consumers?

To date, Telstra's board has presented a united front at the behest of Donald McGauchie, its steely chairman and former confidant of the Prime Minister. But the cracks have started to emerge in recent months with the sudden resignation of director Belinda Hutchinson.

"It astounds me, privately," says an investment banker of Trujillo's strategy. "For Sol, 'This is just a war of attrition and we will fight as long as we have breath in our body'.'

A t first glance, Solomon Dennis Trujillo's emergence from obscurity in the outlying suburbs of Wyoming's capital, Cheyenne, reads like a rags-to-riches story. Records describe him growing up in the 1950s as a "white boy" whose father, Solomon M. Trujillo, worked as a truck driver for a house-moving company and as a railroad worker for Union Pacific. His mum, Theresa, toiled as a clerk and "assistant cashier" at a corner store. A pupil of St Mary's Catholic School, he went on to the University of Wyoming where he gained an MBA and met his future wife, Corine.

But it would take him more than two decades to climb the ladder at US West to become boss in 1998 and earn the title of "America's top Hispanic businessman".

The riches have flowed freely since, as he earned directorships on the boards of Bank of America and PepsiCo, the latter position explaining his penchant for Gatorade and PepsiMax and loathing of Coke.

Today, King Sol personifies the archetypal American businessman, earning the right to live the high life that has seen him circle the globe in corporate jets and dine at the finest hotels.

Although his tenure at the helm of US West Inc lasted less than two years, Trujillo did not hold back from lashing out at regulation before he sold the Baby Bell in 2000. From the headquarters at 18th and California streets in downtown Denver, he complained that regulation handcuffed the company while allowing rivals to "cream-skim" its best customers.

Now, almost a decade after calling for US regulators to "let the marketplace work", Trujillo is humming the same tune to a bemused audience on the other side of the world.

This time, Team Telstra is playing a more high-risk game, taking on a government and regulator in what analysts describe as a no-win battle. Its tactics range from polling shareholders and offering them tool kits for tips on calling talkback radio, to taking legal action against the Communications Minister, Helen Coonan.

"It is not an American thing," says Greg Bundy, a former Merrill Lynch heavyweight who set up the boutique corporate advisory firm InterFinancial.

"It's unprecedented in Australian and American corporate history. Even on Wall Street, which is heavily Republican, very few firms would come out publicly ... because you never know the outcome of an election."

Bundy, who worked on Wall Street for seven years, says that investors are raising questions privately about whether or not Telstra's board has "lost control of the situation".

He doubts the campaign will be successful in meeting Telstra's aims for regulatory concessions because, for a start, the company does not have "warm and fuzzy feelings" with its shareholders because of the share price. "I think people stopped rationalising this a while ago. This is a very high-risk strategy for Telstra."

Not that Burgess, at 68 the same age as the Prime Minister, has batted an eyelid at the reaction in the two years he has been the public face of Telstra's campaign. The Fulbright scholar merely intensified his attacks as the doors to ministers' offices slammed shut in his face not long after he arrived in late 2005, forcing Telstra to hire the services of high-profile lobbyists to keep the lines open.

Among the star recruits is David Quilty, a New Zealand-born ex-adviser to cabinet and to Richard Alston, the former communications minister who was largely responsible for the regulatory environment Telstra has fought so vigorously in the last two years.

Then there's Lynton Crosby. The hiring of the former Liberal Party campaign director regarded as the best-connected lobbyist in Canberra has baffled most.

After guiding the Coalition to election wins in 1998 and 2001, Crosby formed the research and polling consultancy Crosby/Textor with the Liberals' long-time pollster, Mark Textor.

More recently, Crosby/Textor worked behind the scenes on the British Tories' unsuccessful election campaign in 2005 and the National Party's narrow loss to a Labour-led coalition a year later in New Zealand. The political strategists shot to notoriety for introducing to the two campaigns so-called "dog-whistle politics", whereby politicians' messages are aimed at selected groups without offending others.

Connections pervade every aspect of life in the nation's capital. Quilty works out of Engineering House, a nondescript building about 15 minutes' walk from Parliament House. Across the hallway from his office on the second floor is Crosby/Textor's office.

Quilty's job has been to do what Burgess cannot - talk to the minister's advisers on almost a daily basis with help from Telstra's regulatory chief, Tony Warren - while Crosby worked on advising Telstra on publicising its campaign against regulation.

The latter's contract has been baffling because at the same time he was helping the campaign his partner, Mark Textor, had to brief the Prime Minister on countering such publicity. Not surprisingly given the impending election, Crosby/Textor's contract ended several months ago after, as Telstra said, it had "completed the work we asked them to do".

Early on in the strategising, Crosby told Telstra's team that broadband would be difficult to elevate to a vote-changing issue. The bottom line: voters would not be moved solely on the speed of access to the internet, but would respond to catchlines on economic prosperity.

Thus Burgess's resonant theme in the countless speeches he's made travelling from North Queensland to Tasmania has been to link broadband to the country's economic prosperity - something Labor seized on in March when it pledged to build a high-speed broadband network as part of a public-private partnership. For Labor, the underlying message has not been about broadband per se, but about creating the idea in voters' minds that it has strategies for ensuring a strong economy.

In recent months Telstra has taken another leaf out of the Crosby/Textor playbook. Burgess and his masters have repeatedly lambasted the Government for its decision to award an Opel consortium $958 million for broadband services in the bush because the lead company, Optus, is owned by Singapore Telecommunications, whose majority shareholder is the Singapore Government's investment arm. Thus the Telstra line: "foreign aid for Singapore".

And so the public rebukes against regulation have extended beyond the dais to the courtroom. In January Telstra launched a constitutional challenge against the competition regulator in the High Court, before gunning directly for Helen Coonan seven months later.

So far, the Communications Minister has successfully fended it off in the Federal Court. Telstra's attempt to gain secret government documents resulted in a judge giving it a public scolding for using the case to publicise its cause.

What the case has revealed, however, is the lengths Telstra is willing to go in its fight. An internal memo, sent to staff only days after Opel was announced as the winner for Broadband Connect in June, stated: "We are taking the view that so long as we have claims that are arguable and will not be 'laughed out of court', we should run them, even if prospects of success are not great."

To date, the legal action has served to reinforce its dismal track record. For all the bluster, Telstra has failed to win any major concessions from the Government since Trujillo arrived 28 months ago to steer the blue-chip telephone company.

"The real telling point is that Telstra has failed not just in terms of its political campaign but in its appeals on ACCC [Australian Competition and Consumer Commission] decisions and in its attempts with the Government to get any deals on changes to regulation," a BBY analyst, Mark McDonnell, says. "Far from making any real progress in its campaign, Telstra appears to be losing ground. They are on a hiding to nothing on this - it would be different if it was an issue that wasn't so manifestly self-interested."

What makes the campaign all the more bizarre is Telstra's direct links to the Liberal Party. As an insider mused, Telstra is one of the first ports of call for Liberal staffers seeking work elsewhere. In its media relations team alone, at least three of those authorised to speak publicly - including Rod Bruem (Trujillo's minder), Andrew Maiden and Jeremy Mitchell - have worked as advisers to either federal Liberal ministers or state premiers. Maiden's re{aac}sume{aac} includes a stint as NSW Young Liberals president in 1995-96.

Equally bemusing is the ideological position of Telstra's higher echelons. After all, McGauchie was once a close ally of the Prime Minister. The Bendigo blue-blood rose to national prominence in 1998 when, as president of the National Farmers Federation, he joined stevedoring boss Chris Corrigan in confronting the waterfront unions. Later that same year, he was rewarded with a position on Telstra's board and in March 2001 a seat at the Reserve Bank's top table.

Similarly, Trujillo's politics are aligned with the right. Back home in the well-heeled Rancho Santa Fe Valley, north of San Diego, the fine-chocolate aficionado is renowned as a major Republican donor and pal of three-time aspiring presidential hopeful John McCain.

In the race for the White House in 2000, Trujillo became the national finance committee chairman for the Arizona senator while US West was one of his top "career patrons". Seven years later, as the decorated Vietnam vet eyes the presidency again, Trujillo and a plethora of his mates, including Greg Winn, John Gonner, Tom Lamming and Andrew Klein, have made symbolic donations of $US2300 ($2558) each.

Four months after arriving at Telstra, Trujillo unveiled in Sydney in November 2005 his five-year grand plans for turning around a lumbering ship halfway through a privatisation process. His "stakes in the ground" included slashing the workforce by 12,000, doubling the revenue of its directories business Sensis to $3 billion and raising pre-tax earnings margins to between 50 and 52 per cent - something unprecedented within the global telecommunications industry.

Two years later, he's so far largely kept his end of the bargain. That is, apart from moving the goal posts in a key area of the transformation strategy: lowering the bar for pre-tax earning margins to between 46 and 48 per cent by 2010.

"He has done all the basics correctly in terms of the low-hanging fruit," says Justin Braitling, a funds manager at Wilson Asset Management who first met Trujillo at a conference in the late 1990s. "Strategically he is on the right path ... [but] it then becomes an execution issue. They are by no means out of the woods yet in terms of network re-engineering."

Never far from Trujillo's lips two years ago was regulation. Back then, Telstra blamed the rules for its pessimistic forecasts for declines in revenue from fixed-line services.

But the predictions have not rung true. BBY research shows forecasts for a $738 million fall in revenue for 2005-06 became, in reality, a drop of $519 million, while a year later Telstra was $420 million wide of the mark. More telling, the broker says the fall in revenues from Telstra's core business is a reflection of customers using other devices such as mobile phones rather than from the impact of regulation of phone charges.

"The case for a decline in [fixed-line] revenues due to regulatory intervention appears not to have been made," says BBY's McDonnell, who has previously worked as a management consultant and in the 1980s as a policy adviser to government. "The fact that few analysts in the market accept Telstra management's guidance is implicitly a further reflection on its credibility."

Of course, Telstra has come close to a major victory. In February, Trujillo and Coonan put aside their poisonous relationship to hold secret talks to reignite plans for Telstra to build a $4 billion-plus high-speed broadband network in Australia's largest cities. After that meeting Telstra, realising Coonan was desperate to seize the upper hand on an issue that was becoming a major irritant in an election year, left the daily negotiations in the trusty hands of Quilty and Warren.

But any deal faltered at the protestations over price of access to a network from Telstra's No. 1 enemy and the ACCC chairman, Graeme Samuel. "The talks went on and for weeks and we tried very hard to reach accommodation ... and it just became too risky for the whole competitive environment to go with what Telstra wanted and they became very difficult to negotiate with," Coonan told the Herald. "Once it gets to my way or the highway, that's not the way governments operate."

Today, the relationship between Telstra's chieftains and Coonan has reached its nadir. Neither side shies away from throwing verbal barbs at the other.

"It's disgraceful conduct that Telstra would risk their customers' interests to continue to ramp up this political game," Coonan says. "It seems to be characterised as some kind of American game that gets played trying to hijack the political process."

Before Trujillo arrived, she admits to warnings about what was to come. "It hasn't been very complimentary, some of the feedback from around the world ... and places Mr Trujillo has been," she says. "He didn't seem to leave a lot of fans behind - put it that way. You can only wonder if the same is going to happen in Australia."

All the while Telstra's chairman has backed his underlings. "I am not surprised that this is tough and sometimes it gets harder before it gets better," McGauchie told a Sydney business gathering in late July. "In Australia business people don't understand politicians and politicians don't understand business people nearly well enough."

That might be because of a fundamental difference between what Telstra and the Government want. The JPMorgan analyst Laurent Horrut says the company's ultimate goal is for higher prices and a "competitive return" from its investment, while Canberra seeks lower prices and higher broadband speeds.

Trujillo, who lists as one of his favourite books Andrew Grove's Only the Paranoid Survive, might be hoping he has extra reason to celebrate his 56th birthday this year, which falls just seven days before Australians go to the polls on November 24.

Burgess claims the ramping up of the campaign over the last 10 months has been a "huge success", boosting it from a subject that barely registered with the public to an election issue.

"Awareness is the first step; interest in the issue is the second step; willingness to entertain change ... is the third step, and change is the fourth," he says from New York, where he spent this week talking to the media.

"Three of the four steps of getting policy change have already been achieved."

The straight-talker, who lives in a swanky apartment in the exclusive Toaster at Circular Quay, says "fundamental change" of policy will eventually be achieved.

"We are here for the duration. We will get the reforms that are required to get a pro-investment, pro-consumer ... telecommunications environment - that is how we measure success," he says.

"The Telstra campaign will not end until we have a resolution of the fibre-to-the-node issue. What we are seeking is regulatory reform that will provide safeguards to shareholders when they invest $4 billion [on a new broadband network in the cities]."

But inescapable is the fact that Telstra cannot expect a Labor victory in four weeks to herald the beginning of a new era in telecommunications policy. The centrepiece of Labor's policy - an $8 billion fibre-optic broadband network in the cities as part of a public-private partnership - effectively proposes a form of re-nationalisation of the phone network.

Lindsay Tanner, a Labor frontbencher and former communications spokesman, has indicated Telstra will not be getting any free rides. "Nobody says we should be under any illusions that we have some differences of view with Telstra on some of the key issues," he said on CNBC this month.

The alternative, a Coalition victory, is sure to result in only a hardening of Canberra's stance towards Telstra. "At the end of the day they have burned so many bridges in Canberra and destroyed any goodwill," Justin Braitling says. "If it comes to the day when they need a favour, there aren't going to be too many handouts from Canberra."

As Don Gimbel, an American value investor who has been managing funds on behalf of Australians and Americans for four decades, says of Telstra's game plan: "It's like fighting with the boss's wife - does that make any sense?"

© 2007 Sydney Morning Herald

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