Telstra Swings The Axe, But Are They Next On The Chopping Block?

We’ve got quite the shakeup on our hands, folks.

On Wednesday we got the news which experts have been predicting for a while now. Telstra decided to swing the axe once more. But the difference this time is that it was done with a decisive twist.

More on that in a moment.

First we have to address the headline issue, namely the job cuts. All 8,000 of them…

It’s a pretty heft number — a quarter of the company’s entire workforce, in fact. It won’t just be bottom of the rung staff, either. A quarter of all middle-management roles are apparently on the chopping block. That’s a cost-cutting measure which will plug a $1 billion leak.

But, while the figure is impressive, it isn’t the real story here. This is a strategic move to pivot Telstra in an entirely new direction.

This vision, labelled Telstra2022, is possibly Telstra’s last roll of the dice…a final gambit to try and spark some life in the company.

It’s a shakeup that will trim the fat, but also lead to new opportunities. So, we can expect plenty of changes and plenty of new ideas from Telstra. That’s what upper-management is pitching us anyway,

We have worked hard preparing Telstra for this market dynamic while ensuring we did not act precipitously. However, we are now at a tipping point where we must act more boldly if we are to continue to be the nation’s leading telecommunications company.

Now I can’t attest to the ‘worked hard’ declaration, but I can tell you they’re going to have to work harder now. And not just because they’ve got less staff to work with.

Telstra needs something big. They need a plan that will dig them out of the very deep hole they’re in. Or, as the wise Chief Wiggum bluntly put it:

No, no. Dig up, stupid!

Two is better than one

That ‘something big’ could in fact be a big split…a plan to create two companies instead of one. Telstra wants to separate themselves completely from the infrastructure arm of the business.

This means that now, instead of just Telstra, we’ll also have InfraCo. A division that will house their fixed networks, data centres, fibre, copper, hybrid fibre coaxial and subsea cable, exchanges, poles, ducts, pipes…

Basically, any infrastructure not mobile-related will be handled by InfraCo. Which in theory seems fine. By creating a separate entity, they can manage these assets better…right?

After all, InfraCo will have a book value of roughly $11 billion — a company that brings in about $5.5 billion in revenue per year. It’s not some measly department worth pennies.

Here’s the kicker, though… InfraCo is already being teased to the market. The spinoff will provide ‘future optionality for a demerger or the entry of a strategic investor’.

Read into that what you will, but to me, it speaks volumes. It tells me that Telstra has finally realised they don’t want to deal with the fixed-line networks anymore. To me, it says that Telstra’s future is mobile.

By all means, that’s not a bad move. Mobile is definitely still a growth market for telcos. However, potentially selling off their fixed network seems odd…to me, at least.

I have no doubt that this is a reaction to the NBN deal in 2011 — back when Telstra handed over control to what was, and still is, Australia’s largest fixed-line network. It’s the deal that turned Telstra from a supplier to a buyer.

Essentially, now the NBN Co (read: government) owns our national internet infrastructure. It’s a re-nationalisation of sorts, if you will.

There are other networks that have been — or are in the process of being — built, but they don’t really compare. The scope of the NBN network is right there in the name: national.

Now, under this new Telstra2022 plan, Telstra may reduce their interest in this sector even more. That doesn’t necessarily mean NBN Co will get it, though. It could go to any entity, private or public. Or maybe Telstra simply remains in control…we don’t know.

But, like I said, to me the writing is on the wall. 

Cutting the cord

The key consideration, in my view, is where Telstra sees their future. Like I said, I think this new plan is all about mobile. I believe the company is probably looking to aggressively corner the 5G market — a strategy that fits perfectly into their timeline.

We know 5G tech will start rolling out worldwide sometime next year. So we can expect to see a slew of 5G-enabled phones hitting the market next year, as well. Namely from the big duo, Samsung and Apple.

That’s why 2022 gives Telstra some leeway. Three years to rollout the network alongside the uptake of 5G phones by consumers. Giving them a tilt at dominating the market early, and putting them in the driver’s seat.

Now that’s all fine and dandy, a move that I can support. But, it could also leave them exposed.

See, while 5G is the shiny new toy everyone wants, it won’t stay that way forever. Yes, having fixed-line speeds on a mobile network will be fantastic, but it won’t last.

The future is still going to need wires, I’m afraid.

Our data demands aren’t going to plateau at their current levels. We’re going to want more data, more often, and more quickly. In fact, new technologies — like virtual reality, augmented reality, AI and beyond — are going to need better internet.

Similarly connected or ‘smart’ cities are going to process volumes of data that are almost unfathomable. You can’t connect them to 5G — well you could, but everyone would be enjoying dial-up speeds.

Perhaps one day we’ll achieve a truly wireless society. A world where communication is possible without wires. But 5G, as amazing as it is, certainly can’t deliver that.

That’s why wires and wired services will still play a big role in the future. And if Telstra decides to sell those off, well, it may just hurt them a lot more than they think, in the long run.

Just like it did in 2011…

For the company’s sake, I hope they can recognise that, but I’m not holding my breath.


Ryan Clarkson-Ledward,
Editor, Tech Insider

Ryan Clarkson-Ledward is an Editor at Money Morning.

Ryan holds degrees in both communication and international business. He helps bring Money Morning readers the latest market updates, both locally and abroad. Ryan tackles all the issues investors need to know about that the mainstream media neglects.

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