Ask around among corporate middle managers anywhere in New Zealand, and chances are you’ll discover they’ve done time at the company we used to know as Telecom.
Unloved since privatisation in 1990, the telephonic behemoth hid for some years behind Spot the loveable dog, underperformed as a share, and took terrible hits from the Labour Government in the mid-2000s, when none other than Telecommunications Minister David Cunliffe had a gutsful of the way Telecom maintained its dominance.
For years, it endured being described as a monopoly, even as a host of new services, all of them attracting competitors, appeared on the scene.
“The late 2000s were surreal,” says Rod Snodgrass, who resists being tagged an old Telecom lag although his on-and-off history with the company goes back to establishing the Xtra ISP back in 1994.
“A whole lot of industry value was destroyed.”
It took the structural separation of Telecom’s competitive bits from the regulated infrastructure unit, Chorus, to get things back on an even keel, says Snodgrass, who is heading up what's now Spark Digital Ventures – the smallest, but grooviest part of the company.
“We’ve come out on the right side of it and are looking to a really exciting next few years.”
Tell that to Chorus, left behind to be today’s political whipping boy. The backbone provider of the copper wires that make the national telecommunications system work, and builder of the majority of the ultra-fast broadband fibre network, Chorus continues to be beset with regulatory and commercial challenges.
But Spark roams free – a smaller, but still powerful player in the emerging market for digital services of all kinds.
Now it’s time for Spot’s creator to change its own spots.
But can such a transformation really be achieved?
“It’s a lot harder for a big company to become a successful, lean, smaller company that is more specialised,” says Dr Tomas Chamorro-Premuzic, a corporate leadership guru from University College, London, who happened to breeze through New Zealand recently.
A consultant to corporations seeking entrepreneurial talent, he has consulted on telco rejuvenations and says there “aren’t many successful case studies”.
“To be effective, they need to be cultural changes. To change a culture is not something you can do that quickly.
“The questions they need to ask are: ‘Is there vision? Can you switch from what was before and what is now? Who are you going to retain and who are you going to let go?’”
Spark chief executive Simon Moutter gives a nervous laugh when hit with the suggestion that it needs a clean-out. “We’ve had a lot of people change,” he says. “I think you could confidently say in the last two years we’ve had a pretty big injection of new blood and spirit into our business in the process of all those changes.”
Staff polling shows stronger engagement, faster decision-making, and a number of initiatives being run in parallel and successfully executed today that would not have happened in the “old” company, Moutter says.
He should know. He worked there from 1999 to 2008 under previous CEOs Theresa Gattung and Paul Reynolds, before taking off to make his mark at Auckland International Airport from 2008 to 2012.
He returned to the demerged Telecom with a brief to “win the future”.
He’d argue he’s already started, slashing mobile and broadband costs to meet the market and gaining a net 108,000 new mobile customers in the last financial year – the first increase in mobile customer share in a decade.
He’s seen the future is in the cloud and so in April last year Telecom bought cloud service provider Revera for $96.5m, although that company retains its own identity after the Spark rebrand. And the old Gen-i brand has become Spark Digital Solutions.
Meanwhile, the company bought more and paid more than any of its competitors for mobile spectrum in the recent 700 MHz auction, as it prepares to entrench its position in fast mobile internet with the emergence of 4G and LTE – so-called 5G services.
Anticipating the rise of the “internet of things”, investment is going into a globally commonplace platform, Jasper, to enable machines to talk to one another easily, Moutter says.
He’s also established the low-cost Skinny mobile brand, aimed at young users who can be upsold to more profitable packages later, and Bigpipe, a naked broadband service.
Then there’s the “big data” interpretation service, Qrious, and at the same time the division is dabbling in mobile healthcare monitoring and traffic management products.
But the most high-profile proof that Spark is in and Telecom is out also sits in the Digital Ventures unit – the country’s first internet TV service, which launched in June.
Siloes are good
On top of these changes, Moutter is seeking to break the old Telecom culture by insisting that divisions work more autonomously.
“We would, in the past – and I was there, so I’m not criticising – have a lot of controls over everything,” says Moutter. “A lot of consensus-based decision-making, which arises from being a very complex business.”
But consensus decision-making processes “don’t land,” Moutter says.
“You’re always waiting for the perfect answer but in the end the perfect answer just doesn’t exist. I think we have succeeded over the last year and a bit in freeing the organisation up for people to do their jobs.
“At the moment, siloes are good.”
Moutter knows that’s heretical talk and acknowledges the occasional bit of “collateral damage” along the way. “But that’s a lot less than the damage of being a slow follower and a poor market performer.”
Nor are the strict separations likely to be permanent.
“I’ve been running big businesses for 20-something years,” says Moutter, who backs himself to know that organisational change is mostly cyclical.
“You centralise and get some improvements, then you decentralise and get some improvements. There are lots of different ways you can run. There are lots of cultures that can work and organisations need renewal every few years to suit the times.”
As to the level of risk he’s assuming with any of Spark’s new initiatives: “I can say very proudly, there’s not a single thing in our strategy we thought up. It is all copied.”
Not so plain old, but the phone system still matters
It would be easy to forget that beneath all the shiny stuff lies a business, most of which was already there, and all of which still has to make money.
That makes Spark’s first full year profit announcement under its new name, due on August 22, especially important. Institutional investors were disappointed with the weakness of first half earnings and were only encouraged to keep the faith because Moutter talks a good game on future strategy.
While internet TV (IPTV) and the love-em-or-hate-em Giganaire ads may attract the headlines, the fact remains that Spark’s single largest revenue source is still in fixed line services based on a copper wire network – the kind that end up with an old-fashioned phone and somebody’s Grandad ringing the Spark call centre to ask if his PC “has Google in it”. A true story.
The point is that those fixed line revenues are tumbling, from a bit over $2 billion in the 2013 financial year to a forecast $1.5b in 2016, Deutsche Bank figures suggest.
And while Moutter can be rightly pleased at the turnaround in mobile connections, forecast growth in mobile revenues from $921m last year to a shade over $1b in 2016 doesn’t make up the difference in lost revenues from fixed line services.
At the same time, charges for broadband and long distances calls continue to drop and be eroded by competitors, while the company remains committed to spending the thick end of $500m a year on infrastructure. That’s about half what it spent when Chorus was still in the fold, but Spark will still be the largest telco investor in the New Zealand market.
Revenue from hotly contested IT and cloud services, through Spark Digital Solutions, Revera and Bigpipe are forecast to be relatively static, growing from $530m last year to perhaps $567m by the end of 2016.
And while IPTV will gain public notice, it will take five to seven years at least to start making positive contributions to earnings.
The upshot of all that? Put simply, what will save Spark’s profits from being a damp squib over the next few years will be ensuring operating costs fall faster than revenue.
Deutsche Bank analyst Arie Dekker forecasts total revenues will fall by an average 4.1% a year for the next three years, while costs of operation should drop at an average 5.7% annual rate between 2014 and 2016.
Luckily earnings remain underpinned by larger dividends than previously anticipated from Telecom's 50% interest in the trans-Pacific cable, Southern Cross.
A big chunk of the lower costs comes from the “re-engineering programme” that Moutter has embarked on to get cost – which includes people – out of the business. This is expected to be worth $200m-$300m annually.
So, while Spark’s full year operating earnings (ebitda) are expected to fall to $917m this financial year, they should bounce back to around $968m in 2015.
In other words, this is a story of a shrinking company improving its returns on a combination of lower prices (to meet the market) being more than matched by lower expenses, with upside created from a combination of regaining market share and growing earnings from new business lines as yet unproven.
So what about the shiny new stuff?
Placed in the context of a business that turns over $4b-plus a year, the $20m cost of rebranding to Spark is neither here nor there. It only just counts as a material item for financial reporting.
Nonetheless, Moutter reckons it’s an opportunity whose time has come.
“France Telecom is called Orange today. British Telecom mobile is O2. The big broadband provider in Europe is called Free.”
So changing from Telecom – a name associated with telephones and locked in the past – was always inevitable. The catalyst for moving now is the visible progress in the move to become “a digital services business”.
Spark also seeks to be a humbler, friendlier positioning.
“We’re not the incumbent anymore. We’re second in market share in mobile (behind Vodafone), and we’re at 50% in broadband, not 100%. It’s time to get over the idea that we are operating some process where our returns are better by trying to maintain high prices – so we brought our prices down dramatically across the board to meet the market.”
That’s put Spark back in the game and, competitors note, it’s becoming more savvy about pushing those prices where it can. Skinny, for example, quietly pushed its lowest-in-market price per minute for voice calls from 40c to 43c earlier this year.
That’s consistent with a new discipline in marketing teams, which now meet every morning to review competitor offers, and check market performance. The aim is to respond to new developments in no more than 24 hours.
In “old Telecom”, marketing was more backward-looking, and based on monthly reviews.
In the broadband market, Moutter led a “big reset which bottomed out the whole market at around the $75 bundle price point”. More recently, Spark has rolled out uncapped broadband data plans and added free Spotify and nationwide wi-fi hotspots. Then there is fibre-enabled broadband. Moutter suggests the fuss over the regulated price of copper wire versus fibre is overstated.
“Fibre is a better product. It’s perfectly saleable today and I don’t think it matters where copper pricing is. The only thing holding us up in fibre is Chorus’s ability to deploy it,” he says, with another nervous laugh. “Making it much less hassle to get connected is the biggest single thing that could make a difference.”
Peter Wise, IDC’s telco research director in New Zealand and, typically, a former head of strategy for Telecom Wholesale, reckons fibre is one of the biggest challenges for the next five years.
“Everyone’s going to reconfigure to a fibre future as they did from dial-up to broadband,” he says. “[Telecom is] a bit hehind some of the smaller players”.
One of the services fibre will make possible is TV over the internet, which is where Spark Digital Ventures comes in.
Like the rebrand, Rod Snodgrass’s division is operating on an immaterial annual budget (less than $20m) to develop a range of new initiatives, of which IPTV is simply the most visible.
Chamorro-Premuzic, the UK-based leadership guru, says all big technology businesses today are investing in gambles on the future, partly for brand definition and partly because they all know their market position today is unlikely to last unless they keep innovating.
“You hear about Google Glass and Drive and you know that most of these things will fail and won’t make Google a lot of money, but it’s very good marketing, very good PR, and they can afford to channel resources from the stuff that’s working to the stuff that might work.”
They can also make a big corporate seem a more interesting place to work.
For Snodgrass, who could really do with a funkier surname as he helps lead the revolution to a more engaging, younger brand, the task is to create as close to a start-up culture as a big business can muster. In pep-talks he’s been giving to customer audiences in recent times, The Snod (a rebranding suggestion there, Rod) encourages staff to think: “What would Telecom do?” and then try to do the opposite.
After giving him permission to cherry-pick staff from old Telecom in his first month on the job, Moutter then insisted further hires come from outside the business. That suited Snodgrass, who went off and poached some locals – from small-scale rival Orcon, for example – as well as picking up a few smart international hires from the US, Europe and Asia. He also returned some of his original budget on the grounds that start-ups do better when starved of capital.
Snodgrass' approach is full of entrepreneurial jargon about being willing to “fail fast”, “no water-falling” in decision-making processes, and a mandate from Moutter to “presume permission and seek forgiveness”.
His team backs Wellington’s Lightning Lab start-up accelerator programme, participates in IT geek “hack” events, and is looking for a distinctly new range of skills. A “venture board” oversees investment opportunities.
Snodgrass’s biggest challenge, because it will be Spark’s most visible new initiative, is rolling out an internet television service that will seek its place in a market dominated by Sky Television and free-to-air TV broadcasting.
By the time you read this, you’ll know what the offering is, what the name of the service is, and whether it contains enough compelling content to make you a subscriber. Snodgrass expects it to be a complementary offering to sit alongside other TV options.
Some 5,000 hours of content is envisaged from day one, including English Premier League games. But industry watchers say the new service will struggle to win big gigs like All Blacks tests, where owners are likely to want guaranteed eyeballs more than eye-watering cheques from a newcomer.
For Moutter, the TV gambit marks a particularly sweet milestone. For most of his Telecom career he worked for the big telco New Zealanders loved to hate; a telco which traditionally grew into new markets by acquiring existing players.
“We’re on the right side of disruption for the first time in our history on this one,” he says. “We’re coming with a new model, so there isn’t anything to buy.
“The only things to bring in are the skills and capabilities.”
That meant going to the US to find content buyers who understood a market Telecom has never tangled with. Moutter doesn’t see Spark creating its own content, although Snodgrass can imagine co-creation further down the track.
IPTV is no more than Spark entering “a logical adjacent market,” Snodgrass says.
For employees at TVNZ, that adjacency couldn’t be much greater. The financially challenged state-owned broadcaster has moved much of its operation out of its old Auckland headquarters to make way for the Sky City convention centre. In an ironic twist, their new offices, a stone’s throw away, are joined by a foyer to the atrium at the heart of Spark’s new headquarters.
If Moutter fails to transform old Telecom into a new, more profitable Spark with a healthier future, does it matter?
“I don’t know much about this case,” says Chamorro-Premuzic. “It’s rare a CEO suffers when a business goes down. If they really fail, they go on the speaking circuit and pick up cheques for 50 or 100 grand for telling people what they shouldn’t do.
“Once you get to the level of CEO, it’s like getting to president or prime minister. Unless you get sent to prison, which is unlikely, you will be fine.
Moutter, however, is more sanguine about his chances. For a start, he’s not so sure the transformation is as huge as it’s billed. And he says there’s already evidence of successful market repositioning, if not yet the profitability it’s intended should follow.
Secondly, he believes the pendulum is swinging back in favour of the network owner after a decade in which consumers were encouraged to leave, driven in part by the rise of cloud computing.
“For most customers, they’re still very reliant on their provider of broadband and mobile for an awful lot of help.
“You can see that borne out in our Tech in a Sec ads. People who’ve got a bit of savvy think they’re silly, but a hundred thousand people go and watch those videos.”
Whereas value moved away rapidly from telcos for a while, “my instincts today are that value is coming back to the network. Today, if you want a high quality, managed service through the internet, you need our help,” he says.
As cloud services develop, that’s likely to become even more the case.
That insight was at the heart of the Telecom board’s decision on reviewing post-demerger strategy.
“Just being there with a pipe and saying ‘go for your life’ was probably not the best way to unleash New Zealand’s potential,” Moutter says. “We chose deliberately to be a retailer of digital services in both the company’s and customers’ interests.
“We also felt there was more upside in the long run. It’s a much harder strategy to execute, but a higher value strategy because you’re more valuable to the customer, where you’re instrumental to the service, not just the pipe.” ⋅