ATUG analyst calls for financial realism in telco industry

Highlighting a lack of institutional investment in listed Australian telecommunications companies, BBY telecommunications analyst Mark McDonnell blamed a persistent deflationary market of falling prices and profits.

Meanwhile, he said, the legal and regulatory framework that currently governs the telecommunications industry has yet to be updated to cope with today's problems.

While issues of 20 years ago revolved around high STD and local call rates, low access charges, and what McDonnell called "a bloated, inefficient, government-owned monopolist", the environment has changed.

Telecommunications incumbent Telstra is no longer a government-owned monopolist, but a listed private sector carrier that now services less than half of the mobile and broadband market, McDonnell said.

"When I say the industry has changed, I'm not talking about subtle shifts or mere changes of degree," he said. "The change that has occurred in this industry is profound and fundamentally transforming."

"We are not in a high-growth environment anymore. We are in a low-growth one, where both competition and regulation have combined to create one of the most persistently deflationary markets in any sector of the Australian economy."

"This is why the dominating question for the industry today is not how to deal with a bloated, inefficient, government-owned monopolist. The new dominating question is: how do we get more investment?"

McDonnell listed Telstra, Singtel and Telecom New Zealand as the only three carriers with operations in Australia to be attracting investment. However, he pointed out that Singtel and Telecom New Zealand are both dual-listed companies with most shareholders based off-shore.

Worse, both Singtel and Telecom New Zealand have recently been under pressure from their investors regarding the diminishing value of their respective holdings in Australia: Optus and AAPT.

Calling for an infusion of realism in recent discussions of a new high-speed network to service Australian homes, McDonnell pointed out differences in levels of demand between the Australian industry and the overseas markets to which it is often compared.

"Much of the political agenda appears to be driven by international comparisons on rates and service penetration, comparative speeds and the like," he said, "[but] the single minded supply-side focus ignores the different levels of demand that surfaces in different economies."

"Investors need a dispassionate and objective assessment of real demand and not a simplistic exercise in wishful thinking of the 'build it and they will come' variety," he said.

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