Qualiport

Telecoms problems down under

By Bruce Jackson (TMF Googly)

Melbourne, Australia -- The Qualiport reports will be coming to you from here for the next few weeks. Apart from being 11 hours ahead, I thought I'd be able to carry on my job as usual, the only difference being that it's a bit sunnier down here. Via the Internet, I can access many of the British newspapers, pick up my share quotes and basically keep abreast of current economic and stock market developments. I packed in my bag the annual reports of Glaxo Wellcome (GLXO) and Vodafone (VOD) -- both Qualiwatch companies -- which should enable me to learn more about these great companies and, more importantly, to place a valuation on them. Everything seemed hunky dory.

That was, until I tried to access the Internet from my parents' home. They have recently moved to a new house, and as we all know, that involves getting a new phone line installed. Sounds rather simple at the outset. Enter Telstra, the recently privatised Australian telecommunications monopoly. Well, they're not quite a monopoly, because you can connect to Optus -- part owned by Britian's Cable & Wireless (CW.) -- but as far as getting new lines installed, that comes under the jurisdiction of Telstra.

I'm a shareholder of Telstra, along with seemingly half of Australia. This was a very eagerly awaited privatisation, and heavily oversubscribed -- a classic Mum & Dad scramble. As with most government assets of Britain, this one was priced relatively attractively, and this added to the interest. The dash for telecommunications companies has not passed Australia by, and movement in the Telstra share price has made shareholders very happy. From a total purchase price of A$3.30 the shares now stand at around A$8.30. Not bad work if you can get it! Personally, I put it down to luck and not to some great stock picking skills that involved me identifying the next great growth area of the telecommunications industry.

Can you remember back to the early days of British Telecommunications' (BT.A) life as a privatised company? In the late 1980s I remember there being at least a 50% chance that a public phone would be out of order. The waiting time to get a new line at home installed was lengthy and the cost enormous. But what was there the consumer could do about it? We were dealing with a monopoly supplier, and there were no other options. It was very frustrating. At the same time, BT suddenly had a new set of people to please -- its shareholders. Most companies want to offer outstanding customer service and charge them a fair price for the privilege. The higher the price -- relative to the costs -- the higher the profit margin and therefore profits. Pricing normally depends on the competition.

In the case of BT, in those days, the competition was virtually nonexistent. BT did have some constraints over their pricing model, which were imposed by the regulator. Customer service was being sacrificed in the name of creating shareholder value. Job cuts were fast and deep. Layers of bureaucracy naturally build up in many nationalised companies, and these were the first target of management that was suddenly responsible to its shareholders rather than to some government committee. The fact that these managers had share options and remuneration packages linked to the creation of shareholder wealth certainly helped drive the company down this route.

Only because of the lack of competition could BT afford to drop its guard on customer service and value for money. In most other industries, the customers would have voted with their feet and taken their business elsewhere. If you don't like the spring collection at Marks & Spencer (MKS), you go to Next (NXT). If Dixons' (DXNS) sales staff give you a hard time and you feel you are being forced to make a purchase, you don't shop there again. But if you want a new phone line installed, you've got no option but to pay the going rate and wait for BT to do the work at their convenience, not yours.

Thankfully, BT have now very much got their act together. Those painful years of the past are distant memories. I'm still a customer, and over the past 5 years I have found them to be generally pretty good. I still hate paying by the minute for local calls, and particularly I hate paying the local calls charges for Internet access, but unfortunately that's part of British communications life. Perhaps one day we'll have free phone calls. In Australia they will soon be introducing completely free phone calls, but they will be interspersed with advertisements at the rate of one every two minutes. What did you expect? Something for nothing?

To my eyes and ears, it appears BT have finally achieved the dual aim of pleasing the customer and the shareholders. It took them a long time, and the company and the consumer both went through a lot of pain. Above all, the onset of serious competition really focussed BT on the customer service and marrying that with pricing to suit all.

I've only been in Australia for a few hours, but already I get the feeling that Telstra are operating like BT were in the early part of their privatised life. Fixed line telecommunication competition in Australia is still in its infancy. Telstra are in the position of pleasing the shareholder ahead of the customer, because they can. I hear stories of job cuts despite the massive growth in the communications business. The demand for new phone lines is enormous. And here comes the crux of my little tale.

It will take Telstra almost 3 whole months to connect a new line into my parents' new house. They have been told it is because of unprecedented demand and the need for Telstra to add line capacity. In the meantime, Telstra have installed a temporary line, but it doesn't enable me to connect to the Internet. And, because Telstra have a monopoly over fixed line connections, there's nothing I can do about it. It's almost unbelievable that in this day and age and in a technologically advanced country I can't connect to the Internet from my own home.

This episode has left me with a sour Telstra taste in my mouth. On the one hand, I'm thrilled that the shares are performing so well, but on the other, I'm disgusted with their customer service. This again highlights the peculiarities with the early BT and current Telstra business models. They can, and do, sacrifice customer service in the pursuit of profitability and enhancing shareholder value. In a normal company, operating in a competitive environment, this tactic would be corporate suicide.

Compare and contrast companies like BT and Telstra with our newest Qualiport addition, Dell Computer Corporation (Nasdaq: DELL). Dell's business model is relatively simple -- a combination of the low cost supplier coupled with excellent customer service -- and this gives them a large competitive advantage. Sticking with Dell for a moment, extremely strong results from Microsoft potentially argue well for our company. On the other hand, Dell's main competitors, Gateway and Compaq, have also announced strong sales growth. These two companies could just be regaining the market share they've lost to Dell in the past few years. We'll know in the next few weeks when they announce full year results to the end of January.

That's all for today. I'm off to find a proper phone line so I can file this report. In the meantime, I wonder what's happened to the market on Thursday and Friday? In the absence of an unforeseen profit warning from any of the Qualiport 7, I'll remain comfortable with my investments in them. I hope you can sleep just as easy about your investments in the stock market.

Because of the lack of communication, the numbers at the bottom of this report haven't been updated to reflect today's share prices. We'll get this sorted shortly.

Have a great weekend, and I'll see you on the message boards.

                    29/1/99 Close

                    Company   Change    Bid
                      DELL    +$5.75   $95.00 
                      EMA      +0.11    12.26
                      IIG      -0.04     2.41 
                      MKS      +0.01     3.60
                      PIZ      +0.15     7.57 
                      RTO      +0.06     4.46
                      ULVR     -0.06     6.05

Qualiport Stocks

Last Rec'd  Total #  Company   In At  Current  Change
 19/12/97    783       RTO      2.55    4.46    74.9%
 27/01/99     37       DELL   $89.25  $95.00     6.4%
 04/11/98    245       PIZ      7.93    7.57    (4.5%)
 17/04/98    169       EMA     11.85   12.26     3.5%
 27/10/98    755       IIG      2.58    2.41    (6.6%)
 17/07/98    298       ULVR     6.72    6.05   (10.0%)
 11/05/98    368       MKS      5.54    3.60   (35.0%)

Last Rec'd  Total #  Company   In At    Value    Change
 19/12/97    783       RTO    2046.53  3492.18  1445.65
 27/01/99     37       DELL   2007.42  2001.36   122.88
 17/04/98    169       EMA    2052.57  2019.55    19.37
 04/11/98    245       PIZ    1966.34  1842.40  (111.69)
 27/10/98    755       IIG    1972.64  1834.65  (153.09)
 17/07/98    298       ULVR   2052.54  1808.86  (249.64)
 11/05/98    368       MKS    2054.11  1291.68  (729.31)

Cash:                                £2,000.18
Current Total :                     £16,496.50

Total Invested:                     £16,184.62
Profit/(Loss) :                       £ 311.88 

Value Per Share

                    Day      Month      Year      
Qualiport          1.20%    -1.86%     -1.86%
FTSE 100           0.40%     0.23%      0.23%
FTSE All Share     0.55%     0.82%      0.82%

Click here for the latest Qualiport share price quotes.

For an explanation of Value Per Share accounting, please click here.