Wednesday, 7 October 2009

Why Telstra's Shareholders Should Support the Company's Breakup

Even as I write, forces are gathering to pressure the Australian government to back down from its aggressive posture towards the telecom monopoly Telstra that is forcing the company to voluntarily split into two independent entities if it is to remain a significant player in the Australian economy.

Large shareholder bodies, fearful for their own losses, are attempting to bully the government into letting the status quo remain. Which is both shameful and a shame.

The enormous ongoing costs of a monopoly like Telstra to the Australian economy as a whole is well-known. Australian consumers pay higher prices for services than consumers in other advanced economies, and it really shouldn't come as a surprise to anyone. The link between monopolistic markets and high prices is well-known. It should be the duty of every government to crack down on monopolies and keep markets free and liquid. That's why it's shameful that Telstra shareholders are ganging up against Australian society as a whole, brazenly asking to be allowed to profit at the expense of everyone else.

I am a Telstra shareholder too, though admittedly not on the same scale as AFIC. By AFIC's logic, I should be joining the chorus against the government's bold action.

Actually, I believe that I would benefit from a breakup of Telstra, both as a consumer and as a shareholder. That's why I support the government's hardline position. This is the point a lot of shareholders don't seem to get, which is a shame.

When the US Justice Department forced a breakup of AT&T in 1984, one would have expected AT&T shareholders to suffer. And perhaps those who sold their shares in the period immediately following the breakup did sustain losses. But it's instructive to see what happened in the longer term. Each of the 8 "Baby Bells" that were carved out of the single entity went on to become bigger than "Ma Bell" within a decade. The shareholders who held onto their shares and waited a few years reaped the benefits.

In similar fashion, when Telstra splits into two companies, I expect to receive equivalent shares in both. Sure, their combined market value will initially be less than the market value of shares in the undivided company. But rather than sell my shares in a hurry, I intend to wait till they both rise. Then I expect to be sitting on more capital than before.

But wouldn't increasing competition hurt Telstra's monopoly profits and therefore depress share prices even in the longer term? Only if the company has been efficiently harvesting its monopoly so far. On the contrary, like all complacent monopolies, I believe Telstra today is fat and lazy. It charges its customers more than it should, and it pays its shareholders less than it should. The differential evaporates as corporate waste. And why wouldn't Telstra be wasteful? It's a monopoly, after all.

As a Telstra shareholder, I want to see the government deliver a swift kick in the pants to this giant sloth to get it to smarten up, work harder and provide better returns to shareholders even as it drops its prices to customers in a more competitive market. I want to benefit both as a consumer and as a shareholder. Is that realistic? It looks like I'm expecting money to appear from nowhere, but what I'm really expecting is an efficiency dividend. When competition emerges in a market, waste disappears, and both consumers and shareholders see more money in their pockets.

That's why every enlightened Telstra shareholder should write to the Minister for Broadband, Communications and the Digital Economy, Senator Stephen Conroy (minister@dbcde.gov.au), and urge him not to yield to the shortsighted bullying tactics of fat cat shareholder lobbies.

As I have done.

Update 09/10/2009: I have written to the Senate Standing Committee on Environment, Communications and the Arts (eca.sen@aph.gov.au) expressing my support for the government's position. It's perhaps more important for enlightened shareholders to have their voices heard by this body than for them to write to the minister.

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