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The best of times, the worst of times

01 Dec 2009

Telecom Chief Executive Paul Reynolds has been in the role for two years, after being hired from British  Telecom where he played a key role in that company’s operational separation. In conversation with  Telecommunications Review editor Sarah Putt, he reflects on Telecom’s massive programme of  transformation.Has 2009 been a tough year? I would say the financial year just finished was a huge amount of change in driving for customer satisfaction;  really gettingthe Telecom team motivated behind XT and all of those things out of the door, so that was a tremendous challenge. But the phase we’re in now is every bit as challenging ahead of us because we’ve built some of the best infrastructure in the world and the challenge now is to make sure that that’s really deliveringfor customers.When you announced the fibre to the node programme, did you expect the government to come out with its fibre to home (FTTH) plan?It’s inevitable that we’ll get to FTTH; the question is simply when. Over most of the world people are getting  fibre closer and closer to customers, not yet in a mass scale way into homes. I think the National government  came out with a brave and bold plan and it meant the need for government subsidy to help make it happen, so  I’m pleased with it. Did we know they were going to do it? No.It hasn’t made you hesitate, to slow down or stop or change the direction of the FTTN programme? customers’ needs for broadband – customers want fast broadband. At     the moment far and away the mostcost-effective way of doing that is FTTN, which we’re doing and this has  been a very successful programme for us – why would we slow it down? Not at all. The issue is about meetingYou’ve talked about VDSL and getting 40Mbps from your house in the testing. VDSL can deliver fast services, but can it also deliver competition? Because that seems to be what the government is looking for in terms of its fast broadband plans.I don’t think that’s (competition) primarily the reason at all. Can VDSL deliver competition? I think we’re  entering a world of regulated price access, where essentially big master-deployed infrastructures are controlled  by an appropriate regulation; regulation that allows the people who deploy it to achieve an acceptable rate of  return, and service provider competition over that infrastructure.Nowhere in the world, nowhere is delivering significant competing access infrastructures. It’s like building two  or three railway lines to any one village; it’s the most expensive thing you can do.I’m absolutely sure we’re  on a controlled and efficient deployment of infrastructure and service provider competition over that  infrastructure through equal access. And we already have that model through Telecom. The government’s  plan is the opposite – it seems to be designed (with regional Local Fibre Cos) to avoid having vertically integrated telcos.I don’t think they’ll be competition at the infrastructure level.How can Telecom participate at  an infrastructure level and run services?That’s what we’re looking at right now; you’re jumping to the end game. We’re looking at how we can  participate effectively to get it done. The structure doesn’t help that; doesn’t make it easyfor us to participate and we’re turning over every stone to see how we can. It’s hard to see how there will be extensive FTTH  deployment without Telecom.Are you working with other partners? You hinted as much at the Q1 results briefing. People have come and spoken to us, we’ve spoken to others. Everybody is struggling to make a business  case, whether you’re Telecom or whether you’re one of the little guys. Nobody can see how this works very easily, so naturally people are looking at partnerships, to see if that can defray some of the costs and make the  business case easier.What’s the best case scenario for Telecom out of all of this?I can’t say that right now because we haven’t explored all the options. It depends on where the government finally ends up. It depends on how our discussions with others go, so I don’tknow what the best case option is until we get there. We’re in the middle of two months of intensive work by us and by others. If you’re saying does Telecom have a simple answer, no we don’t. Not yet.How would you describe your relationship with government?I would say government relationships were good. I certainly have a very open relationship with Steven Joyce,  mainlythrough him at my level, but also up to the Prime Minister and other officials as well. Not surprisingly, Telecom’s a big part of their agenda. I think the very important point is that relationships have moved over a period of time from when I arrived, which were hostile, to a position where they are now professional, and  that’s a very different feel. Telecom used to be fighting a battle; now we’re more about trying to align commercial interests with government policy interests. I’m not saying that’s easy, it’s not, but it’s a very  professional relationship and a working relationship.What about the regulator, the Commerce Commission, how would you describe that relationship?We’ve been disappointed in issues like loyalty, we’ve been pretty cooperative in issues like mobile termination  rates and we’ve been quite pleased with issues like the whole proposal to start looking at the resale of retail services. Again, it’s moved from wholly hostile to quite professional covering a whole spectrum  of issues, as it should be in a modern environment as between an incumbent player and a regulator.What about the correspondence over the loyalty issue?We’re disappointed in that, as I’ve said, because we negotiated in the undertakings what was an understood degree of commercial freedom to compete in the wholesale market place and we took legal advice about what  our freedom was and we consulted with the Commerce Commission.They’re claiming that is not a correct,it’s a misleading statement, in the latest correspondence on their website.I don’t agree with them. We’ve never been given clear guidance as to what our freedoms are, even when  asked, and that will come out, so I’m pretty confident about that. These are complicated issues and I’m  disappointed that one’s gone where it’s gone, but there you go.You’ve asked for a merits-based review on regulation. Can you tell me what you mean by that?A regulator sets prices and practices as the law and a merits-based review enables the incumbent or other  players in the market place, if there are regulations that affect them, [to] on occasions ask for a review of  decisions on merits. We are pricing below cost in some services in Telecom today and we believe an  occasional merits-based review would provide the checks and balances in the system to make sure that not  only is Telecom acting transparently, but the regulator acts transparently as well. Merits-based reviews don’t  exist in telecommunications in NZ at the moment and that’s extremely unusual.Is it like a spot check – every so often a piece of regulation would be reviewed randomly? Actually, they  never get used; becausethey exist, they don’t get used. If you have a merits based review, if your logic   and rationale is likely to be up for public discussion, it puts tremendous pressure on you to make sure it’s  water tight for all stakeholders and before you make it. If you can go away in secret and come up with a   decision that you don’t have to justify, you can do all sorts of things.Is that what you think the regulator’s doing here?No, I think that most decisions are fine. Some aren’t though. There are some key ones and I think all should  be up for scrutiny. There should be transparency. A merits based review, because it’s there it hardly ever gets  used. That’s the point.What about your relationship with Telstra? At the AGM you referred them as “our chums across the   Tasman”; it seems to be quite a good relationship then?That’s just a figure of speech. I’ve met David Thodey more than once. I think they’ve got a big challenge ofchange before them. They’re probably two to three years behind Telecom in that change journey. I think  there’s a relationship in that we look at each other and see some of the same challenges. Whereas we’ll  compete very aggressively in respect of markets, in terms of corporate positioning I think both companies can  see some similarities, or at least some historical similarities.Where can Telecom grow, what are the opportunities? Our investment has been in mobile and broadband and ICT in this market, and there are long-run growth opportunities in all three. Mobile will in time be the   dominant form of communication; mobile data is a wholly new revenue stream in most markets around the  world. IT services is something through Gen-i that we do particularly well, and it’s a growing revenue stream.   Broadband has room to grow yet. We’re at 60% penetration in New Zealand; I think it will get to 80 or 90, but the rate of growth is likely to be slower than it has been historically.We don’t have any major plans for growth markets out of NZ right now; we’re going to get the basics right  and grow the mobile broadband and ICT and keep our Australian business cash positive. That’s the overall  picture.The XT Network: how do you think the launch went? The advertising campaign had a mixed response - it won the Fair Go award for the worst campaign of the year?If you ask anybody in New Zealand what is XT and they’ll tell you exactly what it is. On that judgment I  think XT is possibly the biggest single marketing campaign in New Zealand this year, and in terms of a new  brand recognition probably the most successful, whether you liked our ads or not.I’ve been in advertising for 20 years, every advertising campaign I’ve ever been part of has won one kind of  an award or another, and I don’t really pay much attention to the ones that win the best of and ones that win  the worst of.What I do judge is, are customers buying the product, is it a brand position, is the brand being positioned in  the market place, and in both those counts XT’s been a resounding success.Why have you brought MVNO (Mobile Virtual Network Operators) forward if it’s been so good?We always  planned with one to two years in the marketplace for a retail business for this; it’s not a precise  science. We were slightly concerned about the sheer scale of systems required to support MVNOs as well, but  actually the launch has gone very well. The systems are working pretty well and we know we can make it  work for players in the marketplace. We’ve had huge demand from our customers for it.Really? Because most of them seem to be on Vodafone’s network. All of the ones that are currently and may in future be on XT; every one of those players, we’ve been talking  with.There’s only one Telecom MVNO -Digital Island. Every single retailer in the market place has been talking to Telecom wanting to be on XT because it’s the  primary offering.So you think you’ll get TelstraClear back on?I think you’ll have to watch this space, who goes where. I think all people would say XT has a better position  than the one’s they’re with because it’s the highest quality proposition in the market, everybody knows it and  that goes back to the marketing and promotional work.How do you think Vodafone reacted to XT? I think with horror. XT took Telecom decisively into the league with a single large leap. I think it’s kind of  frightened them, judging by the degree in which they’ve upped their marketing and so forth. They’ve lost an  awful lot ofcustomers, so it must have been a very tough year for Vodafone.What about that court case, did that surprise you?Everybody knows that was a surprise, but we settled it and it’s not a course of action I would have chosen. So  there were always enough filters in the country?*I didn’t say that, no. As was true at the time, and it’s  true now, if there are interference issues you need to  have a one-to-one discussions, and you fix them. You do  that between engineers, that was always our  position. There’s never been a network introduced in the world that hasn’t had those issues, but there’s rarely been a court case.What about 2degrees – serious competition for you? 2degrees seem to have done a good launch; they’re not registered on our scale as much at the moment. I don’t know if that will continue to be the case because clearly a lot of people have taken 2degrees SIMs and put  them in their phones, and since most of that market before has been Vodafone market it seems to have a  bigger impact on Vodafone than they have with Telecom.At the AGM you reported a 10% increase in staff engagement staff - what do you think you’ve done to change the culture in Telecom? I wouldn’t take all the credit for it. There’s a fantastic team at Telecom, the whole executive team has been on  one mission, which has been to make us a very customer focused business, and I think our folks have  responded firstly to the notion that we’re working as one team for our customers.The whole leadership team has been like as one going in that direction, still a way to go and people have  stepped up to it, they love it. Most of the leadership team you have imported haven’t you? I would say about a third of the current executive team are rising stars at Telecom that were promoted into  key roles, a third are returning Kiwis new to Telecom and maybe third are people I’ve known before that have  come in, so it’s quite a mix.What do you think of your predecessor? I’m not commenting on that.Have you met her? I have met Theresa, yeah.Presumably when you took the [CEO] job you did due diligence on Telecom. What’s surprised you that you  hadn’t expected?I expected all the challenges that we’ve faced; the challenge of technology, a more  competitive market – they  were all expected. I’d say two things surprised. One is what an iconic brand Telecom is in New Zealand  culture; we’re such a big company in NZ.But the most interesting thing has just been the sheer depth of talent  that’s actually been in the company. We’ve got an awful lot more done in a short period of time than  any telco you could look at in the world. Just nobody has built a nationwide 3G network and FTTN, and  that’s the boys and girls the length and breadth of New Zealand. It’s just unleashed all that talent in the  business; it’s got some of the best technologists and marketers and customer service people in the world. And  that surprised you.The surprise to me has been the rapidity in which we’ve upped our game.What about the  country itself?  What’s surprised you about coming here, why did you want to come, other than the job?Who doesn’t like an adventure in life, and New Zealand’s a beautiful country. In the world’s eye New  Zealand is a great place for the outdoors, for the landscapes, the seascapes, the fishing and all of that stuff really appeals to me.It’s a long way to come if you find you don’t like it.Sure, nothing ventured, nothing gained.Is that what you like to do, go fishing?I like to go fishing, I like to tour around the North and South Island.What about New Zealanders themselves, were you surprised about the reaction to your salary?When I took the job it was one of the big questions; it’s a big salary in a country that doesn’t have many big salaries. It’s a salary similar to what I  was earning before, so I wasn’t entirely surprised (by the reaction) at all. It’s the way it goes, it’s part of progress and the same reactions happen in other markets around the worldCan you comment on the economic challenges facing the country? Is the government doing the right   things to get us out of the recession?I think the fiscal management of New Zealand has been good and there’s been a sense of confidence about that. I think New Zealand’s been in an unusual position, in that we are actually one of the few countries in the  world to already be in a recession before the global impact hit, and the depth of the trough has been much  shallower than overseas. Partly I think because of good management and partly because of the shadow of Australia effect and, in part because investors have long appreciated the higher interest rate returns that you can get in New ZealandSo we’ve come through it relatively benignly. It won’t feel like that to many businesses and Telecom’s been impacted, as have others, but the impact hasn’t been as deep as elsewhere,  and that’s a good thing and it stands us in good stead to rebound.If I compare the Britain I left two years ago  with the Britain of today, it’s just dramatic. The debt that’s to be paid back over the next 25 years in the UK  is just horrendous, so New Zealand is pretty blessed not to be in that situation.Does that mean you would  stay here after your tenure at Telecom, which I’m assuming is five years?I don’t have any agreed fixed length. I’ve got a fantastic job, I’m giving it 150%, I love the fact that we’ve been able to take NZ in a short period of time from behind the pace in the global stage to significantly ahead of  most countries we compare ourselves with. It’s really exciting and I’ve got no plans to be doing anything else.So, last question. There does seem to be quite a collegial environment now in the telecommunications  industry than there was in the past, and I’m thinking things like the formation of the  Telecommunications Industry Group?I think collegial is the wrong phrase, because we’re all competing like mad out there. The competition in the marketplace is actually ruthless and unprecedented in NZ, but we’re also much more mature. This whole idea  of running to court every five minutes and slagging each other off in the press and so forth is just not a  mature environment.We’re a big industry; we’re probably the biggest sector in NZ at the moment. We have room to compete like  mad but also to recognise the issues in which we have common purpose and make sure we represent those  well.The wine industry does it, the electricity industry does it. So should the telecommunications industry  because we are after all the biggest investor of all and we’re an industry at the heart of public policy and I  think that will be the case for many years to come. It’s very important that the industry has a voice.

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