@onyx,
I have to admit, my due diligence on Telstra as an investment has, to date, been confined to the experiences of myself and some of my fellow family members, as long-term Telstra customers.
The reason we give our business to Telstra is based on a sense of Telstra having the best network reach and with the greatest availability.
(Of course, the irony of my saying this on a day when Telstra's mobile service is down is not for a minute lost on me).
Sure, there are the odd times (once a year, maybe for a few hours or for a day or two) when I don't have telecommunication service from Telstra - either broadband or mobile, but never both - but, in general, I am not a dissatisfied customer of Telstra. In fact, from what I hear from friends and associates who use Telstra's competitors, I actually think Telstra's service is above-average (hard as that might be for many Telstra customers to contemplate).
So, you'd think that my "satisfied and loyal customer" sentiment would translate into an automatic endorsement of Telstra as an investment. After all, customer loyalty and granularity is a good thing, right?
Trouble with that observation is that my satisfaction and loyalty to Telstra is not being translated into any pricing power for Telstra.
Exactly the opposite of it, in fact.
Because, just about every time over the past decade one of us has needed to review our mobile phone contracts, we have found that we get more bang for our buck.
And not only because the "bang" keeps getting bigger (more data, faster speeds, more ancillary services such as additional Foxtel), but the required "buck" needed to pay for that "bang" got smaller.
Now I understand that the technology evolution curve and falling marginal technological cost economics, but when a business - notably the one that is the so-called industry leader - is compelled to offer increased levels of service at ever-reducing prices (overwhelmingly because it's service offering is considered to be commoditised and its competitor base has a long history of behaving in a somewhat economically irrational manner), then that is really not the sort of business I want to own.
Some people might be tempted to argue that, after is spectacular fall over the past few years, the stock is now cheap. However, in order to determine "cheapness" or otherwise, requires having a feel for future financial performance.
And in Telstra's case, I simply have no idea what the company will be earning in 2, 3 or 5 years' time, or what its calls on capital to support those mystery earnings, between now and then, will be.
My intuition many years ago that this industry amounted to shareholders of telco. companies subsidising the customers of those telcos. has been fully borne out in Telstra's case.
And I don't see what events could possibly transpire to stem the ongoing conversion of shareholder value into value for customers.
In closing, with Telstra, it's a case of someone is effectively saying to me,
"Hey, Madamser, I've got a business to sell you.
A few things about the business you might want to know:
- It's in the service sector.
- It's got several aggressive and well-capitalised competitors providing the same (or very similar) services.
- In order to provide those services requires significant capital consumption.
- At some stage over the next few years, you will have to spend meaningful amount of capital to remain current in terms of technology.
- But at this stage it is unknown just how much capital you'll need to spend.
- Your customers have a bit of an expectation of increasing service levels over time.
- What's more, you probably will get an effective price reduction of 7%pa to 10%pa, despite providing increased services.
- Oh, and by the way, the people who are currently managing the business don't exactly appear to be on top of things, nor do they seem to have the sort of visionary insight required to reinvent the company.
So, how about it, Madamswer, are you interested? How much of your personal wealth would you be interested in allocating to such a proposition?"
(20min delay)