Does Telstra have a healthy future?

Telstra ASX TLS telco jobs shareholders
Telstra's share price has fallen almost 9% this week.

Australia’s dominant telco Telstra (ASX: TLS) has had something of an existential crisis since chief executive Andy Penn decided to axe 8000 jobs.

Not only were there howls of protest from its own employee base, the share market hated the new strategy and marked Telstra shares down sharply to seven year lows in the midst of a rising market.

Finally, after so long, people are beginning to realise that Telstra is transitioning from building and running the fixed line phone and internet network to becoming a reseller of the NBN like everyone else, which means it must have a similar cost base to its competitors.

That is the basic logic behind the job losses but it doesn’t match the image people have of the telco – both from a customer and shareholder point of view.

Can Telstra remain a premium supplier?

Customers see Telstra as the full service premium provider which has allowed it to charge premium prices.

That may well remain the case for mobile phones as Telstra continues to have the best coverage but the difference is becoming less pronounced and may become more so as new budget players such as TPG enter the mobile space.

For fixed internet and phone services, Telstra is increasingly becoming one of the pack and customers are quickly realising that in the NBN era, there may be better and cheaper alternatives.

There are huge scale benefits that come from being the former incumbent and there is the very large advantage of the $11 billion Federal Government package for using Telstra ducts and wires as part of the NBN but those lush 60 per cent margins on home phones are rapidly becoming a thing of the past.

Telstra is still winning around half of new NBN/home phone customers but winning that business is costly and once the rollout is complete, there will be plenty of competitive offers around.

Shareholders feeling the pain

For shareholders, Telstra has long been seen as a reliable high yield share but that status is rapidly coming to an end as the rivers of cash from the compensation payments and the legacy phone/internet network begin to dry up while debt will still need to be repaid.

If there is a hopeful sign for Telstra it is the 5G mobile network, which it has a chance to use to continue its dominance on the mobile phone market and to make some inroads competing against the NBN.

Telstra TLS share price chart three year decline
Telstra’s share price has been in a steady decline.

Customers don’t really care how they get their internet – through the NBN or 5G – so the much publicised failures of speed and cost with the NBN could see customers leak across to 5G if it is cheap and fast enough to compete.

Telstra also has some opportunities such as floating off its infrastructure and other property assets into a REIT (real estate investment trust) and you never know, that REIT might even get the chance to acquire the NBN in the future – potentially at a bargain price.

However, with the share price hovering around the $2.68 mark and no positive news on the horizon other than a massive round of sackings, it is hard to see Telstra even getting the shareholder recognition for the assets it already owns, let alone making any transformative acquisitions.