Saturday, December 8, 2007

Telstra are liars says court

When you play hardball, as Telstra does, with a whole range of your constituents, including politicians, regulators, the law, competitors, shareholders and even consumers, you face the possibility of an equally harsh response. That is what it received yesterday.

Until now Telstra has displayed aggressive behaviour towards many of these groups. Its historical relationship with the previous Coalition government has been nothing short of toxic, as have its public brawls with the regulator, the Australian Competition and Consumer Commission. Telstra has tried to justify this posture of pushing the bounds of its regulatory and legislative restraints in the name of improving returns for its shareholders. But the concept of this shareholder-centric behaviour blew up a month ago when a majority of investors voted down the pay package for chief executive Sol Trujillo and the board chose to ignore them and push it through regardless.

That doesn't mean Telstra management is not attempting to maximise profits, it just means that shareholders' views run a poor second to management's personal financial prospects. Only time will tell whether keeping the management happy and financially well rewarded was worth the sacrifice.

But yesterday's news was all about the most important Telstra constituents - its customers. And the Federal Court ruled that this group has been dudded. Justice Michelle Gordon delivered a judgment that Telstra had misled consumers about the available coverage of its Next G mobile network. The commission took action against Telstra in September, claiming the company had engaged in misleading and deceptive conduct courtesy of claims that the Next G network had coverage "everywhere you need it". (We have all experienced being in a tall building, a lift, or a remote location and losing reception.) In reality, there are plenty of places that the signal cannot be received.

The advertisements that make these claims will probably need to be withdrawn, as the commission will seek injunctions to stop these representations from being made any more. Relief orders have not yet been made. The damage to Telstra will not be financial; it will be to its image among customers.

In terms of commercial gains, the really big actions being fought by Telstra are on the battleground of regulatory pricing. It wins some and it loses some, and there are already plenty clogging the court lists. These decisions potentially make a big difference to Telstra's profits and they are hard-fought, with important commercial outcomes.

But there are other court actions to which Telstra is a party that are considered questionable by investors and by the courts. In October Telstra was spanked for using legal action as a tool to publicise its campaign against regulation - a court ruling denied it the chance to get secret documents from the then communications minister, Helen Coonan. It was all about Coonan's decision to award an Optus consortium a contract to build broadband in the bush. (This has been appealed.)

A recent decision in a class action about Telstra's disclosure presented more of a victory as it was ordered to pay shareholders a mere $5 million against the hundreds of millions sought.

Meanwhile, Telstra has initiated a constitutional challenge to the power of the Government and the commission to regulate the prices it can charge its wholesale customers. The list of actions taken by and against Telstra is long - some are long shots, some are small and some are incidental. But yesterday's judgment is about reputation. Plenty of small and large companies are accused of misleading and deceptive conduct - some inadvertent, some bold and risky.

For Telstra the establishment of the Next G mobile network is the biggest display to date of the achievement of its new management. It's been done ahead of time. It's the big boast and the largest initiative to capture market share in any of Telstra's markets. For those with 3G market coverage issues this news will come as no surprise, but those thinking of signing up or those that are annoyed that the existing CDMA network will be shut down will have some additional ammunition.


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