Should locals buy Telecom shares?

Friday May 23, 2014 Written by Bill Carruthers Published in Weekend
Telecom Cook Islands headquarters in Avarua. 14040719 Telecom Cook Islands headquarters in Avarua. 14040719

Local commentator Bill Carruthers has taken a keen interest in telecommunications developments, both in the Cook Islands and overseas.

In this three-part article he explains why it is not a good idea for locals to buy Telecom Cook Islands shares from Telecom New Zealand, and what alternatives and opportunities there are. This is part one.

There is a lot of emotion and interest being generated these days by the sale or potential sale of TCNZ’s 60per cent shareholding in TCI and also over what should happen to 40 per centGovernment shareholding.

I think a considered look at the economics of the situation is needed in order to allow people to make more considered decisions.

The efforts of some local people to make a huge investment in purchasing some, or all, of the shares for sale are largely motivated by wishing to let locals participate in the huge profits which TCI has generated over the years.

Many forget that what allowed TCI to be a “cash cow” was (and still is), the fact that it ran as a Government-mandated total monopoly over any outward communications from the Cooks.

Although several governments were, to varying extents, anxious to change the rules, TCNZ used a carrot and stick technique to stymie any efforts to liberalise the monopoly – the carrot was the several million dollars brought in each year by the dividend on a 40 per cent shareholding which was a substantial pay-out; and the stick was a very restrictive clause in the joint venture agreement between Government and TCNZ meant that any action (such as allowing competition) taken by Government which impacted adversely on TCI’s profit levels would allow TCNZ to compel Government to buy all the TCNZ shares for a price that reflected their inflated value prior to the action the Government took that triggered this clause.

All this meant that for all intents and purposes TCI and its TCNZ masters had an everlasting monopoly over all communications in the Cook Islands.

With Digicel making an offer to buy TCNZ’s shares there comes a chance to write a new joint venture agreement which will allow free competition in the communication market place and, at the same time, the equally ill-worded telecommunications act can be updated. (It is my understanding that Digicel has been informed that this will be the case and they are comfortable with this idea, as they work everywhere else in very competitive markets. But there seems to be some degree of differing opinion about this and I cannot now state absolutely which case is true.)

So the proposed local purchasers of any shares should first recognise that they will have to face a competitive marketplace environment. If they are not happy with that then they will be arguing that we should simply carry on with the onerous and grasping monopoly and that the only change will be “they” will collect the obscenely inflated returns from TCI rather than TCNZ.

People should be made aware of the fact that POTS (Plain Old Telephone System) companies are now considered almost universally to a bad investment, and TCI is no different.

Why is buying shares in TCI a bad investment?

Because the technology of communications has changed dramatically in the last 20 years and will carry on doing so at an increasing pace.

Companies like TCI will come under pressure from both above and below. Their profit margins will be squeezed as excessive revenue from termination and connection charges is siphoned off by the various Skype-like programs and the main income stream will be in selling data transfers – a technology that is far harder to regulate than the old telecom companies income sources.

From above there is already an increasing consolidation in the number of major players in the world of international communications. Huge companies like AT&T, Vodaphone, Verizon, TMobile, and Telefonico to name a few are building new networks and methods of connecting at a frenzied pace. The fact that while TCI has just launched its 3G network for cell phones and other devices, much of the world is already on 4G and the implementation of what might be 5G is not far around the corner. To be able to use these systems often demands heavy financial commitments from telecom operators and small companies like a locally owned TCI would need to fund these upgrades either through calls on the shareholders for funds, or through borrowings, the interest on which further erodes profits.

As a result it is becoming more and more necessary for “the little guys” to have relationships with one or the other of “the big guys” to ensure access to the world wide data distribution system similar to the way that airlines are increasingly finding it necessary to be part of a wider alliance, Digicel is a member of the alliance club now, a tiny locally-owned TCI would have little leverage to join the club and thus would face higher access costs due to its low quantity of needed data transfer the result = lower profits.

The old style of telecom company which relied on a system where all of the “traditional” companies set prices for things like termination charges – of which one of the highest in the world is the one for incoming calls to the Cooks. This is why you can call NZ for an hour for $5.00 –their termination charge is less than three cents per minute – while a call from your auntie or grandchild in NZ to the Cooks will cost them $1.30 for every minute with no cap at all.

Most telecom companies are no longer making much money at all on their “POTS” services but instead rely almost totally on delivering “data”, and “selling” the data is where most of their money is made. The traditional “phone” company is already in many ways an extinct dinosaur as communications become more and more owned by ISPs (Internet Service Providers)

 (A brief explanation is in the use of Skype and similar services – on Skype to Skype calls anywhere in the world there is no charge at all and for a Skype call to NZ the charge is about three cents NZ per minute, or one can make unlimited calls to NZ for about $8.10 per month!  Even if one thinks TCI’s capped rates at $5.00 per hour are cheap – one must remember that even a five minute phone call, which for many businesses is more like the norm, will cost that same five dollars as opposed to a five minute Skype call which would cost 15 cents.)

And, of course, using Skype or similar programs also allows video calls and photo or other file transfers which traditional phone services cannot possibly do.

The only money that TCI gets from people using Skype is what they pay for their data use, which is far less than a dollar a minute phone call, hence a huge loss of revenue.

And with the advent of a new cell phone app called WhatsApp which allows unlimited texting around the world for 99 cents US per year, the income from texting will be as scarce as hen’s teeth as well. Net result = More profit declines.

 

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