Switkowski has Lee on the ropes

June 25, 2002
Singapore Democrats

This post is at least a year old. Some of the links in this post may no longer work correctly.

Less than 24 hours after Allan Fels’ historic blocking of the Foxtel/Optus deal, Telstra chief Ziggy Switkowski and his Singapore Telecommunications counterpart, Lee Hsien Yang, saw Wall Street fall again.

The forces behind the latest decline were the same as those that have driven the market down 11 per cent in five weeks.

There is a clear danger of a sell-off. It must be apparent to Switkowski and Lee, as well as most other world CEOs, that if Wall Street keeps falling, then the hoped-for sustained US recovery in 2002 becomes less and less likely.

That means continued tough times for telecommunications in Singapore and Hong Kong, and probably Australia.

Indeed, the one caveat that Peter Costello put on his Australian Budget forecasts was a possible economic decline in the US.

When the global environment looks tough, CEOs are much less likely to make major concessions to government regulators if they reduce shareholder value.

Switkowski knows that he has Lee trapped and he does not have to concede anything.

Singapore Telecom bought Optus because, to be a major force in the region, it believed it had to have a significant Australian operation. And Optus gave it the opportunity to be a regional pioneer in linking all the modern aspects of modern telecommunications, fixed-wire phones, mobiles, the internet and pay TV.

But its enthusiasm caused it to pay far too much for Optus, some estimates say that it has lost $6 billion on paper. From day one it was reluctant to commit major funds to the Optus pay-TV side of the business because it loses money.

Yet pay TV is an important leg in the integration of Lee’s telecommunications services. Australians are coming to like the idea of having their pay TV, internet and phone provided by the one cable.

But the system won’t work for SingTel if the Optus pay-TV service is significantly inferior to Foxtel, given that 80 per cent of Foxtel and Optus cables run down the same streets.

Once Lee agreed to the Foxtel deal, he appeared to throwing in the towel on Optus pay-TV as a standalone unit battling with Foxtel.

Fels, by blocking the deal, has effectively killed off Optus pay-TV unless Lee is prepared to fund even bigger losses to lift its programming up to Foxtel standards.

Alternatively, he can try to find another buyer. There are not too many around who would want to fund the losses, even if they got the operation for nothing.

But, whether Lee shuts down Optus pay-TV or even runs an inferior service, his dream of an integrated operation has been damaged and the Optus brand value will be reduced.

Given all the other problems Lee has, any further Optus writedowns on Singapore Telecommunications’ books would further hammer the SingTel share price.

Switkowski was prepared to help him if he could get what he wanted on Foxtel.

But it seems that there was no way under the existing Trade Practices Act that Allan Fels could agree to the Foxtel-Optus proposal.

At the weekend the Foxtel people were optimistic that they could reach a compromise with Fels. They may be right, but normally Fels likes to do the deal before his public rejection.

While the Foxtel people would love to compromise, Switkowski has all the cards and would be a fool to make significant long-term concessions, especially in the light of what is occurring in the US.

If Switkowski can significantly lessen Optus power in Australia it would be akin to what Qantas was able to achieve when Ansett collapsed.

Of course Switkowski has his own set of problems. The continuing tightening of mobile margins and the decline in telecommunications asset value mean that the written-down value of his Hong Kong investments may still be too high.

But whereas Lee is not prepared to commit vast sums to rescue the Australian pay-TV operation, Switkowski is looking to take advantage of the depressed conditions to further expand his Asian empire.

The institutions will hate him for it, but he must use this opportunity.

The mistake Lee made in buying Optus was to assume that he could make an easy exit from pay-TV.

At the time of purchase he would have been encouraged by some of the decisions of Fels that favoured Optus and indeed at one point Switkowski complained that Fels was favouring Singapore over Australia.

Whether he intended to or not, there is no doubt that this time Fels has dug the boot into Lee and the Optus network. The Singaporeans have always found Australians hard to understand.

They were mystified that the Australian Government would take action which in their view effectively destroyed the number two airline, Ansett.

Now they are seeing the same thing happen to their own operation in Australia, via the competition regulator.

The Singapore cynics would suggest that this is a deep plot to increase the share price of Telstra so the Government gains more revenue on the sale.

That’s simply not right, Fels is not that machiavellian. And of course Telstra shares will continue under pressure because margins on mobile phones are declining and US analysts are continuing to hit global telecommunications stocks.

However, the two key reasons why Wall Street is falling is that American analysts have overestimated the ability of US companies to lift their profits in the short term and it is clear that many companies have used questionable means to boost profits.

Meanwhile, the US dollar is now developing a freefall which is causing European and other overseas investors to sell American shares rather than continue to be hammered with currency losses.

In turn this further aggravates the fall in the US dollar.

The Australian dollar has received some of the benefit of the fall and in the longer term this will mean much lower costs for telecommunications and computer equipment, which will help Telstra. But that is in the future.

Robert Gottliebsen writes daily for The Australian and broadcasts each night on ABC Asia Pacific TV