In February 1999 Ziggy Switkowski was appointed the new CEO of
Telstra, the incumbent operator in Australia, which is still
majority state-owned. His appointment came as surprise to many,
as Patric Russel, a telecoms equity analyst at Merrill Lynch,
explains: "Well it was a bit of a surprise when Ziggy
Switkowski was appointed CEO, because it took so long. Then
they ended up with an internal candidate. He came from their
major competitor, so he understands the landscape in
Russel believes that Telstra is one of the most
forward-thinking incumbent telcos around: "The company is
richly endowed with assets. It has a lot of technological
flexibility with two wireless networks, GSM and AMPS, migrating
to CDMA. It has a relatively large modern copper network. It
has the capacity to migrate to DSL. It has got a very large
broadband footprint. It has got fibre-optic rings in the
cities. It has got satellite capacity. It is the largest cable
TV company. It is the largest ISP in Australia. It is the
largest long-distance, mobile and local provider and so on. It
has got a very broad range of data products, which are
supported on these various networks by a brand which is
vigorously marketed. You probably won't find an incumbent
around the world with as much technological flexibility as
Switkowski and his new management team will be leveraging
these assets to boost shareholder value, in a bid to reduce
dependence on voice revenues. Russel sees this as critical to
Telstra's future success: "I guess that the main challenge for
the company is to migrate from basically having 30-40% of its
revenues coming from voice services to a data platform and to
do it in a way that is not damaging to shareholder value. So
basically this involves moving from the old circuit-switched
world to the digital IP world. Obviously this is going to
affect margins on some services such as traditional
long-distance voice, but it is potentially going to create an
enormous amount of growth in other related services."
The operator may adopt a more aggressive approach with regards
international investments and acquisitions. However, Telstra is
hampered by the government's majority holding, as Russel
explains: "The major weakness for the company is that it is
government-owned. This factor restricts its ability to grow in
terms of using its script to make acquisitions. It would
probably like to be more freewheeling. At the end of the day,
it is still partly answerable to the commonwealth government of
Australia and there are clearly some conflicts of interest
associated with that ownership."
In an exclusive interview Switkowski sets out his agenda for
the company and explains how he intends to build on Telstra's
How do you view the domestic market in light of
increased competition? What do you believe to be Telstra's
competitive advantages? How do you view Cable & Wireless
Switkowski: Competition is vigorous throughout the
domestic market. We now have about 26 licensed carriers and new
entrants. There are relatively few constraints, because there
is regulated access to key services such as the PSTN. I think
that our advantages lie in the fact that we are a full service
We have a broadly diversified product and revenue base and we
have the legacy advantages of a very strong brand, a history of
being part of the social fabric of the whole of Australia and,
since the introduction of competition in the early 1990s, a
performance that has met customer expectations in quite a
While we are participating in a very competitive market, I
think that Telstra remains very well placed to continue to do
well. I would also like to note that, when searching for
evidence of a healthy competitive environment, one looks for in
my mind, the following trends: reduced pricing; the level of
innovation in new products and services; the quality of service
to customers, level of capital spending and availability of
choice. All those dimensions are very healthy in the Australian
market. I think that Telstra has demonstrated over the past few
years an ability to perform very well in the business sense.
Cable & Wireless is a strong competitor. As you know, they
are in the middle of an interesting take-over initiative of the
number three player in the country, AAPT, which probably has a
little way to run before that is concluded.
Optus has proven to be formidably capable in the GSM/mobile
business and has had a domestic monopoly on satellite
provision. They have done very well between mobile and
satellite and are a lively competitor in business services. So
I think that their involvement in the Australian market has
been good for consumers.
How do you view the current ownership structure of
Telstra? When will the government relinquish its golden
Switkowski: The current ownership structure marks the
halfway stage. The next step to reduce government ownership is
being debated by our legislature at the moment. The government
would like to sell the remaining stake in the company.
In our opinion, complete privatization is in the best
interests of shareholders, customers and the community and will
enable Telstra to compete more effectively against some of the
largest companies in the world, so that we have the ability to
raise capital, for example, enter joint ventures which may
involve equity swaps and generally manage our balance sheet
Is it true to say that Telstra's ability to issue new
shares is constrained by the government's majority holding in
the company? Are you using the same investment banks which
advised you on the IPO in November 1997?
Switkowski: The latter question is a matter for our
owners - the government that sells its stake in Telstra.
Therefore the government employs the joint global
co-ordinators. I think they have signalled that they are using
the same co-ordinators if the next tranche proceeds. In terms
of limitations on Telstra, the government is prevented by
legislation from owning less than 66.7% of Telstra.
So if we wanted to raise equity capital, we would probably
need to participate to the same degree as private shareholders.
But we are finding that government is more risk-adverse and
conservative by nature. Therefore to engage them in these sort
of strategic issues does constrain our ambitions to some
extent. In addition bringing the government to the table as a
potential partner in any JV discussions is not always welcomed
by our partners. So these are a couple of examples where the
government gets in the way.
Why have you argued for the gradual introduction of
competition in rural and remote locations in Australia? Do you
believe that competitors may be able to offer cheaper services
by using satellite technologies?
Switkowski: Let me make the point that we (Telstra)
have been the provider of basic telephony services to all
Australians, including regional Australia since the beginning
of telephony 100 or so years ago. We believe that we do it
well. We believe that we do it very effectively. However, given
the diversity of carriers in Australia today, it is quite
proper to open up regional Australia for competition.
We are happy to participate in that process and demonstrate
that we are good providers for the bush. There are emerging new
generation technologies, including satellite telephony that
will be of interest, but we are very mindful of the need for
robust enduring solutions in often difficult, non-powered
locations. I think that this is an area where we are
particularly strong and our competitors are not well informed
about the needs of customers in those markets.
How do you view the decision of the ACCC (Australian
Competition and Consumer Commission) to issue a fourth
competition notice, alleging delaying tactics and overcharging?
How do you explain the number of complaints from other carriers
about the transfer of customers?
Switkowski: Frankly we are somewhat perplexed,
because the fourth notice appears to cover the same ground as
the earlier notices. We are contesting the ACCC court action
which was launched just prior to Christmas last year. I will
remind you that the concerns focus on customer churn costs, the
time of processing the churn and the need to make system
investments to meet industry needs.
We believe that we have responded satisfactorily to all these
concerns. We are not receiving customer complaints of any kind.
The complaints are primarily made by our competitors in the
industry. I guess that we are not surprised that they are
taking this particular view.
Telstra could face fines of up to $A4 million ($2.6
million) a day from the ACCC. Do you believe that your
competitors have any cause for complaint? How do you answer
allegations that Telstra's business practices have been
Switkowski: The ACCC indicated their areas of concern
to us just prior to Christmas. The cycle time of processing
those churns is more influenced by the time that order resides
with competitors, rather than with us. We are making
investments in the systems that are required to automate that
So we think that we have responded constructively and
promptly. We have reviewed the ACCC allegations. We feel very,
very confident about our position. While they have powers to
impose substantial fines were we to be found guilty of improper
behaviour, we don't believe that we are substantially exposed.
How do you view cellular in Australia? How many
subscribers do you currently have? How do you view the
potential for pre-paid services in Australia?
Switkowski: The cellular market in Australia is quite
extraordinary. The level of penetration is now in the 30-plus
range and moving up quickly. We don't see any reason why mobile
penetration should stop at 50% and not go any further.
We launched some pretty aggressive marketing programmes
pre-Christmas. We now have 2.2 million GSM digital customers
and about a million amps customers with a total market share of
just over 50%. So Telstra continues to travel well in a very
Pre-paid services in Australia have not proven as popular in
terms of volume as they have been on the continent for example,
but it is still comparatively early days since their
introduction. Australia already has low access plans in place
in the mobile market since the early 1990s.
So the Australian consumer has quite a number of low-cost
cellular options, which makes it a little harder and a little
less convenient for pre-paid services. But we are participating
in that particular market.
We are launching a CDMA network to replace the analogue
network and the CDMA network in conjunction with the GSM
network. In my opinion the proliferation of wireless products
will underpin attractive growth for us in this market.
How do you rate Vodafone and its ability to leverage
wireless business clients, in view of its impending merger with
Switkowski: Obviously, any carrier with global
offerings in an increasingly global market would be a positive.
Vodafone and AirTouch will become quite a formidable global
operation. But at Telstra we have an international
point-of-presence strategy and offer GSM international roaming
to 62 countries. We are working on a global product solution
across all Telstra's products to cater for the world-wide needs
of our customers.
What are your opinions on CDMA? Which suppliers do you
work with in cellular? How do you view the potential for
Switkowski: We are pretty optimistic. We are moving
into CDMA technology. Recently we tested the network in one of
our regional locations in the state of Victoria and confirmed
its integrity, voice quality and reach. We demonstrated that it
was the equivalent or better than analogue in country
locations, which is really very important for our rural
Nortel is our CDMA supplier for the network. You may know that
it is Ericsson for GSM. In handsets we pretty much deal with
all the manufacturers around the world. Our leading suppliers
are Nokia, Ericsson, Motorola and Panasonic. We will be
trialling CDMA for packet data speeds of up to 144kbts/second
mid-next year. Once we have demonstrated the robustness of that
services, this will open up a whole bunch of new opportunities
for customers to gain access to the Internet.
We are pretty excited about wireless data services. We are
seeing in the evolution of the mobile market a move beyond
simple handset acquisition for voice telephony to a whole range
of value-added products based on digital technology and
mobility. We are going to see handsets turn into quite diverse
communications devices, which will provide us with plenty of
opportunities for affordable and attractive non-voice
What pricing packages are you devising to attract
long-distance customers? How will Telstra increase profit
margins in the fixed market and regain customers who went to
Switkowski: Unsurprisingly, long distance is the most
competitive market in Australia, attracting the greatest number
of suppliers. I think that it is the one area where Telstra's
market share has been reduced the most to below 50%. At this
point it appears to be stabilizing owing to the introduction of
a range of pricing programmes such as the Easy HalfHour, where
our offer enables people to make long-distance calls for 30
minutes at attractive rates.
We have other cap-call offers that are simple and low cost,
which also appear to be reaching a market valuing that
approach. International long distance is very important to
Australians, given the high proportion of Australian residents
with overseas relatives and heritage. We are looking to
technology to reduce our overall costs as well.
Margins will be increased through better utilization of the
network, for example. Of course, volume growth will come
through the sales of enhanced services such as caller-number
display, message bank and increased use of the Internet. So we
are seeing a stabilization of our revenue base and our margins.
What are your plans to build up your wholesale
business in the local market? Do you believe that wholesale
should account for more than 10% of revenues and that you
should reduce your dependence on retail?
Switkowski: We established a discrete dedicated
wholesale business unit within Telstra in 1995 with a charter
to manage Telstra's entry into the wholesale business. More
recently that business unit was expanded and given more support
by the company in terms of high-level delegation and higher
I don't believe that we will ever overtly seek to reduce our
dependence on retail, as that is such an important business
requiring dedication and focus on our part.
On the other hand, clearly as the number of competitors in the
Australian market increases and their share of the conventional
business increases - as the regulatory forces are determined to
see that this happens - we will seek to be the preferred
wholesale supplier to our competitors.
At the moment, wholesale revenues constitute about 10% of
total revenues. I can see them growing considerably beyond that
What are your opinions on Internet telephony? Could
you tell us about the voice over Internet trial between the UK
and Australia? How will these new technologies affect Telstra's
Switkowski: We have been trialling voice over the
Internet in the UK. We have been doing it with technologies
that we have been trying to make vendor independent. We are
testing really the quality of the service, scalability and
certain price sensitivities.
When we are comfortable that we have understood those
dimensions, we will seek to roll out the product. I am working
on a rule of thumb which suggests that at some time in the
early part of the next decade, Internet telephony will begin to
account for about 1% of our voice telephony revenues and then
grow by 1% each year thereafter. About half of that will
cannibalize our existing business, while the other half will be
How much do you spend annually on network
modernization? How do you view DSL and ATM?
Switkowski: The best approach at trying to work out
our annual spend is to look backwards at a programme which we
call the Future Mode of Operation, where we sought to
completely digitize the network. The programme was completed
this year at a cost of A$3.3 billion ($2.2 billion) over three
years. That should provide you with a sense of the scale of our
expenditure in the context of our overall A$4 billion capex
budget each year.
In terms of DSL and ATM, ATM is the technology that we use to
provide enhanced data services and bandwidth-on-demand in the
core network. Of course DSL is a set of access technologies
that will allow our customers to connect to the core network.
ATM has proven to be an important service for a number of our
large corporate customers. We offer advanced ATM services which
provide full inter-working with frame relay. DSL is one of a
number of access technologies that we are investigating to
provide high-speed access to our customers. We are probably
still some months away from concluding the actual business plan
for DSL in this country.
Could you tell our readers about some current research
projects involving Telstra? When do you expect to make an
announcement about the upcoming Data Mode of Operation (DMO)
Switkowski: We expect a decision relatively soon on
the DMO subject to current commercial negotiations. In terms of
research projects, as you know we run the largest industrial
research laboratory in Australia. It covers a variety of
applications in our business.
You should remember that, as a full service network and quite
distinctly so, we range all the way from conventional telephony
on the fixed-line network through the HFC network, wireless,
satellite and a full suite of products that are built on these
So our research effort underpins a fair diversity of
technologies and applications. But as an example we have been
looking at CDMA technology now for the better part of seven
years. So when we launch CDMA, we will genuinely be at the
leading edge in terms of the products.
We have a new generation of Internet search engines based on
artificial intelligence which we are particularly enthusiastic
about. As an example, one search engine can understand natural
language. This means that when you place a query for something
like a glass of wine, it distinguishes the request from a query
directed at searching on wine glasses. This is kind of helpful,
as we establish search engines to interrogate supermarket lists
or restaurant menus for example.
Owing to our participation in the pay-TV industry as the
largest supplier of pay-TV in the land, we have a range of TV
and web-based integration activities - interactive TV - in our
research efforts, including on-line programme guides and
multi-media information related to TV programmes.
The appetite for the Internet, building on the growth in usage
of our network from fax and e-mail, means that we have
developed a virtual second line concept, permitting customers
to receive phone calls, whereas the phone line would otherwise
be tied up in an Internet session.
We are using WAP (Wireless Application Protocol) to provide
enhanced data capabilities connecting to the web while on the
move through the digital mobile network. These represent just a
few examples of activities that are being conducted in our
Can you explain why you are creating a multi-media
group? Is this aimed at refocusing the company to exploit the
potential for Internet and data services?
Switkowski: The answer to the second question is
clearly "Yes". This is such an important part of our business.
If I might preface this statement, I would add that the company
is very determined to exploit the growth in this industry and
therefore grow at historically higher rates, as growth is going
to come from four primary drivers - international business, the
wholesale business that we talked about, Internet, E-commerce
and data, while the fourth element is wireless/mobile.
So we have designed an organizational structure that puts
clear resources in places where they are clearly aligned with
these growth sectors.
Part of the strategy behind the creation of a multi-media
group is to send a strong signal to the market that we are
serious about exploiting new developments, such as the
Internet, which we expect to underpin our growth and our value
to shareholders over the next few years.
How are you targeting the business sector in
Australia? How do you see the future for E-commerce?
Switkowski: We have done a couple of things to
emphasize our commitment to the business sector and E-commerce.
Firstly, high-end businesses, the government, institutions as
well as small-to-medium businesses, are collectively very
important. They represent nearly half of the company's revenues
and earnings contributions. Their growth rate is faster than
average for an already fast-growing industry, so they matter to
We are finding that business customers are especially
demanding in their requirements for ever-increasing complete
and complex solutions with service guarantees that reassure
them about the integrity of the network and the reliability of
the products. I think that those demands play to Telstra's
strengths very well.
But there are two particular examples that I would offer up:
the fact that we are the telecoms supplier and sponsor to the
Sydney 2000 Olympic Games and that we have responsibility for
the end-to-end provision of all telecoms services to the games,
which is a hitherto unprecedented commitment by a telco. In
this way we make sure that we are engaged in a really
Manhattan-type project in the telecoms space on a stage that is
particularly visible to the entire world. So our commitment to
complex projects is certainly on display there.
Secondly, along with others we believe that the appetite and
interest in electronic commerce is just now achieving lift-off
in Australia. We are seeing that this is the case in the
surveys that we are undertaking. We are seeing that in direct
contact, particularly by small-to-medium businesses.
So we have configured our organization to focus on
small-to-medium businesses. We have made some investments in
certain E-commerce organizations, applications and
technologies. We expect to see an increasing contribution from
E-commerce applications in the immediate future.
Can you describe the varying usages of ADSL, HFC and
satellite for your data services? Is there a risk of cost
duplication on your networks? When do you expect to expand the
HFC broadband network from 2.5 million to 5 million
Switkowski: Well we use the hybrid fibre coax network
to promote pay-TV and broadband Internet, which we refer to as
Big Pond cable. As I mentioned earlier, ADSL is currently under
development. We are still analysing the business plan. Were it
to be launched, it would not be much before next year.
ADSL is for us an access service which will be targeted
initially to teleworking and broadband Internet. It is likely
that it will be deployed in metropolitan areas that are not
currently served by the HFC network.
We use satellite technologies for a wide variety of
applications from pay-TV, remote learning and broadband
Internet. This is in general provided in areas where the fixed
network is uncertain or unable to support these applications.
They will be increasingly relevant, as we seek to deliver on
our universal service obligations to regional Australia.
There is a risk of cost duplication on our networks, although
we think that it is minimal, as we conduct an active review of
the technology that is likely to provide the highest quality
service at the lowest cost to our customers. In our case, cable
is limited to the existing pay-TV roll-out areas.
As you know ADSL is technically limited to 3-4 kilometres from
existing exchange buildings. That leads quite logically to the
use of satellite to provide broadband access to the rest of the
population. At this stage our broadband HFC network reaches 2.5
million homes. We have no plans to extend beyond that.
Will you have to reduce the number of employees to
make the company more efficient? Which efficiency benchmarks do
Switkowski: I recall that the headcount for Telstra
has fallen from about 94,000 employees in 1991 to about 54,000
now. We are part way towards the completion of a five-year
business plan that projects a continued reduction in staffing
levels, albeit at slower rates.
Now we are discovering that, even as our headcount falls in
some parts of the company, we are vigorously recruiting in
other parts of the organization, as we seek to get the right
balance of skills in the organization and position ourselves to
be an increasingly IT and IP-literate company into the next
We are helped by having a whole bunch of metrics and
benchmarks that are available in our industry from peer
companies. We sense that we are making good progress in terms
of productivity gains measured by these benchmarking studies.
On the other hand, we know that the world continues to improve
quite quickly and we will have to maintain vigilance and focus
to ensure that our costs continue to fall as a proportion of
We are seeing opportunities to reduce costs by improving our
processes, removing some overlapping responsibilities and
exploiting more strategic sourcing arrangements with our
vendors. These constitute just some of the examples. We can
also reduce costs by unlocking the potential of a workforce
that remains enthusiastic about contributing more productively
to achieving the company's vision.
How are you restructuring Telstra's international
operations? Do you have any ambitions to become a regional hub
in the Asia Pacific?
Switkowski: Firstly we are looking to our
international businesses to contribute to the accelerated
growth of Telstra that we have targeted over the next several
years. We believe that the Asian geography is an area where
Telstra has a strong legacy, quite an important franchise and
historically deep relationships. So the platform is there for
us to build on and grow.
Our international strategy can be thought of as having the
following dimensions: we have some offshore investments mainly
in Asia, which we will continue to manage more effectively. We
are proposing to encircle the globe with a number of points of
presence, so that we can provide international customers with
global products. We are continuing to look at forging alliances
as appropriate, where our multi-national corporations can
benefit, either from lower costs of capacity or end-to-end
connectivity in a customer-friendly way.
So these will be the criteria that we will use to drive our
international strategy. I think that our regional hub ambitions
have been well documented over the years. We have worked pretty
closely with Australian government departments such as foreign
affairs and in particular with Austrade, to promote Australia
as a hub. We are finding that the Sydney 2000 Olympics is
providing a very attractive event and opportunity that has
caught the attention of overseas organizations, as they seek to
establish a stable hub in the Asian environment.
Would you like to scale up Telstra's international
investments? Do you expect international investments to yield
an increasing proportion of revenues, as the domestic market
gets more competitive?
Switkowski: We will certainly be looking to
international investments to contribute more than they have so
far. At the same time, we have very demanding criteria for both
the risk and returns that we demand of all our investments. We
do have a strong balance sheet, and one that is capable of
bulky investments, should the right ones come along.
But we are more interested in investing in the future, that is
in the data/Internet and E-commerce space that in the past
characterized fixed line construction in third world locations.
We are poised to scale up our offshore operations, assuming
that we have business opportunities that meet that criteria.
Could you tell us about your presence in Vietnam? What
are your opinions on the future of global alliances?
Switkowski: We are proud of our achievements in
Vietnam over the past decade or so. We have a privileged
position with the Vietnamese government owing to our
long-standing presence in that country and the fact that we
have a good business. We have been responsible for ensuring
that Vietnam has a high quality telecoms infrastructure that is
as good as any in South-East Asia.
In fact, one of our senior executives, Peter Shore, was
acknowledged by the Vietnamese government and presented with a
medal for his services to the Vietnamese telecoms industry.
In terms of alliances, as I have described, that is one of the
key approaches that we have adopted to participate around the
world. I don't want to foreshadow some of our discussions at
the moment, because it is a pretty competitive industry. I am
reluctant to show too much of our hand. But it is fair to say
that Telstra is seen as an attractive ally owing to our
franchise in this area.
In a recent interview that we conducted with James
Crowe, he talked about the difficulties for traditional telcos
to adapt to change owing to 70-80 year-old business models,
claiming that new entrants who can come in and build a network
from scratch have a distinct advantage. What do you
Switkowski: Well, the question probably has more
relevance offshore than it does here, where Telstra has defined
the communications industry since the beginning of telephony in
the 1880s in Australia. But it is abundantly clear, that in
order to be relevant and successful, the business model of the
past is not the way forward.
The way forward will require us to effect the transition into
a high-touch, high-tech and high-growth enterprise. By
high-touch, I mean that we should be truly in touch with
customers determined to deliver high-quality service through a
workforce that is motivated, incentivized and well-trained to
deliver that service.
By high-tech I mean that we represent the only example of a
large, technically sophisticated intensive capital and IT
enterprise in Australia, making technology judgements all the
time. In terms of high growth, we are blessed by being a player
in the most dynamic industry in the world, which should lead us
to evolve disproportionately quickly and use that fast growth
as an opportunity to accelerate the transformation of the
organization into a 21st century communications telco. We will
adhere to the following model going forward: we will build upon
the past, but we will very quickly evolve away from it.
Finally, how have your experiences at Kodak and Optus
shaped your vision for the future of Telstra? What are your
hopes and ambitions for the next two-three years? What general
trends do you see emerging in this time?
Switkowski: A cosmic question. I will just hit on a
couple of those points. Firstly we are clearly driven by
shareholder value. I believe that you deliver
disproportionately attractive returns to shareholders by being
exquisitely good at delivering customer service.
You can only do that if you have people with the right skills
working with good processes in an environment that motivates
them to contribute. So the connection is between the
satisfaction of your people to deliver satisfaction to
customers and therefore meet shareholder expectations.
That connection is a strategic one for me. We will be working
on those dimensions. Secondly, I would go back to that headline
phrase I used earlier. We are going to be a high-tech,
high-touch, high-growth 21st century communications company. We
also benefit from our presence in a very dynamic industry. We
are resourceful. We have got a strong balance sheet.
We have an appetite to accelerate the transformation, a
process that was initiated by Frank Blount during his time
here. He took the company a huge way towards becoming a truly
world class operation. You will see fairly rapid progress in
all those dimensions over the next two-three years.