Telstra Corporation Ltd (ASX: TLS) recently hit multi-decade highs when it closed above $6.60, but since then, the market seemed to be looking for reasons to mark the stock down and it may well have found some.
Whether investors sell the stock based on the below headwinds will depend on their risk tolerance, but it seems as though Telstra may have to reinvent itself again to grow its profits at the same rate as past years, and there is no guarantee it will be able to do so.
Mobile madness
Around a decade ago the structural shift away from landline phones to mobile phones was in its infancy. At the time, Telstra management was heavily critiqued for its heavy investment in mobile infrastructure, which impacted shareholder returns at a time when many were still irritated at the heavy share price falls after tranches of privatisation.
Fast forward to 2015, and Telstra has 16.7 million mobile subscribers, which is more than the number two and number three providers combined.
During the same time period, Vodafone earned the unfortunate nickname "Vodafail" for its deplorable service levels and network failures. That created 2 million customers without an acceptable mobile network, and many flocked to Telstra.
Now, those trends are reversing, and competitors including Optus and Vodafone have signalled intentions to compete hard for market share. In addition, it is highly unlikely that the massive failings of competitors will be repeated, depriving Telstra of the "free kicks" of the past.
NBN nightmare
For a long time, Telstra's unassailable competitive advantage over its competitors was its ownership of the most extensive national network of telecommunications infrastructure. In some cases, it was even able to charge competitors for use of its assets, especially in remote areas.
The rollout of the NBN also represents the coming of a threat to Telstra's advantages as a business. Put simply, the NBN represents a levelling of the playing field between internet providers.
While Telstra was compensated in cash for the loss of its monopoly, the fact is that cash is only an adequate replacement for a monopoly asset if it can be reinvested in another asset that provides equal or better returns over a substantial time period, and there is no clear evidence of that taking place.
Regulatory hurdles
Telstra (and other phone companies) have long been beneficiaries of falling SMS and mobile phone call costs. The benefit arises because the phone companies have thus far failed to pass those cost savings onto consumers.
The ACCC has identified this disparity, and has plans to regulate the costs that companies can charge each other for exchange fees, which have been a lucrative cash cow up until this point. With more communication than ever taking place on mobile devices, the proposal to cut fees via regulation may have significant effects on the bottom line for Telstra.
Telstra has benefitted from enormous tailwinds over the past decade as a primary facilitator of a huge increase in mobile and internet communications. But those tailwinds have eased and in some cases, become headwinds. Better opportunities may exist elsewhere in the market.
