Like incumbent telecoms around the world, Telstra is facing falling profits from its traditional fixed-line networks and competition is squeezing mobile margins. Credit:Rob Homer Telstra did not directly answer Reuters' questions about the performance of specific investments or make its CEO Andrew Penn available for interview for this story. In a written statement, Telstra said all of its investments were consistent with aspirations to become a "world-class technology company". The company also responded by noting recent public remarks by Penn, who told an investor briefing in Sydney on November 17 that after making "a number of acquisitions" the company is "consolidating" its investments in new businesses. Like incumbent telecoms around the world, Telstra is facing falling profits from its traditional fixed-line networks and competition is squeezing mobile margins.

Telstra CEO Andy Penn the investor briefing earlier this month that he still believed in Ooyala and the potential for video streaming. Credit:Jessica Hromas Telstra is conducting a review of its capital allocation as a result of the pressures. That prompted rating agency Standard & Poor's to revise its outlook on the company to negative, concerned that Telstra may take on more debt at a time when competition among mobile operators is intensifying. Any change to Telstra's A/A-1 rating would increase its cost of capital. "They're at a critical juncture; for me as an investor it's hard to paint a picture that Telstra is in a better place in five years' time, with any confidence, than they are now," said Hugh Dive, senior portfolio manager at Aurora Funds Management, who sold the fund's Telstra holding during a company buyback in September. The company's mainstay businesses remain profitable - fixed and mobile income together came to $16.7 billion in the last fiscal year - and some bolt-on investments such as the 2014 purchase of undersea cable company Pacnet for $US697 million are boosting operating revenue. Also, with a gross dividend yield of 8.80 per cent, Telstra is among the highest yielding companies in Australia, while still retaining $3.6 billion in cash or equivalents in June.

But income from Telstra's traditional businesses of fixed-voice line and mobiles fell 1.5 per cent in the last fiscal year, the company said in August. It has also forecast a hit against earnings before interest, tax, depreciation and amortisation of $2 billion to $3 billion from the loss of its wholesale business when the new government-owned broadband network replaces Telstra's copper lines completely by around 2020. Telstra's strategy has been to look to venture-capital to find new businesses. But new, steady, revenue has proved elusive. "The underlying traditional income has been under threat for a long time and it is a long-term decline but at the same time generating new revenues are taking much longer to eventuate," said telecommunications analyst Paul Budde, who runs his own consultancy. Music-streaming service

Telstra's experiments have been many and varied. It launched a music streaming service in Australia in 2012, only to close it in 2015 in the face of competition from market-leader Spotify. It purchased a quarter-share of Dimmi, a restaurant booking app in 2012, then sold it in 2015, without disclosing the value of either transaction. It persists with a Netflix-type movie streaming service as part of its media division. Its investments in software start-ups span healthcare, mining services, mobile messaging apps and cloud computing, and have recorded some modest successes. In 2013, it bought 18 per cent of start-up Whispir, a growing Melbourne-based communication software company. In 2014 it bought in to DocuSign, a San Francisco company that makes electronic-signature software and is now headed for a $US3 billion listing. But neither they, nor Telstra's healthcare division, established in 2013, have delivered revenues sufficient to move the needle much on Telstra's bottom line.

Posterboy for its problems is Ooyala, whose video playing technology combines high-quality streaming with data-crunching, which is supposed to allow media customers to run targeted adverts within videos. One issue was Telstra's slow-moving monopolistic culture in a competitive sector that changes dramatically every few months, according to one former investor. Scott Flanders, former Playboy CEO and an angel investor in Ooyala, told Reuters that as soon as Telstra took over, Ooyala's once "crisp" customer service and product pipeline began to slip. "They did fall behind ... we probably shouldn't have been, but we were surprised because we thought there'd be more engineers hired and the company would even widen its technology advantage over other, less-well-funded start-ups," Flanders said in a phone interview from Silicon Valley. In two tranches, Telstra spent $US330 million buying 98 per cent of Ooyala between 2012 and 2014. It booked a $246 million impairment on the investment in August.

Ooyala's vice president of products and strategy, Jonathan Wilner, said in a statement in response to Flanders' comments that it had bought two video advertising and media logistics companies within nine months of the Telstra acquisition, and that this had slowed down innovation. But both new businesses were growing, he said. Wilner said the company had under Telstra resumed a "steady pace of innovation and product releases". Loading Penn the investor briefing earlier this month that he still believed in Ooyala and the potential for video streaming. Reuters