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September 15, 2009
I never thought that the Rudd government had the political courage to correct the mistakes of the previous Howard and Keating governments that created the 600-pound Telstra gorilla in the telecommunications market. We all knew what happened: Telstra stalled on providing access to its copper wire network, charged unfair access fees, offered poor services, and it acted to both undermine regulation and prevent competition to further its monopolistic agenda.
For consumers broadband on the old copper wire was expensive, slow, geographically limited with limited competition. Reforms were long overdue, and the right policy was to structurally split Telstra's wholesale and retail businesses, as well as to build a new publicly owned, high speed cable broadband network. I didn't think that Rudd + Co were up to splitting Telstra, even when they came up with the $43 billion national broadband network--a pure wholesale fibre-to-the-premises network-- which they plan to complete in eight years.
However, this morning Communications Minister Senator Stephen Conroy announced that Telstra would need to structurally separate voluntarily; and if not, then the Government would force a split under a new regulatory regime by preventing Telstra from acquiring new wireless broadband spectrum to build up its wireless internet service (4G services) in direct competition to the NBN. Structural separation, presumably, means the creation of two entirely separate companies.
Conroy also addressed Telstra's vertically integration-- his proposed reforms require Telstra to sell its Foxtel stake and to lose its cable network. He also proposed to strengthen the Australian Competition and Consumer Commission's power to set upfront terms for access to Telstra networks.
These are far reaching and much welcomed reforms. Though Conroy can’t force Telstra to divest the cable and its Foxtel interest, he can coerce it into ‘voluntary’ divestment with that threat of denying it spectrum for its future mobile broadband. Telstra will probably would take the voluntary option, as we are in the dying days of the old copper era, and so begin the cultural shift to being only a retailer and a media company, as well as operating a mobile network
The government's strategy is to create a purely wholesale monopoly by displacing Telstra’s copper and gaining its customer base. The problem here is how can the NBN develop critical mass in the face of a still-operating, fully depreciated copper network capable of delivering fast-enough and cheap-enough broadband to most of the population that would pay for it. The answer is to get the internet service providers to defect from Telstra. Presumably, consumers would shift from Telstra's cheaper copper broadband to the more expensive national broadband network if we’re getting real value added in terms of services that we’re not getting today. Those services are....
Will structural separation reduce the incentive for Telstra to keep its customer base on its existing copper network, and therefore help accelerate the process of building volumes on the NBN? Will Telstra be required to provide regulated access to its upgraded 100Mbps cable network? Who will try and grab Telstra's 50 per cent stake Telstra ($1.5 billion) in Foxtel--- Stokes, Packer or Murdoch? Foxtel is a lucrative business for the telco and it will try and wriggle free by trying to sell something else instead.
Update
Answers to these and other questions will emerge over the next year or so as the legislation passes through Parliament. Stephen Bartholomeusz says in Business Spectator that it is Telstra’s customer base the NBN needs, which means that the copper has to be made unattractive – or unavailable – to Telstra so that the government’s stated objective of having only one wholesale network with a series of competing telcos and ISP's with equal access to that network would be achieved.
Alan Kohler points out the problem for Telstra, as it shifts from wholesale plus retail margin to retail margin only, is how can its huge fixed line customer base be leveraged into high margin mobile and media products before it is eroded by competition on the NBN? It will have to work harder than it ever has before to keep customers.
What happens to the old copper network? Closed down and sold off for scrap?
Will the Coalition support greater competition and more open markets, rather than be tempted to defend Telstra? My gut says that the Nationals will probably support the legislation in the Senate but the Liberals won’t.
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I'm holding off getting too excited about this. Every other big, brave announcement by this government has been watered down to the point of meaninglessness and I expect this to be the same.
One decent push from four Telstra share owning Exclusive Brethren members in a marginal seat full of working families and it could all fall over.