Vertically challenged: Telstra gets an offer it can’t refuse

Political double-speak was at fever pitch this week as the Australian Government proposed a “voluntary” break-up of incumbent Telstra, backed by laws that will lock the US$37billion giant out of wireless spectrum sales if it does not comply.

Australia’s Communications Minister Stephen Conroy is well-versed in his political party’s tradition of doing the deal first and having the debate later – and this is clearly how he intends to deal withTelstra.
Announcing new legislation the Labor Party Senator said: “It is the government’s clear desire for Telstra to structurally separate, on a voluntary and cooperative basis.”

And then came the sting, in the background paper: “Telstra will be prevented from acquiring additional spectrum for advanced wireless broadband while it: remains vertically integrated; and owns a hybrid fibre coaxial cable network; and maintains its interest inFoxtel.”

The deal was done. Telstra can sign an enforceable agreement with the Australian Competition and Consumer Commissioner by the end of the year to break itself up or face so-called “functional” separation under legislation that would force its network and wholesale operations to work at arms length from the rest of the company.

Telstra’s new CEO David Thodey expressed “disappointment” and a willingness to discuss “options around separation”. But it seemed Telstra was caught like a rabbit in the headlights. Colourful former CEO Sol Trujillo might have come out swinging but he is long gone.

Observers are divided over the benefits of structural separation.

“Separation has only been accomplished in two other markets, the UK and New Zealand, so global experience is limited,” said David Kennedy, Research Director for Ovum in Australia. “There is no doubt that separation creates a more level playing field and a more dynamic market. However, it also increases static costs, and there are suggestions it reduces investment incentives. It remains to be seen where the long-term balance lies.”

But behind all the argument is Australia’s National Broadband Network (NBN). Telstra missed out on participating in the NBN when the Australian Government announced it would set up a stand-alone company to develop the network from scratch.

Now, of course, Telstra needs spectrum to develop its advanced wireless broadband network that could compete with the NBN. Mr Thodey’s response to the Conroy package harked back to this. 

“Telstra supports the Government's NBN vision,” Thodey said. “We are willing to discuss options around separation, (but) it is Telstra's view that many aspects of this package are unnecessary and need never be implemented if a mutually acceptable outcome can be reached on the National Broadband Network.”

Ovum’s Kennedy suggests that these reforms are an opportunity to create a transition strategy to the NBN, porting Telstra’s copper access network into the NBN Co. and thereby providing an immediate wholesale revenue stream for the company.

“This would also reconfigure the NBN Co’s task,” explains Kennedy.