Tuesday, April 17, 2007

Tuesday column: "I'm from Telstra, I want you to campaign for higher prices"

If you are ever asked to join a “grassroots movement”, run. It’ll be no such thing.

A year ago Coca-Cola launched a fake “zero movement” in order to make it seem as if its latest soft drink was part of a social phenomena.

Now Telstra is bombarding its shareholders, customers and employees with glossy brochures, fact sheets and DVDs promoting a “Broadband Australia Campaign”.

It's a “grassroots” campaign. The brochures say so..

They ask us to “talk to family, friends and colleagues, contact local federal MPs, organize community meetings, set up supporters groups, write letters to the editor and ring talkback radio”.

In my view they’ve got about as much chance of building such a movement as Coca-Cola had of creating “the zero movement”. And they could be spending as much of their shareholders, customers and employees’ money trying.

Telstra’s complaint, apparently serious, is that someone in Australia is holding up the development of Broadband.

Gee – I wonder who that would be. Much of Gungahlin can’t get broadband at all. What was the name of the telecommunications company that wired those suburbs?

Even where Telstra has installed high-speed broadband equipment in its exchanges, it won’t allow it to run at full speed until someone else, another company, puts in competing equipment. Really.

Telstra confirms this. In the words of its website and glossy brochures: “Today BigPond broadband is available at speeds up to 20Mbps in some areas. That’s pretty quick compared to what we’ve been used to. However because of regulatory constraints, the up to 20 Mbps service is limited to exchanges where competitors are also offering those speeds.”

Telstra is prepared to speed things up, but it’ll only do so where someone else is offering high-speed competition.

What was that question again? Oh yes. Who is holding up the development of Australian broadband.

Telstra says it is “regulatory constraints”. What it means is that if it does turn on its high-speed equipment it will be forced to allow other internet companies to buy the high speed service from it at wholesale rates and compete against it.

If it doesn’t turn up the speed it won’t have to give what it sees as a leg-up to a retail competitor. But where a competitor goes to the expense of installing its own competing equipment, it will turn up its speed in order to match the competition.

It’s the commercial equivalent of a strike - the sporting equivalent of taking home its bat because it doesn’t like the rules.

Telstra’s Broadband Australia Campaign is about scaling up that tactic.

It is holding out the promise of spending what it says would be $4 billion building a state-of-the-art fibre to node network with a maximum speed of an impossibly fast 100 Mbps, about 100 times what fibre-to-node operations such as TransACT offer.

But it says it won’t build it if it has to provide wholesale access at prices decided by the Competition and Consumer Commission.

In its words, it wants a price “that enables Telstra to fully recover its costs and achieve a competitive rate of return on its investments.”

Oddly for an organisation so keen about putting forward its case, it hasn’t said what that price is, but the industry talk is that it wants $90 per line per month. That’s right: $90. Any competitor bold enough to take up the offer would have to charge more than $90 per month retail.

Telstra’s competitors would prefer to pay something closer to $20 per month, which they say would represent the actual cost to Telstra of adding them on to the service, and in any event they would like the ACCC to adjudicate, as the present law requires.

To an economist it is a straightforward debate over the merits of charging the average cost versus the marginal cost.

To Telstra, it is case of: give us what we want or we won’t build it.

The average cost would be the $4 billion Telstra says it would spend, divided by the likely number of customers. The marginal cost would be much lower - the cost to Telstra of adding another customer to an existing service.

Good economic arguments can be made for either charge, and most probably the ACCC would settle for a charge somewhere in between.

It might be interested in looking at the arguments made across the Tasman.

There a relatively small telecommunications provider is seeking access to the infrastructure built by the bigger Telecom New Zealand.

In its 2005 submission to New Zealand’s pricing regulator it has argued for “a lower, rather than a higher” price arguing that that will bring about lower prices to end-users, strengthen competition, promote innovation and reduce the need for competitors to needlessly duplicate Telecom NZ’s infrastructure.

That relatively small NZ telecommunications provider is TelstraClear, a wholly-owned subsidiary of Telstra.

Perhaps unwisely in these days of increasing use of the internet, Telstra is mounting one argument on one side of the Tasman and another on the other.

What’s disturbing for computer users on this side of the Tasman who don’t want to pay $90+ per month for high-speed internet, is that it looks as if Telstra is about to win.

Ever since Labor announced its own $4.7 billion broadband plan last month Telstra is thought to have been hunkered down with the Communications Minister working out a response.

So worried are Telstra’s competitors that Senator Coonan is about to give Telstra what it wants that 11 of them came to Parliament House last week to try to stir up opposition.

There was one notable exception. Optus – Australia’s second biggest telecommunications company declined to take part.

It is feared that the Minister will announce that Telstra has been given a holiday from the requirement to charge low access prices in return for building a fibre-to-node network in the cities and that Optus has been given $600 million to build a rudimentary network in the bush.

The plan would trump Labor’s because it would start straight away and would be seen to cost much less.

But anyone who was in a hurry to use high-speed broadband would end up paying much more.

Telstra would do what any company granted near monopoly pricing power would do. It would charge an extraordinarily high price at first to gouge money from the early adopters, and then lower the price slowly - just as it did 20 years ago when it introduced mobile phones to Australia.

The customers that Telstra is recruiting to its “grassroots” campaign may not fully understand what they are campaigning for.