Friday, June 22, 2007

Saturday Forum: Telstra's worst nightmare just got worse.

Telstra’s worst nightmare just got worse. Until this week it had been understood that if ever there was big money to be spent building phone and broadband networks in the bush, Telstra would do it.

And if ever Australia was to get a rolled-gold replacement for its copper-wire based network in the cities Telstra would build it. It owns the network we already have, and more importantly it owns the wires going into each home that would have to connect to the new network.

On Monday John Howard and his Communications Minister Helen Coonan rendered the first assumption obsolete. A new consortium made of Optus and Elders was given almost $1 billion to help it provide broadband and associated phone services in the bush.

For the first time where big government money was at stake Telstra lost out. It says the government “ignored Telstra’s bid altogether, refusing approaches to meet on the matter and not once asking for any further information or clarification”...

Optus and Elders will be able to make Telstra irrelevant in the bush if they want to, using their own equipment and radio transmitters to bypass Telstra’s ownership of the wires that go into houses and farms.

Work on the network will start in eight weeks. When it is finished in two years time Telstra’s old slogan “Advancing Australia” will be quaint and wrong.

In the cities Telstra believed it had the government in a headlock. It said only it could build a fibre-to-node broadband network that would connect that would reach every house in every street. Again, its trump card was that only it owned the wires going into the homes.

It said unless it was freed form the oversight of the Competition and Consumer Commission it wouldn’t build it, and it imposed a deadline. It gave the government until July 31.

On Monday Howard and Coonan ignored it on that as well. They up an expert committee to more broadly examine ideas on broadband with no fixed deadline.

They called Telstra’s bluff. Telstra had threatened to walk away in the belief that no-one else would be able to build a network that would supersede its own.

On Wednesday Telstra’s nightmare turned toxic.

Europe's largest telecommunications company Deutsche Telekom was named as one of several international corporations keen to build a new broadband network in Telstra’s place.

In the ACT we know that despite the conventional wisdom it is possible to build a broadband network and take it into homes without Telstra.

TransACT puts it into ACT homes by putting in its own wires. Telstra sockets sit unloved on ACT skirting boards, presumably still connected to the network but irrelevant.

It is a very expensive exercise for TransACT and it is able to do it only because one of its parents ACTEW already owns the electricity poles from which it strings the cables. (It can’t do it where it doesn’t have the poles, which is why it can’t service parts of the Canberra suburb of Gungahlin. The electricity wires put underground.)

With enough money behind it a corporation such as Deutsche Telekom could render Telstra’s entire network irrelevant.

Operating as a new Australian company with new equipment it could secure greenfields industrial agreements and employ only the minimum of highly skilled staff it needed to make its network work. Unburdened by thousands of telephone exchanges, call centres, retail shops and creaking IT systems, it would be a cheaper network than Telstra’s to run.

If a company such as Deutsche put a fibre wire into every home instead of a wire (a very expensive undertaking), it would have a network that ultimately would cost very little to maintain.

As the aging Telstra network became more expensive to run and as the new corporation paid down its debt and gained more users its network would keep getting relatively cheaper.

And far from trying to keep other companies off its network, as Telstra has done, it would welcome them. The new network owner wouldn’t be in the complicated and expensive business of retailing. It could make more money by selling access to the network wholesale, at reasonable prices. With practically unlimited capacity on the network it would make more financial sense for it to charge a low price and get a lot of customers than to charge a high price and get few.

All Deutsche Telekom would need would be the money. The worst part of the scenario for Telstra is that it would be find it in spades.

Australia’s Macquarie Bank and Babcock and Brown have made fortunes finding the money for these sort of deals. Macquarie does it for radio and TV transmission towers and for toll roads. Babcock and Brown is part of 3 groups bidding for the right to build Singapore’s high speed broadband network.

Right now the world is awash with superannuation and pension fund money looking for safe, reliable and ultra-long-term returns. Investment banks such as Macquarie and Babcock use this money to build or buy infrastructure designed to last a very long time. A fibre broadband network covering every city in the country would last longer than most of the assets Macquarie packages into trusts, and the income from it would never stop.

For putting such deals together (contracting the builders, working with a company such as Deutsche and spruiking the trusts to funds) organisations such as Macquarie and Babcock and Brown charge healthy fees. But the investors in the trusts don’t mind. Boring, stable income earning-earners are exactly what they need.

(Those investors would however be very alarmed if the trusts started behaving like Telstra and sprayed around billions in ill-conceived ego-boosting expansion plans.)

The plain but unlikely-sounding truth is that an infrastructure company that only provides infrastructure is worth more to a certain type of investor than one combined with an aggressive and market-leading retailer.

Telstra had and still has the opportunity to structure itself as such a company. It could either split itself into two shareholder-owned companies, one operating the wires and other using them or split itself internally. One of its business units would chase business from the likes of Optus, iiNet, and Telstra Retail while the other one would compete agressively against them.

To date Telstra has resisted structural separation at every turn. It persuaded the former Communications Minister Senator Richard Alston to do the same. Late in 2002 he set up a parliamentary inquiry into the idea in an attempt to discredit it and then shut the inquiry down when it looked as if it was not going his way.

The government and Telstra’s shareholders may now be wishing that Richard Alston had been less successful. In private hands and conflicted as both Australia’s dominant wholesaler and retailer Telstra has behaved like a bully. It won’t turn on the high-speed equipment it already installed in many of Australia’s exchanges for fear that competitors will try to buy access to it. It charges so much for its impressive Next-G wireless broadband service (through excess download fees) that neither its competitors nor most of its retail customers can afford to use it for true broadband. And it lobbies and delivers ultimatums in order to keep its competitors away from its wires.

The group that Senator Coonan has set up to examine ideas for broadband is likely to be extremely receptive to proposals from stand-alone operators such as Deutsche with Macquarie. They would be proposing a network that stood alongside, rather than replaced the existing one. Telstra wanted to disconnect each of us from its existing network, reconnect us to its new higher-priced one and turn the old network off.

With the new network and Telstra’s old one operating side by side Australians would have a choice - old technology or new, Telstra’s prices or those of the companies using the new network. The competition would hold prices down, at least until Telstra’s network died of old age.

12 consortia are bidding for the right to build the Singapore network. It is highly likely that they would be interested in doing so here as well.

Telstra’s 1.7 million shareholders stand to lose a lot from the decisions announced by Howard and Coonan this week, especially Telstra’s management makes good its threat to walk away from its offer to build a fibre-to-node network after July 31.

Those shareholders might take the view that Telstra’s management has served them incredibly badly, that Telstra’s lobbying and its threats have unleashed processes that Telstra can no longer control.

The Labor Party might be feeling bruised as well. Its “nation-building” plan to kick $4.7 billion into a consortium to build a national fibre-to-node network looks redundant. Now that Elders and Optus have been given money to fix up the bush, a fibre-to-node network in the cities looks commercial without government money.

As far as I can tell Labor’s Communications spokesman Senator Steven Conroy put out only one press release after the Minister’s announcement this week, complaining that it defined Hobart and Launceston as regional centres rather than as cities.

Like Telstra, Labor appears to have been blindsided.