Telstra Needs Threat of Separation | BTalk Australia

Telstra has its detractors. One of them is telco industry analyst Paul Budde. In this edition of BTalk Australia Budde tells Phil Dobbie that he sees the structure and behaviour of Telstra as unique in the world.

Budde believes there needs to be at least a threat of a structural separation of Telstra to encourage a more cooperative approach to the planning of Australia’s broadband future.

Click on “Play” above to hear the podcast.

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• Today’s Transcript

Dobbie: Good day, I’m Phil Dobbie. Telstra, love them or hate them, they’re the biggest telecommunications company in the country. Should they stay as they are? That’s today on BTalk Australia.

It’s been a topic of discussion for many years. Telstra, should it stay as it is or should it be broken into wholesale and retail operating units? To add some insights to the debate, I’m joined by telco analyst Paul Budde. Paul did this problem really start back in 1997 when the first part of Telstra was listed on the ASX? Should it have been split up then before we got into this problem? Should we have sold off the retail part and kept the wholesale part with the government?

Budde: I think Phil that the whole thing goes back even further to 1989. At that point in time, the government decided to merge what was then Telecom Australia and OTC, the overseas telecommunications corporation. And that starts to create this massive organisation back in those days. At that point in time as hindsight, you know there would have been a fantastic opportunity to sell the seats for two independent companies that could eventually compete with each other. So yes, there was a missed opportunity in 1989, yes there was a missed opportunity in 1997 when the government introduced a new telecommunications act and yes there was another one in 2004-2005 when the government decided to privatise. So at three points in time, the government had an opportunity to, you know, to get an industry structure in place that would support competition and innovation and started to look forward to, you know, the applications that are required over broadband, for health care, education, smart grids, etcetera. They missed three opportunities in a row.

Dobbie: Right, but I guess on each of those opportunities the problem was getting worse wasn’t it? It was getting more complicated to untangle?

Budde: Yeah, because you know what is happening of course over time Telstra has grown and grown and grown and is now so incredibly omnipotent and powerful that it feels itself above the law, it feels itself you know totally separated from the rest of the country. It’s incredibly arrogant, you know, it has sued ministers, it’s talking very, very poorly about the regulator. It calls its competitors leeches and parasites. I mean, one of those leeches, Optus, is at the same time their largest customer, perhaps worth you know a billion dollars or so. So you know it really feels itself above the law.

Dobbie: So what’s the situation around the world? How many incumbent telcos like Telstra have retained the infrastructure and retail operations together in one entity? Is that still the norm around the world?

Budde: No, the uniqueness of Telstra is that it dominates in the fixed telephone market, in the mobile market, in the pay television market, in the directory market … and that makes it — across these industries — totally unique in the world. There’s no other telco in the Western world that has that level of dominance across a range of markets. And also the behaviour of Telstra is absolutely totally unique in the world. You know there’s no other telco that feels itself so powerful that it starts suing ministers and calling these competitors names and things like that. That’s pretty, pretty unique in the world.

Dobbie: Now one of those people who has got a colourful handle on the language is Phil Burgess, Telstra’s PR man. He’s compared BT to a basket case since they had that operational separation imposed on them two and a half years ago. Is he right about that? What’s the situation with BT? I look at the share price; it’s pretty close to where it was back then two and a half years ago. It lifted a little bit then it seems to have nosedived a bit. Whereas Telstra has you know by and large over that period gradually seen a bit of an increase. So what’s the comparison with BT?

Budde: Well, first of all, BT responded quite angrily themselves from London about these remarks from Telstra. And they can speak for themselves; they don’t need Phil Burgess to do that. They are on the record of having quite significant growth after the structural separation of the company. So I think it’s all of those sort of arrogant stands of Telstra to make that sort of wild announcement that are absolutely totally not true. Telstra is basically telling all these sort of stories which are bordering on the edge of lies, continuously. And they continuously get away with it. Now if you are a dominant monopoly as Telstra is in Australia, you are most probably one of the most profitable telcos in the whole world. They get a four-billion-dollar profit because they’re dominant. They can set the prices the way they want. They can screw people the way they want. They don’t have to provide customer service because people can’t go to anybody else. They dominate — something like 90 percent of all the profits in the market and the other 700 companies have to share the other 10 percent, of which Optus takes 5, so you can say 700 companies share 5 percent of the profits of all telecommunications in this country. So yes, if you have the opportunity to print money, then obviously you’re doing a great job for shareholders. Shareholders love monopolies. But that’s not in the national interest, that’s not nation building and that’s not looking forward to a more sustainable environment because it’s totally impossible that Telstra will be allowed to maintain this monopolistic and dominate position for much longer.

Dobbie: So can I take it you’re not a big fan of the ACCC? I mean the argument obviously is that the ACCC should have the teeth to be able to control the excesses of having such a dominate telco in the country.

Budde: Yeah, in 1996-97, the then government took the decision to actually set up and sell off a regulatory regime. So it thought that by indicating that the government wanted more competition and that the government wanted to change Telstra, but actually it says we leave it up to Telstra then to make decisions, you know to change, and works it down with the industry. Now it’s like one big elephant with 12 little mice walking on the football field and trying to play a game without an arbiter. So guess who wins. So the sale of regulatory regime that was set in place by the previous government has totally and utterly failed. And all the time, because of the privatisation process, the previous government didn’t really want to give the ACCC more powers because that would mean that would decrease the value of the share price that the government would fetch for selling off Telstra. So you had this vested interest from the government to actually not come up with the proper regime and not looking after the national interest, but really looking after the money and greed got a hold of the previous government rather than the national interest.

So yes, you know that is the situation that we are in now. The ACCC still doesn’t have sufficient powers. If you look at all the countries, take for example Britain that we spoke about earlier. There the government has given the Ofcom, similar to the ACCC, the powers to, if needed, structurally separate the British telecom, structurally separate, yeah. So split them totally into two or three parts if they want. You know not that it’s necessarily the case that you need to use that, but if you have those powers, then most probably a telco is going to listen to you rather than abuse you.

Dobbie: It’s going to behave, yeah. David Kennedy from Ovum has said that separation of Telstra could be detrimental, and he gives the example of France. He says they’re the leader in Europe for fibre to the home and they did that without a separation policy. And he says separation would simply delay broadband roll out. Is France a good example to look at overseas? Is he right on that?

Budde: Yeah, it’s very easy for David to make that sort of mentioning. But you know the reality is that what we want our outcomes, you know we don’t want operational structure or whatever. I mean the outcome should be more competition that leads to innovation and that you can start building you know proper broadband networks. Now, what you need for example, if you want to deliver a health care service to the community, you need the health care organisation need to be able to deliver telemonitoring, video nurses or whatever service they want to every single household in the country. Now if you do that based on Telstra’s mobile worth says I want an 18 percent plus return on my investment, yeah? Then it becomes totally economically unviable to deliver health care, education, smart grid services to the population. Users will have to pay something like 70, 80 dollars a month for internet access.

Dobbie: Yeah.

Budde: Well, that’s great, but 60 percent of the population is not going to do that. So what you need to create is an environment whereby Telstra is willing to actually start asking for on the infrastructure level a return on investments around 8, 9, 10 percent. And if you do that, then you build an infrastructure that becomes economically viable not only for the competitors but also for some of the other social and economic service that you want to run over the network. Now, in Australia, Telstra is saying no, no, no, no. They don’t want to talk. They don’t want to talk to the government, not to the regulator, not to the industry. They don’t want to sit down like what happened in France where the industry sits together and sorts out the problems. That happened in New Zealand. That happened in Britain. That happened in the Netherlands, where you sit down and sort out the problems. But if you have one party, the dominant party who absolutely, totally refuses to sit down, then it’s nice to say “oh, we don’t need operational separation”, but the reality is how on earth can you force anything less if the incumbent is absolutely totally adamant not to cooperate? The only solution that the government then has is the biggest possible stake they have and that a structural separation and say Telstra if you don’t come to the table, if you don’t sit down, if you don’t come up with a solution, we structurally separate you. Nothing less, Telstra will not listen to anything else, anything less. I’m not saying that we do need structural separation, but in the situation of Australia, I cannot see any other solution because of the total and utter unwillingness of Telstra to sit down with the rest of the industry and the rest of the country to work out a solution.

Dobbie: Now it seems one of those areas of debate apart from the structure of Telstra is what needs to be built. I mean Telstra are saying we need 80,000 fibres and load boxes to cover 98 percent of the population. Some other people who are pitching are saying, well we can do it with a combination of fibre to the node and ADSL2+. What do you believe?

Budde: I mean, what I’ve discussed with the Minister Stephen Conroy is that what we need to develop is a long-term plan. What we need to say is where do we want to be in 10 or 20 years? If you talk about infrastructure, you don’t talk about the next financial quarter. You talk about 5, 10, 15, 20 years from now. So we should say let’s say by 2020, the whole of the country should be linked to a fibre to the home network, yeah? So that would be the ultimate goal. Then you start working your way back. And you say, OK, what is needed now? What is needed in five years? And what’s needed in 10 years? And what’s then finally needed by 2020? Now obviously this is an evolution not a revolution. So obviously you have to start using DSLAMs and DSL and ADSL and VDSL and wireless and satellite to make that first step. Then you make the next step and then you know that includes fibre to the node and what have you. And all the way together with an industry, you have to sit down and say what’s the best solution forward? Because the solution is not just getting a monopolistic network out there and screw everybody, as Telstra has been doing so far. You need an environment that is affordable, where everybody can participate and where there is very, very importantly, where there is competition. And if you split the infrastructure from the services, I have no problems whatsoever if Telstra or anybody else comes up with a brilliant service and makes a 500 percent profit on that particular service because we the consumers love it and are now prepared to pay for it. Good on them. But if you talk about the infrastructure, that’s a totally different issue. That’s where you have to have a national sort of plan of action and that’s where you have to start looking at that level. Once you split that from each other, you can sit down with engineers who know and understand infrastructure and say “what’s the best for this country?” Not what’s the best for Telstra or best for Optus or the best for whatever, no. What’s the best for the country? And then work out an infrastructure plan together and look, you know what do the utilities have? What do the railroads have? You know what can we use from other networks that are already in place? You know, map them, make a blueprint, link them together and then on top of the network, have competition and have services. You know the more the better. And yes, there will be services that will fail, there will be services that will be good. But that’s the nature of competition. That’s the nature of our society.

Dobbie: How are you going to get that cohesive plan? Telstra would argue you really need one company of a decent size to be able to deliver an infrastructure and develop a plan over a period of year. If you’ve got a consortium which is made up of a variety of companies that are going to share that investment in infrastructure, aren’t we going to see, you know it sounds like a recipe for disaster. Isn’t there going to be continual in-fighting amongst those consortium partners in terms of the financing of that infrastructure?

Budde: The reality is that you know that if you talk about infrastructure that’s highly unlikely that you can have multiple players in the market. So you need one network. Now one network could be the bits and pieces are owned by all the people, here for example, as I mentioned the electricity companies or railroads or gas companies or sewage companies, whatever. But you have to utilise the network that you have. It doesn’t make sense, particularly not in regional and rural Australia, to overbuild networks. So if there is anything, for heaven’s sake, let’s use it. If it’s the gas pipeline, with then fibre next to it, let’s use it. You know, so you start looking at what infrastructure is there, what can you use. You also cannot have a solution without Telstra. You know Telstra is by far the largest player in this market. You know they have 90 percent of all the infrastructure. So it would be even silly to consider an alternative to Telstra from an infrastructure point of view. So the only real solution going forwards is actually a separation of the infrastructure from Telstra and then it can be used by others. I mean the outcome that everybody wants including G9, including the other bidders is access to infrastructure. They don’t necessarily want to be infrastructure builders, access to infrastructure. So when you start solving access to infrastructure by operational separation for example, then you create a much more economic viable situation on how to go forward. Now G9 for example or Deutsche Telecom or Axia or you know whatever, you know is bidding for networks, for the tender at the moment. They all, what they want, deliver the services over the network, yeah? So if you as the government makes a plan that say we operationally separate, then you will start seeing that the tender documents, this was only a request for proposals, the tender documents will be totally different from these tender documents because you know you cannot make a tender if you don’t know what the regulatory environment is. If the regulatory environment will be, there will be operational separation, then my tender will look totally different from a situation where there wouldn’t be operational separation and the government would say, no we start overbuilding networks, there will be competing infrastructure and everybody you know builds their own network and start competing as in the Wild West, and kill each other in that process. Now obviously the tender process in a situation like that, the tender, the formats of the tender, the document, tender documents will be totally different from a situation whereby you have more sanity in the market and where you start talking about infrastructure rather than overbuilding and sharing it, particularly in regional and rural Australia.

Dobbie: So how do you think the situation is going to be resolved? I mean we’ve missed three opportunities for operational separation. Are we going to make it around to a nice round four?

Budde: The odds in Australia, of course, are in favour of yet another disaster story. In the next 10 years we’ll be battling on as we’ve done with the previous 10 years. The odds are clearly in favour of a situation that Australia has not proven to be able to come up with a sensible solution. So if it comes to the crunch, the governments are giving in. It’s all too difficult and they give to all sort of rows to Telstra. However, there is significant hope that this government you know is making, is prepared to make tough decisions, yeah? And if the tough decision is to come up with structural separation as a threat, not necessarily to say it has to be structural separation. But if it gives the ACCC the power for structural separation, then you also will start seeing that Telstra will have to change. Telstra cannot afford not to be in the telecommunications game. So they have to be part of it. If it’s clear that the legislation will be structurally, structural separation, then obviously Telstra will also have to start changing its tune and will have to start looking at alternatives. You know we might need a new management from Telstra to put a different sort of plan in place. But you know if the government is strong as you’ve seen with the governments in Britain and in New Zealand and in, well even in France and in the Netherlands, you know the governments were very, very strong. The outcome was not necessarily always the separation, but the initiative from the government was strong enough to either force the company to the negotiation table or to come up with solutions that suited various parties in the market. So you know I think that the next step would be for this government to take the big step, to come with the big stick and say, this is what we’re going to do. Now you sit around a table, you find solutions, if not then in six months time, we pass legislation and you will be structurally separated, yeah? So that will most probably then start bringing Telstra to the table and start you know seeing them to change their tune.

Dobbie: So delay the tenure process, sort out the operational structure and then ask for the tenders after that? Is that what you’re saying?

Budde: Absolutely. You know it’s the last thing that we want to do something in haste, yeah? So you know the delays are looking now more towards the end of the year. You know Telstra has to provide network plans. Apparently there are still all sorts of problems. We don’t know if it’s a department or Telstra who is delaying it, but there are delays. But it looks like we’re already talking about September, October. Then you get the silly season of Christmas, et cetera. So to be honest, I don’t expect a lot of real action before the end of this year.

Dobbie: That’s great. Thanks so much for your time today Paul.

Budde: My pleasure Phil.

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