Telstra frog-marched into a brave new world: Kohler

Telstra has never really had any choice about whether to compete or cooperate with the national broadband network, and the company has already been negotiating the terms of its cooperation for a few weeks.

Those terms include a retail “non-poaching” period.

Telstra’s priority, wisely, is to ensure it keeps all of its 10 million households and businesses as customers at the point of transition to the wholesale NBN, and that it doesn’t take place in a competitive free-for-all.

So as each customer is transferred to the NBN, one at a time, Telstra will not only be compensated for lost wholesale revenue, it will get to keep that customer away from its competitors for a certain period. How that might work in practice without restricting the citizens’ freedom to choose is a bit hard to imagine, but that’s the idea.

Up until yesterday this negotiation was quite even.

Telstra CEO David Thodey knew Communications Minister Stephen Conroy had a gun in his pocket, but he also knew the last thing the Government would want is to build a fibre network that competes with Telstra’s copper-based customer access network, which, as my colleague Stephen Bartholomeusz has been pointing out, would be cheaper and fast enough for most people.

So Thodey and his team did have some negotiating strength. Not any more.

The unsavoury part of what happened yesterday is that Conroy is both commercial negotiator and legislator, and he has whipped out the gun without knowing what Telstra would do and how it would negotiate.

As a result, a tentative, fairly equal negotiation has turned into an ugly forced march.

And as far as I can tell from a series of conversations yesterday, it was a matter of trust: over several years of dealing with the previous management, trust has been destroyed and Conroy’s attitude is that Telstra is a corporation, not one or more individuals. While Old Dave Thodey is definitely a good bloke, how long will he last? Best to be sure, and bring out the gun now.

The weapon is 4G mobile spectrum. And despite all the outrage and bluster yesterday, the Government is perfectly entitled to set the rules around which it will issue that spectrum.

It’s worth looking carefully at what was actually announced yesterday. Here is a simplified description of what the legislation contains, taken from page 7 of the Bill:

• Telstra may give the following undertakings:
(a) an undertaking about structural separation;
(b) an undertaking about hybrid fibre-coaxial networks;
(c) an undertaking about subscription television broadcasting licences.

• An undertaking comes into force when it is accepted by the ACCC.

• Telstra will not be allowed to supply services using a designated part of the spectrum unless all three undertakings given by Telstra are in force.

It’s a bit like deciding who gets a casino licence – it’s what governments do. As foreshadowed in this column previously, the Government has laid down a condition for issuing spectrum: that it won’t be sold to Telstra if it’s an integrated telco at the time.

Conroy could quite easily have done that in an open letter to all Australian telecommunications companies and applied that rule across the board.

This would have had the same effect on Telstra as yesterday’s dramatic, mind-blowing release of 141 pages of legislation and 204 pages of explanatory memorandum, specifically naming Telstra, timed to coincide with NBN CEO Mike Quigley’s first public description of what he’s doing.

Putting it in legislation was unnecessary.

The Government did it for two reasons: firstly, to turn a .22 revolver into a .44 Magnum and say to Thodey: “Do you feel lucky, punk? Well, do you?”, and secondly to drive a wedge between the Nationals and the Liberals, since the Nationals will probably support the legislation in the Senate and the Liberals won’t.

So to sum up: yesterday’s drama was both a strong-arm negotiating tactic to ensure Telstra joins the NBN process and a political weapon against the opposition – a wedge, and potentially a double dissolution trigger if the Liberals prevail against the Nationals and block it in the Senate.

How badly will Telstra be affected by yesterday’s events? Well, it potentially changes everything and very little.

The second and third undertakings are there to drive the point home, and Conroy said in briefings yesterday that they would be withdrawn if the first was given. So the whole thing is about structural separation.

Telstra’s history and culture is all about being a network operator – its very existence flows from that. It has looked at separating the network operation several times but the engineers running the place could never quite bring themselves to do it.

So the cultural shift to being only a retailer and a media company, as well as operating a mobile network, will be enormous and difficult.

On the other hand, all that matters at the end of the day is profit margin, and no one really knows whether Telstra’s overall margin will be squeezed by shifting from wholesale plus retail margin to retail margin only.

Telstra says it will be squeezed, which it must say to get compensation, but the company could still come out ahead – with reasonable compensation plus a decent non-poaching period plus a good pricing deal on NBN access.

On pricing, Quigley said yesterday: “The reality is we’re going to have to be priced to meet the market.”

Of course, with no competition from Telstra that is an entirely different proposition to a market where Quigley is competing against cheap ADSL copper broadband.

He went on: “Why would a customer move from a service that they have today to a much more expensive service unless they’re getting real value? Now, if there’s real value added in terms of services they’re not getting today… a retail service provider would be able to charge more for that added value and hence would be able to have a slightly higher price on wholesale.”

From Telstra’s point of view, it’s all about margin and added value, not the underlying access price.

It’s true that as an NBN access seeker alongside a bunch of competitors buying the same wholesale service, it will have to work harder than it ever has before to keep customers, but with the ability to bundle a good mobile network plus Foxtel, Sensis and its Bigpond media properties it should still have an advantage. It might even get a bulk pricing deal.

The company will have to learn a new way of thinking, which will require intelligent leadership from the board and management.

They will have to think carefully about their three businesses – fixed line retail, integrated mobile and media (Foxtel, Sensis and Bigpond) – and how they fit together.

Specifically: 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?

But that’s what competition is all about.

This article first appeared on Business Spectator.