Autralia - Telstra tactics

Telstra in line for epic broadband battle

TELSTRA is marching strongly through Sol Trujillo's grand five-year transformation plan -- but what if it is marching straight into a broadband ditch?

The telco's chief executive resolutely ignored the national broadband network in his announcement of the company's impressive results last week.

Telstra's projections, he said firmly, were based on the status quo being maintained -- except, of course, that it isn't supposed to be.

So behind the glossy charts and slick presentation, there's a much messier struggle going on that will have greater significance for Telstra's long-term growth.

Despite its frustration with the delay, Telstra is determined to win the government's tender to build a high-speed broadband network. It is also totally dismissive of the ability of its main competitor, the Singtel Optus-led consortium, Terria, to deliver anything beyond rhetoric and pressure on the Government to hog-tie Telstra.

This is a view widely shared in the market, where most see Telstra as the only logical choice and Terria's bid as more of a delaying tactic.

Even Terria chairman Michael Egan concedes that building the network itself is not the consortium's preferred option, particularly for businesses focused more on retail.

It's just that for Terria, the alternative looks worse. "Our hand is forced," Egan says. "It's a matter of necessity. It's the only way we believe we can get an open access network."

That is a fundamental part of the dilemma for the Government. And that uncertainty may yet derail the entire project for years, along with Labor's credibility on delivering its own "agenda for the future".

Communications Minister Stephen Conroy certainly has a lot of political capital at risk if he is unable to fulfil the campaign commitment to provide high-speed broadband to 98 per cent of Australia.

Telstra considers it is risking even more of its own hard-earned capital and therefore will not compromise its standards on the pricing or the structure of its proposal or its operations.

Yet the Government is equally determined to show that it won't produce a "broadband revolution" that leads to less competition for Telstra and predictions of higher prices for consumers.

That leaves a lot of room for lose-lose -- an outcome that would be unthinkable were it not for the dismal evidence of the last few years in telecommunications policy.

It means that market assumptions of commercial logic can still be confounded by politics. And no matter what the expert panel assessing the bids says, this will still be a highly political decision.

"The market is convinced Telstra is the only operator that can fund, build and operate this new network," says Citigroup's Tim Smeallie.

"However, it is dangerous to assume that the bargaining power of the Government or third parties is significantly less than that of Telstra."

For Telstra, the bargaining power of the Government has relatively little to do with the $4.7 billion in public funds it is planning to put towards a new network.

Trujillo has already made it plain that he will not be a partner in a joint venture that equates to losing any management control. But Telstra will participate in a much more restricted version of a public-private partnership that means the government provides funding for areas in rural and regional Australia where it would otherwise be uneconomic to build a fibre network.

This will certainly mean plenty of tension about priorities -- and plenty of gaps in coverage.

But such arguments would be strictly secondary to the government's big immediate threat -- its ability to increase regulation, particularly of broadband prices, while simultaneously changing Telstra's corporate structure.

Telstra will warn that the cost will be felt by the national economy and by consumers as it will stifle investment. Its ability to curb regulatory zeal is still limited.

Trujillo is clearly alarmed by the Canberra talk of enforcing a very strict form of what is known as operational separation on the company -- similar to the UK model.

That means that any subsidiary that built the network would be required to operate as a separate company, offering access to Telstra's competitors on exactly the same terms that it offers its own retail market.

Telstra argues it will do precisely this, of course.

But the fights will come over who will have the responsibility for ensuring equality of access, fairness of pricing and whether the rules can be changed by government or regulator along the way. In other words, how much involvement and authority Graeme Samuel will have.

Telstra insists that Singtel Optus could provide all the broadband competition necessary if it was willing to invest in its own coaxial cable. Instead, Singtel Optus has preferred to let its cable network languish in favour of taking Telstra's cheaper wholesale prices -- as enforced by the ACCC.

Now Telstra refuses to participate in a new broadband network if there is a strictly enforced form of operational separation and if the ACCC is allowed similar discretion in determining pricing and access rules.

That's despite the obvious commercial advantages to Telstra in building the network and effectively "stranding" all those troublesome competitors offering broadband services from its exchanges. Then there are the long-term costs to Telstra of blocking its own expansion.

The Government will try carrots as well as stick, with promises to reduce the regulatory load on Telstra in other areas. But it won't want to give Telstra -- or be seen to give it -- too much power either.

So, the great game of bluff may leave Senator Conroy considering the Terria proposal as a real option, despite the market doubts. Terria is certainly promising to be more conciliatory on price, on joint venturing with the government and on welcoming all competitors, including Telstra, into shared ownership of an open access network.

If only it were that simple.

First there's the money.

"Should the pretenders start being forced to put up their money or shut up?" Trujillo asked on Wednesday. "I guess that is part of the story as well."

Even if Singapore Telecom is willing to invest $2 billion in a new fibre network along with the government's $4.7 billion, there is still a lot of cash to raise in an unfriendly market.

To considerable scepticism, Terria insists that in-principle commitments from the banks will be there by the time bids are due, probably in late November.

"It's just a case of wishful thinking on Telstra's part," Egan says. "They have talked themselves into a belief that only they can do it. It's why they are refusing to engage with the objectives the government has clearly set."

But even if Terria can jump the money hurdle, its "race" to build a network will be far tougher and slower. Terria has about 50 people working on its bid but no expertise in putting in such national physical infrastructure.

"Telstra will be using the same contractors we will be using," Egan says. Not quite.

Optus also has an embarrassing track record with the doomed Opel regional network ditched by Conroy. In contrast, Telstra has vast experience as well as hundreds of people who've worked on a fibre network for three years.

Nor will Telstra allow Terria access to what it considers its assets -- access that will be necessary for anyone else trying to build a new network. This would inevitably end up in the courts.

"Access obligations are always a condition of a telecommunications licence," says Egan. "Telstra would be foolish to try to take the nuclear option."

If it does, the fallout will harm everyone -- not just Telstra. The Minister understands that power equation all too well.