Broadband dilemma – Telstra puts its case: Gottliebsen

Telstra chairman Don McGauchie is worried that Optus/Singtel and the ACCC chairman Graeme Samuel have begun to convince communications minister Stephen Conroy that a chunk of Telstra’s operations should be split into two groups.

McGauchie had lunch with a large number of Australia’s leading journalists yesterday to put forward his case that such a separation would be a disaster for both Telstra and Australia.

Put simply, McGauchie’s argument is that the infrastructure component of Telstra is closely interwoven with the operational areas and if the fibre-to-the-node network was owned separately, then the company would not be able to provide the infrastructure required in a rapidly changing market place. Of course, it goes without saying that Telstra shares would also be decimated.

McGauchie says that everywhere in the world where theoretical or actual separation has been attempted it has produced a much lower quality of services because it is either not worth making the investment in the latest technology or it is simply too complicated.

At lunch I turned the McGauchie argument on its head and said if he was in charge of Optus and saw a market developing where Telstra owned the infrastructure, then you would be completely stymied. It is this situation that is pushing Conroy towards separation.

McGauchie came back at me like a machine gun: “They have their own cable which reaches two million homes,” he said loudly. And because of that cable “Telstra is not a monopoly”.

Moreover, the nature of any Telstra fibre-to-the-node tender will be to offer pricing to opponents that is equal to Telstra’s retail business and offer great scope for opponents to “insert bells and whistles”.

But the core of the McGauchie argument is that Optus gets its telephone services from Telstra at prices below cost because of “bad regulation”. As a result, Optus has simply not invested in its cable network.

Instead, bad investments have been made in old technology that stand to be scrapped if fibre-to-the node is installed. McGauchie says this is typical of what happens when regulators get involved.

He used the example of the iron ore industry where there was no regulation and simple ownership structures. When output needed to be expanded the necessary investment into infrastructure was made swiftly.

This is in stark contrast to the coal sector. Here a combination of regulation and multiple ownership structures have led to bungles that resulted in the loss of $5 billion in exports a year.

It is clear that if Optus/Singtel is going to get traction they will need to mount a challenge to this argument.

McGauchie left us in absolutely no doubt that if there is a whiff of separation then Telstra will not invest in fibre-to-the-node and will spend capital on its mobile network, on its Foxtel cable network, in other countries or return it to shareholders.

McGauchie also pointed out that provided pricing and regulations are not restrictive, it’s feasible to provide fibre-to-the-node in capital cities and major country centres without government funding.

Government money is required for outlying areas that are not economic for cable and should really be served by radio. If it is free to charge market rates, Telstra would be happy to put in another network to be pitted against the government-subsidised network.

Stephen Conroy wants to mark his term as Telecommunications Minister by bringing Australia into the future with the second generation of internet services.

I suspect that if he pursues a line that requires the separation of Telstra then that is simply not going to happen – but he faces no easy task.

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