Telstra must be split up and the chairman must leave: Kohler

As predicted last month, none of the bids for the national broadband network was up to scratch, so the expert panel chucked them all out.

But rather than go to back to Minister Stephen Conroy empty handed, they devised, with the help of Graeme Samuel at the ACCC, a cunning plan: Telstra can end up owning the new fibre network and keep its monopoly, with the Government even helping to fund it and take care of all the planning issues, as long as Telstra splits into two separate companies.

If the Telstra board says no to that, which is unthinkable, the Government will create a new, faster, Telstra that will eat the old Telstra.

It will therefore result in the end of Telstra as we know it, and possibly the end of chairman of Donald McGauchie.

The first signs of that appeared this morning, with reports that Telstra is, indeed, considering splitting. What’s more, McGauchie is said to be leading those efforts, which is the reason for the word “possibly” above.

The reason it is unthinkable for Telstra directors not to take up the Government’s invitation to split the company into two and then jointly upgrade Australia’s telecommunications network to fibre, is that they are already flirting with class actions over their abject and expensive failure to sensibly deal with Australia’s political and regulatory reality; if they fail again, they risk being personally bankrupted by class actions and/or thrown into prison for breaching their director duties.

As I see it (and with the benefit of a few days of Queensland rain to lubricate the synapses) the Government’s announcement last week that the $4.7 billion fibre-to-the-node (FTTN) plan had been superseded by a new $43 billion fibre-to-the-home (FTTH) plan, was both an admission of failure and an offer to Telstra that it can’t refuse.

The FTTN was doomed from the start, for two reasons:

1. As I wrote in July last year (Affordable broadband) it makes no sense to cover regional Australia with fibre to achieve 98% coverage when wireless and satellite would do perfectly well. Accordingly, none of the bidders could make it work.

2. Running fibre only as far as neighbourhood nodes would mean Telstra’s copper network would have to be forcibly switched over to the new network at these nodes, requiring compensation of $20 billion to $30 billion and destroying the viability of any FTTN.

The amount of compensation was calculated and confirmed by the Department of Communications earlier this year. That’s the moment FTTN died.

I didn’t know about the compensation figure when I wrote in May last year (Government should build own network) that this issue meant the Government should build it itself rather than invest $4.7 billion in someone else’s network.

I added then: “To make life simpler, and to make the new network faster and more useful, the Government should just make it fibre-to-the-home, rather than fibre-to-the-node.”

It took 11 months for the Prime Minister to announce what I described in that May 2008 column as “a piss into the wind”, but I suppose the Government had to go through the motions of looking through the tenders.

Either the Labor brains trust miscalculated in 2007 when devising the NBN election promise and simply didn’t factor in the compensation to Telstra for the FTTN or, more likely, they thought Telstra would put in the winning bid so compensation would not be necessary.

In the event, Telstra did not bid. The resistance fighters Donald McGauchie and Sol Trujillo remained holed up in their mountain hideaway refusing to come down, and the need to compensate their company for the FTTN property seizure, in the event that someone else won the tender, created a Mexican standoff.

The good news for Telstra shareholders, to extend the resistance fighting metaphor, is that they have been offered a power-sharing deal as an alternative to a messy death. If the board is prepared to abandon its “no structural separation” ideology, Telstra can own 49% of the new fibre network to begin with, plus have an option on the rest.

And Telstra could do this with little cash outlay since it already has enough fibre in the ground to account for nearly half of a national FTTH network – that is, all the CBDs plus fibre backhaul to 5000 exchanges around the country.

In fact I would go further. The proposed $43 billion FTTH network really only makes sense as a joint venture between the Government and Telstra, or rather Telstra’s wholesale division. What’s more, the plan boxes Telstra into a corner; it cannot, in my view, do anything but join with the Government.

Basically the project would involve the Government issuing $17.3 billion in sovereign guaranteed AAA infrastructure bonds to fund the laying of optic fibre cables from Telstra’s exchanges to metropolitan homes and businesses, plus wireless and satellite connections in regional areas. Many regional cities are already fully cabled, so they wouldn’t need it.

The Government’s Building Australia Fund would supply $4.7 billion as equity. Telstra would put in $21 billion as a combination of existing fibre and cash, and eventually buy out the Government’s equity.

But that might not even be necessary. A long-term operating partnership between the Government and a separated Telstra Wholesale utility (“Telecom”?) to supply wholesale broadband access would work fine.

Then again, the Coalition government that would then be in power would no doubt have to sell the business to repay the next lot of Labor debt.

By the way, the proposition that the new network will raise the cost of broadband access to prohibitive levels is a furphy; the FTTN network would carry all data, voice and probably pay TV traffic, and would earn a reasonable ROI while reducing most people’s total bills. That’s because Telstra’s monopoly rents would be removed.

And, yes, Telstra’s profits would no longer be excessive, but that’s better than having no profits at all. And instead of owning an integrated racketeer, shareholders will own two good sustainable businesses – a regulated wholesale monopoly and a very effective retail communications firm. There will no longer be any “regulatory risk” priced into the stock, and the two new pieces of paper will probably end up being worth more than the old single piece.

But none of this can be done with the two resistance fighters, McGauchie and Trujillo, still there. The CEO has already been given his marching orders; the chairman must be sent packing too.

This article first appeared on Business Spectator