Telstra won’t take national broadband network dumping lying down: Bartholomeusz

Just in case the aspiring builders of the national broadband network (NBN) were under any illusions about Telstra’s response, if anyone other than itself is given the NBN mandate, Sol Trujillo and his chief financial officer, John Stanhope, have laid out their strategy in a presentation delivered in the US this morning.

Telstra was booted out of the NBN tender process last year on what could be regarded as a technicality; the failure to detail the benefits for small and medium-sized businesses in its proposal. It remains on the sidelines, waiting to see whether the remaining bidders come up with a proposal acceptable to the Federal Government.

The biggest threat to the bidders, and the NBN, is how Telstra might respond if it is displaced as the dominant fixed-line operator.

Trujillo and Stanhope, presenting at a Citigroup conference in Arizona, spelled out very simply how Telstra would react if one of the remaining bidders to build the national fibre-to-the-node network – SingTel, Acacia and Axia – were successful.

Telstra would migrate its retail customers to its own networks – wireless, cable and fibre – before the NBN was completed. If it had to, it would buy wholesale access to the NBN. It would use its own networks to compete for wholesale customers and would continue to provide internet protocol, mobile and other services to government.

In a nutshell – and the presentation simply confirms what was anticipated – Telstra would try to deny the owners of the NBN its customer base and the volumes that would be needed to underwrite the economics of the new network.

The Telstra executives, in a slide entitled “quantifying the NBN risk”, also tried to put the impact of losing out on the NBN into context.

Non-metropolitan retail customers on the public switched telephone network (PSTN) and fixed broadband constituted about 13% of Telstra’s revenue last financial year. Wholesale revenue on the copper network was only 4% of the Telstra base and declining (Trujillo has made it clear he isn’t keen on helping competitors compete). Government provides only 2% of Telstra’s PSTN revenues.

Metro customers are already contestable. The breakdown of the rest provided by Telstra suggests that less than 20% of Telstra’s revenue – and a lower margin 20% at that – would be at significant risk, and a third of that would probably be its lowest-margin revenue.

By selectively buying access to the NBN for the lower-margin customers Telstra could probably improve its margins, assuming the Government maintains the regime of national averaging of retail prices and de-averaged wholesale prices.

In the process it would impose more pressure on the economics of the NBN, the owners of which would have to fund the cross-subsidy between metro and regional areas while competing fiercely for customers with Telstra’s proprietary networks in the metro areas.

Presumably they would also have to meet Telstra’s universal service obligations which, depending on who is presenting the numbers, cost somewhere between a couple of hundred million dollars a year and many hundreds of millions.

In the presentation, Telstra’s famous/infamous asterisk makes a comeback.

In the earliest phase of Trujillo’s reign at Telstra it was common for the group to stud its slides with asterisks that directed readers to a footnote that said forward-looking financial information was subject to reasonable regulatory outcomes. That was during a period when Telstra was at war with the Australian Competition and Consumer Commission over issues like the price and structure of access to its unconditioned local loop, operational separation and safe harbours for new investments.

Now the footnote reads: “Assuming alternate build that is fully funded, perfectly executed and legislatively supported.”

There is a neat mixture of cynicism and lobbying there.

Telstra doubts the capacity of anyone to build and finance the NBN faster, better or more cheaply than itself. It will take every opportunity to both cast doubts on its rivals’ capabilities and sow doubts in the minds of the legislators that might help to undermine the prospects of the displacement of its dominance of the fixed line space.

The asterisk is likely to pop up frequently over the next few months.

This article first appeared on Business Spectator

Related articles:

• Telstra shows how to play monopoly
• Who will win the battle to build Australia’s national broadband network?