End of Telstra’s grand bargain

James Riley
Editorial Director

One of the many things that the National Broadband Network has done is to finally torpedo Telstra’s grand bargain with the Australian government.

Once upon a time this bargain also applied in essentially the same way to Australia’s other great government owned monopolies, Qantas and the Commonwealth Bank.

It was all about supplying services to the multitude of far flung, sparsely populated spaces that makes the small but geographically huge Australian market unique.

Telstra's Andy Penn
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These companies were privatised piece by piece. Rather than deal with the relevant industry’s structural competition problems, a conga line of Australian governments have blinked in the face of massive union power and management, both keen to trouser once-in-a-lifetime coin.

Then, once parts of these companies were made private, it was the mighty power of financial markets that directly affected the value of the government’s remaining stakes.

In Telstra’s case, the unwritten but clearly evident bargain was that the telco giant could largely get away with murder, backed by massive legal heft against under-funded regulators.

There was a nominal financial calculation known as the Universal Service Obligation to provide a basic phone line service, later upgraded to low-speed internet to every home and business in the country.

Telstra always claimed that the USO cost far more than the government calculation, It was probably right, but the upside in getting to keep its vertically integrated business was in fact the real prize.

Things move slowly in TelcoLand, and the NBN chickens hatched in 2007 and genetically modified seven years later by Malcolm Turnbull, have finally – 11 years later – come how to roost.

The history of telecommunications regulation in Australia and the long road that led us to the Telstra radical shake-up has involved the most powerful political and corporate leaders of the past three decades.

Part of Telstra chief executive Andy Penn’s plan, released on June 19 after several years of intensifying market pressure that has seen the company’s share cleaved in two (below $3), is to finally carve out the company’s fixed infrastructure business into InfraCo and eventually list or sell some of it off.

It is as effective a structural separation of Telstra we are ever likely to see.

Canny and aggressive Telstra management over the years have used all sorts of smoke and mirrors – some carrot and some stick – to avoid the dreaded structural separation that would split its infrastructure and its retail business.

The one-two trick used by Ziggy Switkowksi (CEO from 1999-2005) was to brand and account separately for Telstra Wholesale as a nominally transparent business unit. “Nothing to see here Mr Regulator.”

At the same time Mr Switkowski set up Telstra Countrywide, a special to ‘service’ the bush.

This was manna to a Coalition government under pressure from its National Party and country Liberal members for improved telco services, especially as the internet was taking a grip.

It was also lapped up by financial markets who paid record money for Telstra shares in the float of its second tranche of shares in 1999.

As the dotcom boom busted and Telstra’s shares collapsed, all pressure was off for the Howard government for Telstra to do anything but sit tight and pray for a share price improvement.

The revenue imperative of the Nick Minchin led Finance Department was no match for his Communications colleague Helen Coonan’s desire to get a better deal for end users via improved competition.

The game changed (although the strategy to hold the company together did not) with the arrival of US import Sol Trujillo who, with his team of carpet bagging amigos rode into Canberra full of hubris, demanding government money to roll out a national broadband network (or rather speed up what Telstra was already doing.)

While they were knocked back, it was part of a one-two sucker punch for the government as Mr Trujillo immediately fast tracked the company’s 3G network, the nations’ biggest mobile operation and a sap to that unwritten bargain.

In 2007, Labor’s Kevin Rudd – together with Communications Minister Stephen Conroy – made a carbon copy of Trujillo’s national broadband plan, this time using taxpayers’ money exclusively to plan an all fibre National Broadband Network.

But Telstra would always leverage its massive market leading customer base to push them onto its own broadband services and amplify its central tactic of delay, and so a deal had to be struck. This was the golden opportunity to force a structural separation of Telstra, but Conroy blinked.

Instead, the company would strike a deal under its new chief executive David Thodey, who could always project a picture of calm reasonable reassurance that disguised a tough as nails businessman.

Malcolm Turnbull took the Communications portfolio from 2010 under instructions from Tony Abbott/Peta Credlin to “fix” the NBN, whose costs were blowing out and timetables stretching with ever improving mobile speed and capacity emerging as an alternative

So Mr Turnbull set to slashing costs, or so he thought, by rolling back the all fibre NBN and replacing it with his the now infamous multi-technology mix that has many consumers and business screaming.

Mr Thodey renegotiated and bedded down Telstra’s 2014 pay-out of $11 billion – plus a bunch of billion dollar contracts for upgrades, and shut down.

Helped by mistakes by his major competitors Optus and Vodafone, Mr Thodey helped the share price along to over $6, its highest mark in 15 years, then neatly stepped away.

His chairman Catherine Livingstone followed as soon as she politely could, having delivered warnings the Telstra NBN payout was inadequate to hold up its finances.

The downside was all ahead. Telstra had lost its fading but nonetheless high margin monopoly revenues on its copper and HFC networks (its rival Optus was already a basket case) and it would never be the same again.

Mr Penn then stepped in and soon bowed to the inevitable with a cut to the company’s dividend.

Since then investors have been running for the exits.

In an extraordinarily timed Investor Day on June 19, only 11 days before the end of the financial year and under immense pressure due to the company’s wretched share price, Mr Penn bit the bullet and announced an unprecedented slash and burn exercise dubbed Telstra2022.

Capital spending will be cut, thousands of staff sacked and the fixed line infrastructure business carved out.

But here is the upside: Telstra did not include its market leading mobile networks (it has a 47 per cent market share) increasing the talk of a major 5G mobile bypass (of the NBN) strategy as early as next year, when rival Optus will launch 5G.

The government has also signalled its intention to help pay for the NBN by selling some or all of it off. Even if Labor wins next year’s federal poll, the budget deficit may give it no choice to follow suit.

The likeliest buyer now, as of this week, is Telstra’s separated InfraCo. Everything old in Australia’s telecom sector could be new again.

Do you know more? Contact James Riley via Email.

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