Telstra shareholder value can be saved

Posted : Thursday, December 10, 2009

Michael Porter's commentary on the issue was also published on the Business Spectator website.

Published for ACE online: Thursday, 10 December 2009

Communications Minister Stephen Conroy caused Telstra shareholders much concern in September when he gave the telco the 'structurally separate or else' ultimatum.

Some have since argued against telecoms reforms on the grounds that Telstra shareholder value will be eroded.

Public policy should, however, be based on facilitating community benefits, subject to legal commitments. While Telstra privatisation documents envisaged new regulations, the fears over shareholder value are seriously misplaced.

Most importantly, vast efficiency gains and expansion of the pie can flow from real competition, while enabling shareholders to partake in all three parts of the broadband business, with hedged risks.

And all this without Messrs Conroy or Swan spending any of our $43 billion. Indeed the government can raise funds through auction of bandwidth from analogue TV and other obsolete systems. Studies show the auction could raise well over $2 billion if Telstra competes.

And it is competition that is the game, not propping up a political promise of broadband above 12Mbps when 4G can offer much higher speeds and the convenience of mobiles to 99 per cent of Australia. And as of now only Telstra has any prospect of covering the bush.

Additionally, those with a cable outside can have speeds over 50Mbps starting in Melbourne in 2009 - as flagged by Telstra after the forced departure from the NBN tender. So we can already far exceed promised speeds, Mr Conroy, and reduce the deficit! Or use the proceeds to really help those in black spots.

And we don't need cost benefit analysis of this government investment - you are right Mr Swan - there should be none, because competition can deliver without any taxpayer dollars.

Telstra, with its network assets including ducts and exchanges, bush coverage, holdings in mobiles, HFC cable (including a 50 per cent stake in Foxtel) and copper (ADSL) has always had the capacity to make or break the dream of a national broadband network.

The new NBN not only needs access to the Telstra pipes and ducts, but also a capacity to connect new fibre in a manner that can beat competition from cable modems and wireless (mobile) platforms. And these platforms don't need the NBN.

So how do we get the structure right to promote broadband competition to the benefit of consumers and investors?

The proposal CEDA Research advances, building on our report 'Australia's Broadband Future: Four Doors to Greater Competition', published last December, is to swap each share in TLS for a share in all of three businesses - that I have labelled Telstra Retail, OzCable and FibreTel:

Telstra Retail

The retail land line and mobile NextG/4G phone company (100 per cent Telstra) and which could bid for frequency including that freed up by the closure of analogue TV - without restriction. The customer base would include those who use Telstra land lines and exchanges, ADSL and mobile customers. Customers could move from copper to fibre as the NBN system evolved.

Oz Cable

Based on Telstra Media Ltd, 100 per cent owner of Telstra's HFC cables and their 50 per cent share in FoxTel (SkyCable TV). The ex-Telstra shareholder would now participate directly in the Foxtel business and from rollout of fast modems on existing cable. This rollout based on DOCSIS 3.0 (as in Europe and the US) was announced by Telstra to start in Melbourne late in 2009. With no digging of the streets or hanging of wires, about 3 million customers could shortly have access to speeds of 50 Mbps+ (way in excess of the Rudd Conroy promise of 12Mbps). Down the track cable will be able to compete with fibre in many ways (including adding fibre).

FibreTel

Telstra shares in the NBN company would reflect valuations of wires, ducts and fibre sold in, plus goodwill (eg. for cooperating in creation of a genuinely competitive broadband market). The company would not be in the wired or wireless retail businesses. Other shareholders in the NBN may include owners of fibre and other network assets - eg. NexGen, Optus, TransACT, Tasmanian NBN). The ACCC would need only a limited regulatory role on access charges as per the Trade Practices Act.

OzCable would be a tough competitor for other retailers using copper and the NBN. The customer base would include Foxtel and Big Pond customers on cable modems. OzCable would compete with Telstra retail and other wired and wireless systems (mobile, WiMax and satellite).

Other shareholders in Foxtel (News and Consolidated Media) could retain, expand or sell their shares and content deals. And note Foxtel will face expanding competition eg. from IPTV and other internet media via ever faster fibre, wired and wireless systems.

The NBN will initially be a very marginal business, as often the case in the new media. But under this proposal we will rapidly move to super fast broadband via cable in Melbourne, to super fast 4G for mobiles, and government spend only to help the 1 per cent not covered.

The benefits to Telstra shareholders are hedged in that one or two of the separate shares might benefit at the expense of the others. But the dynamics would change over time and as fibre spreads, fed by demand, not taxes. The loss to Telstra is the ability to deliver integrated packages - whether through wireless, cable or fibre. But the benefit to consumers overall is that we finally get the structure right - and competition across all modes of broadband.

Dr Michael Porter is Research and Policy Director, Committee for Economic Development of Australia.

Return to the Ace Magazine