Telstra has received clear signal of change in policy direction from Canberra

Last week, an unprecedented $43 billion plan to build a next-generation national fibre network was announced by the Australian Government. The announcement is a change in direction by the Government, which is now seeking a public-private partnership to deploy a fibre-to-the-home network covering 90% of Australians in the next eight years. The paper also outlines new measures the Government and regulatory bodies will pursue to foster greater competition. The move has great implications for incumbent operator, Telstra, now facing a very different competition landscape and downward pressure on its stock price.

A key new addition to the toolkit of regulators is functional separation, where  the incumbent operator (owner of the network) is required to create a separate network unit which handles essential network services to other providers and to the incumbent’s own retail units at the same prices and using the same non-price terms and conditions and processes.

An article in The Age was very helpful in understanding the developments in Australia.  It goes in to depth describing proposed changes down under as well as to highlight the successful implementation of functional separation in the United Kingdom and New Zealand. The article is definitely a recommended read.

Changes proposed for Telstra under the new network buildout plan:

… beefing up the Australian Competition and Consumer Commission’s power to regulate other companies’ access to Telstra’s existing network, some form of separation of Telstra’s retail and wholesale arms and forcing the company to sell its HFC high-speed cable network and its stake in Foxtel.

Suprising reaction from Telstra:

it is believed the company would not go to the barricades if the ACCC was given “the ability to make up-front determinations on price and non-price terms of access“… Equally, the prospect of a stricter form of separation does not appear to have the Telstra top brass stocking up on strychnine.

Why is Telstra taking such a concilitary tone to changes that will dramatically alter its business and lead to a fall in stock prices like those of incumbent operators in the UK and NZ?

Telstra profits have come at the cost to society of low rates of Broadband Internet usage

The answer lies in a shift away from the ‘facilities-based’ approach to regulatory matters.  In the past, regulatory bodies have tried to get the private sector to deploy multiple networks, providing the mechanism for competition. This effort has recognized as a  failure, having failed to bring about desired outcomes in virtually every context around the globe.

Aussie regulators demand a fair-go on competition from the incumbent operator

The current worldwide economic downturn has also made it clear to policymakers that a new approach to fostering competition is required and that the time to make these changes is now. Investment in broadband connectivity is no longer seen as something that can wait.

Expect to hear more about functional separation.  There will be a deeper exploration of the issue on this site in upcoming months, including discussion of the UK and NZ example. These two countries are on a very short list of nations to implement functional separation as a policy strategy.

At an Australian Senate hearing on the topic, BT Group executive Peter McCarthy-Ward said that, contrary to expectations, BT’s retail arm increased in profitability when it was forced to go head-to-head on an equal footing with its competitors.

What incentive do incumbent operators have to cooperate?

He also said the new internal audit body stripped BT of “an extensive capacity for self-deception”, and that the company proposed the new separation regime itself to avoid a harsher outcome being inflicted on it by the Government. Mr McCarthy-Ward also made the point that the mutually acceptable separation process would have been far more difficult if the head of Ofcom, the regulatory body, and the chief executive of BT had not been “visionary”.

It will take this kind of visionary thinking to encourage wider take-up of Internet by the populations in our countries. Old arguments for avoiding change are not holding water and the secured market positions of incumbent operators are increasingly coming under review as Government’s have clearly signalled a change in attitude toward competition policy.