Australia | May 31 2007
By Greg Peel
Despite as yet unresolved wholesale access pricing on Telstra’s (TLS) existing copper network, there are many out there who believe, Communications Minister Helen Coonan included, that most Australians will be quite well satisfied with ADSL2+ over copper and that the whole FTTN brouhaha is overdone. Either way, it will be a good five years before an FTTN network could be completed.
(For an appreciation of the argument, and the abbreviations used in this article, please see “Telstra and the FTTN Debacle”; Sell&Buyology; 24/05/07).
However, not only has the federal ALP forced a level of expediency in an FTTN decision given its position of favouritism to win the upcoming election, a group of competitor telcos have also been leveraging off talk of Australia’s broadband inadequacies by attempting to undermine Telstra’s position of monopolistic dominance. Basically, if Telstra is going to hold the country to ransom by expecting high prices for access to any planned FTTN network, then the G9* has another more democratic plan for the building of such a network – one that involves the participation of everyone.
Under the G9 scheme, no two telcos involved could have a voting power of more than 40% on pricing and management, and capex funding would be raised in the financial markets rather than through one single telco or some government injection. This seems like a very fair solution.
The G9’s special access undertaking submitted to the ACCC proposes the building of an FTTN network using ADSL2+ technology and delivering theoretical maximum speeds of 24Mbps. This compares to a speed the average household is currently achieving of around 1Mbps. Consumer access will be broken down into segments that provide for just a basic line rental at $10 per month (wholesale prices), then 1.5Mbps, 6Mbps, 12Mbps and “unlimited” speeds ranging in cost from $14-35 per month. Access for voice and broadband is currently around $58 per month.
No matter what it proposes, the G9 cannot overcome the reality that it is still Telstra that owns the “last mile” of copper – that bit of wire that extends from the customer to the “node”. On that basis, the G9 has factored in an additional $5-$15 per month rental charge on that line, although it will ultimately have to be the ACCC that agrees to this price.
It all sounds quite wonderful. However, it may all yet be a pipe dream.
Firstly, Telstra is unlikely to just give up its last mile based on a price that the G9 likes and the ACCC thinks is reasonable. You can bet your bottom dollar on that. But more fundamentally, the access prices suggested for the network must assume the full cooperation of Telstra as a participant in the scheme, such that all Telstra’s traffic also passes through Australia’s single FTTN infrastructure. More realistically it is a “G10” solution. Once again, it’s a stretch of the imagination to expect Telstra to suddenly agree it’s all a great idea. Deutsche Bank suggests the 40% voting limitation would scupper any Telstra involvement right off the bat.
Deutsche also points out that as a greenfield proposal (ie an FTTN build from scatch), the G9 concept is still at a disadvantage to brownfield capacity from Telstra, accommodating as much of its existing infrastructure into the new network as is possible. the broker also points out that the G9 proposal assumes a fixed line connection, making no allowance for those customers who just want voice and broadband.
We are yet to here what Telstra’s alternative offer is. We do believe, however, that there is at least something in front of the government as we speak – something that has changed since Telstra told the country to get stuffed last year. Macquarie notes that we can’t expect some sort of resolution any time soon. The ACCC will need to table a discussion paper on the G9 proposal in coming weeks, seeking feedback from the industry, then followed by a draft determination that will again be subject to public consultation, before arriving at some final determination. For a G9 proposal to go ahead, Trade Practices Act legislation will need to be changed along with other legislation and – well let’s face – it ain’t gonna happen before the election.
The incumbent government may, however, announce some new whiz-bang deal with Telstra in the meantime, but nor will that proposal be implemented before we find out there’s actually a new government and we all go round again.
Credit Suisse has another angle on matters, which is also prompted to some degree by a possible Rudd election victory. Rudd has indicated he would raid the Future Fund to help pay for an FTTN network if needs be. As the Future Fund holds 17% of Telstra’s remaining capital, currently escrowed, CS suggests Telstra is likely to review its capital initiatives, which could result in a share buyback and/or an increased dividend payout. With a lazy balance sheet, CS believes a private equity consortium could pay $6.50 for the telco and still achieve a 20% IRR.
*AAPT (TEL) (TCN.NZ), Internode, iiNet (IIN), Macquarie Telecom (MAQ), Optus, (SGT), PowerTel (TEL) (TCN.NZ), Primus, Soul (SPT) and TransACT.