FTTN will end up at $40 per month, says Morgan Stanley

Stuart Corner
Sunday, 06 May 2007 17:39

IT Policy - Regulation

Morgan Stanley is forecasting that, if Telstra does go ahead with its FTTN rollout the access price will end up at around $40 per month, reflecting a balance between a fair return on investment and the financial impact on Telstra through loss of revenue from wholesale services that FTTN will replace.

Telstra has been widely reported as wanting a wholesale price for its FTTN rollout of $80-$90 per month, whereas the rival G9 consortium is talking of $21-$24.

Morgan Stanley analyst Sachin Gupta told iTWire: "It's very difficult to come up with an access price that promotes competition and delivers services at a price that consumers will pay and that would be acceptable to Telstra. What is proposed by the G9 is value destroying for Telstra, and what Telstra is proposing would be very bad for competition and consumers - Telstra's problem is that it still makes too much money from legacy voice services on copper which would be cannibalised by fibre."

In a new research paper, Gupta and Andrew Hines say that for a new FTTN investment an access price of $23 per month would generate a "reasonable" return on invested capital of 12 percent. However Telstra presently generates $82 per line per month from wholesale voice and data, which it would lose if wholesale customers switched to using an FTTN network:  would be $56 per line per month worse of from a $23 per month access charge for FTTN.

For FTTN to be revenue neutral for Telstra Gupta and Hines estimate that Telstra would have to charge an access price of $47-$50 per month. And, thanks to cost savings estimated at $300-$400m from replacing the current access network with FTTN, Morgan Stanley says an FTTN access price of $34-$38 per month would be earnings neutral for Telstra.

However any price less than $56 per month would be value-destroying for Telstra because the incremental revenue it would gain would not cover the cost of capital needed to build the FTTN network. But at this price the return on the FTTN investment alone would be a whopping 39 percent, which is unlikely to be acceptable to the ACCC, or to Telstra's competitors.

According to the Gupta and Hines: "This is an incremental investment for Telstra and needs to generate incremental revenues to get a positive return [but] we struggle to see what this incremental revenue will be. In fact the only benefit for Telstra could be: (a) revenues which would otherwise be lost to ULL; and (b) lower operating costs.