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Author's Opinion

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Monday, 21 June 2010 12:15

NBN deal is a great deal, for Telstra


Not surprisingly opinion on the merits, for Telstra, of its heads of agreement with NBN Co span the gamut from disastrous and stupid, for Telstra, to disastrous and stupid for the Government, Telstra's competitors and just about everybody else. However there is noone better placed to exploit the NBN than Telstra.

My colleague Renai LeMay, was unequivocal, describing it as "the most disastrous decision [Telstra] has ever made in the telco's long and tortured history in Australia's telecommunications sector."

Outspoken commentator, Kevin Morgan, was equally certain that the deal represented a monumental win for Telstra. "Thank God that David and Catherine took over from those hard nuts Sol and Don!," he said. "If this is the deal the team who didn't want to confront the Federal Government could win, I'd hate to think how much Sol and Don could have extracted."

The people who really matter - Telstra's competitors - were much more measured and generally supportive. Optus' director of corporate and government affairs, Maha Krishnapillai, said: "Optus cautiously welcomes today's announcement as a potential step in the right direction. However it is important to note that a number of key details are still to be finalised."

He stressed that: "rollout of the NBN is not just about building the network, it's vitally important that it goes hand-in-hand with reform of our sector'¦It's more important than ever that the Regulatory Reform Bill is passed quickly as this legislation contains fundamental and crucial protection for the taxpayers of Australia by ensuring any Telstra deal represents demonstrably fair value for taxpayers and is open to ACCC oversight."


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Michael Malone, CEO, of iiNet, the largest ISP after Telstra and Optus, welcomed the announcement, saying: "The NBN is the future of broadband in Australia and iiNet had always believed it would be better served by having Telstra involved rather than not'¦From our initial examination of yesterday's announcement, the agreement is consistent with the Federal Government's earlier commitments of an open access network, structural separation and regulatory reform."

Competing and winning customers was a key message that Telstra CEO, David Thodey, sought to convey when he announced the deal to Telstra staff. "It's'¦timely to remind ourselves about the need to stay absolutely focussed on achieving our core objectives of winning every day in the market, serving our customers and working together to deliver innovative products and services'¦Today's announcement will have little or no immediate impact on our daily operations or your role at Telstra. However it is an important step towards delivering sufficient regulatory certainty to enable our company to move ahead with confidence, serving our customers and winning in the competitive market place."

The deal has been described as a levelling of the playing field. That's been a much used, and abused, term in Australian telecoms regulatory debate over the past decade and a half; generally in the context of removing a tilt that favours Telstra over its competitors.

This agreement, if consummated, will certain create a level playing field in one sense: there will be one wholesale network, the NBN, used by all service providers on an ostensibly equal basis. However, as NBN Co said, it would make Telstra its largest customer and it's hard to believe there won't be some advantages accruing to Telstra from this status.

That aside, all the other levelling is in Telstra's favour. Number one: Telstra gets paid billions of dollars for an aging asset (the copper network) that is becoming increasingly costly to maintain.

Number two: the billions of dollars Telstra is paid for this aging asset can be devoted to product innovation, marketing, winning and retaining customers, and customer service,

Number three: (if you believe Telstra) Telstra no longer has to provide access to this asset at subsidised rates in the form of regulated prices for the line sharing and unbundled local loop service.

Number four: Telstra no longer will need to devote huge internal staff resources and pay funds to an army of lawyers fighting perpetual battles with the ACCC over access disputes, rejected access undertakings etc. These resources can now be redirected to product innovation, marketing and customer service.

Number five (if you believe Telstra) Telstra is no longer burdened with delivering a universal service obligation the cost of which far outweighs the money it receives under the USO funding scheme.


I believe the real question on whether this deal will be good for Telstra is: "How well positioned to compete will Telstra be as the NBN rolls out and as Telstra, and every other service provider that uses Telstra's copper network, transition their customers from Telstra copper to the NBN.

I asked Thodey at today's press briefing what the process for cutting over customers from copper to fibre would be. He replied that this would be totally under control of NBN Co and that end users would need to have regard to any existing contracts with their current services providers, but with that proviso, they would be offered choice.

So, it's very easy to see what's going to happen. In any given area the cutover date will be known well in advance, giving service providers ample opportunity to tout their offering to that target market, to try and lock existing customers into long term contracts, and persuade non-customers not to enter into long term contracts with their current service provider(s).

Telstra has the biggest brand, the biggest marketing budget, the biggest range of content and the biggest opportunity to offer customers bundles of fixed and mobile delivered services.

And, as I have pointed out before, with the investment that it has made in its Next IP network, it is extremely well placed to integrate and deliver a wide range of content and services over the NBN or any other access network.


Le May suggests that "the [NBN} agreement '” in a single fatal stroke '” attempts to transform the fundamental nature of Telstra's business, changing it from an engineering company which primarily builds and operates telecommunications networks into a retail service provider focused on delivering the best customer service and value-add products in Australia's telco sector."

Well the description of Telstra as primarily an engineering company is years out of date and in any case Telstra is still a builder and operator of the telecommunications networks that matter: the mobile network and the common core of both the fixed and mobile networks wherein lies all the intelligence that underpins services. The NBN, for all its bandwidth and the hype that surrounds it, will be nothing more than a dumb access network.

As Telstra's then group managing director, Networks and Services, Michael Rocca said at a briefing last year:  "Next IP is the largest fully integrated national IP network in the world and it underpins all the other networks that we offer'¦Regardless of what happens with the NBN it is an access technology and we are here today to talk about the core network because ultimately that is how we bring products and services to our customers."

The generally accepted view is that Telstra customer service is lousy, its prices higher than everybody else's and that it is losing market share. All of these may be true, and when a company was a monopoly all it can do is lose market share.


It's also been argued that many customers stay with Telstra out of apathy or ignorance and that being cut over to NBN fibre will rouse them from their slumbers and force them to make a choice: one likely to be for a smaller, cheaper, provider with better service than Telstra.

Well, forcing choice on customers has been tried before and Telstra (or Telecom as it then was) fared well. Back in the early 90s the Government ended Telecom's monopoly with the granting of a second licence to Optus and required every Telecom telephone customer to be offered a choice: stay with Telecom for your phone service or be 'preselected' to Optus.

Despite the fact that Optus' entry into the market had been a huge story for months, and despite Optus' aggressive marketing campaign both the response rate and the desertion rate were low. Optus gained between 10 and 18 percent of customers, depending on region and response rates were generally only about 50 percent.

The power of incumbency should never be under-estimated. If all goes to plan, including the Rudd Government winning the next election, it will be at least six months before a definitive agreement is signed between Telstra and NBN Co and probably at least another year before the first customers are cut over to NBN fibre and told to choose.

In the mean time this new heads of agreement will give Telstra, and its staff, a new clarity and direction of purpose to prepare for a world where customer service, applications and services count for everything and fixed access network ownership for nothing.

I believe Telstra will come out of this very well indeed.


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