What If Telstra Just Disappeared?

There has been a valid and interesting debate with respect to the rollout of the National Broadband Network (NBN). Why is it we need to replace what is almost a complete monopoly wholesale network provider – (Telstra) – with another complete monopoly in NBN Co?

How does replacing one monopoly with another promote competition as the government claims?

On the surface, it is not perfectly clear, but not that difficult to see either. In the current environment, Telstra plays in the wholesale market, and also the retail market. This gives them a massive advantage in the overall telecommunications market.

They can very easily – (and have a history of) – squeezing their retail competitors by upping the wholesale costs to those competitors – (who in most cases have no other option than to wholesale from Telstra) – thereby making their own retail offerings as attractive as possible.

Almost every copper based access service to any premise in Australia is served by Telstra in the “last-mile”. Therein lies their massively rosy market position.

The NBN will eliminate Telstra’s ability to artificially twist the market for fixed line services in their direction. The NBN will be a near-monopoly also, but will not operate in the retail space, and as reiterated recently by CEO Mike Quigley, NBN Co will offer the exact same wholesale pricing to all retail service providers. NBN Co have also asked the government to ensure that the legislation precludes NBN Co from operating in the retail market.

NBN Co is not interested in the retail market.

So couldn’t we just legislate that Telstra offers the same pricing to everyone?

We might be able to – but their shareholders will more than likely not cop that, and is probably not even legally possible – however the decommissioning of the Telstra copper network and replacing it with the fibre of the NBN for 93% of all Australians has a number of benefits over and above helping to make the market fairer.

First and foremost, the NBN will provide uniform access to all Australian premises to all retail service providers, with the 7% not covered by fibre to be reached with wireless and satellite. This is a big win for consumers, and will foster massive benefits to competition in the retail market.

But the biggest advantage to removing Telstra’s market dominance is a little more abstract – ask yourself the question “what if Telstra actually completely disappeared?”

Now, while I am not going to suggest that Telstra is about to go belly up, who is to say that Telstra will not someday face an accounting scandal of the magnitude of say, Enron? Enron was a massive company that no longer exists, and this happened in the space of a very short period of time.

If something like this happened to Telstra, the obvious course of action would be for it to go into the hands of administrators, who would be tasked to recover lost funds on behalf of creditors. The only way to do that ultimately would be to sell Telstra assets to the highest bidder and recover as much as possible.

Would it recover everything? Probably not – eleven years later, the administrators of Enron are still hunting for funds. In Australia, a parallel would be Ansett Airlines, of which many creditors – (including former employees) – are still waiting for their money, ten years after the initial collapse of that airline.

The imaginary administrators of Telstra might try and sell some assets, and then reform a new company to try and trade to make up the shortfall in lost funds, then sell the new company – as was attempted with Ansett, the so-called “Ansett Mark II”.

There is of course a sticky precedent with our telecommunications industry, namely One.Tel. The legal wrangling also continues in that case.

First and foremost, they would try and sell Telstra in its entirety as a going concern. As one of our biggest companies, it is hard to envisage a single other Australian company buying all of Telstra, in the face of the debt, and the costs to rationalise and run the company afterwards.

The only option might be a large overseas company – but foreign investment rules would probably prevent that.

So more than likely, Telstra would be broken up and sold to many different buyers. Do Optus buy the copper network in capital city areas? Maybe AAPT buys the network in regional areas?

Who buys their mobile business? Does that get broken up too and sold to more than one buyer? Maybe not, because the mobile business on its own would be a very attractive proposition, possibly to an overseas telco.

Who buys their business hosting services? Who buys their retail business?

Very quickly, any failure of Telstra would create a very fractured and difficult telecommunications environment in Australia, and that will be of massive detriment to the economy as a whole. The economy depends on communications, and complicating it like this would create inefficiencies and waste that no nation can afford in the current world economic climate.

The government could buy the network business back to protect the economy, and leave the carcass of the retail arm to be picked over and scavenged by the rest of the market – but that leaves the government with a massive operational cost – (maintenance and other upkeep) – of a deteriorating 60-year-old asset.

That’s what Telstra really does face right now. Repairs are delayed as long as possible, and sometimes done in piecemeal fashion when they eventually happen.

The government is finalising arrangements to pay Telstra around $11b to decommission the copper network and move customers to the NBN – so the government is effectively buying the goodwill of Telstra’s existing network business, and moving it onto new fibre infrastructure over the next nine years.

Eliminating Telstra’s dominant position in the market by establishing the NBN actually provides a level of protection to the telecommunications market – and in turn the entire economy – that Telstra alone could never hope to provide.

So ask yourself the question again – “what if Telstra actually completely disappeared?”

Telstra actually is about to disappear from the wholesale market – and they get a $11b cash injection for the privilege – probably fair payment. Some call it market interference, but that is not necessarily a bad thing in the long run, and I believe it will be very valuable in this instance.

The economy as a whole will no longer be at risk of the albeit unlikely demise of Telstra, and in nine-years we get world-leading communications infrastructure as a valuable public asset. To that I say “Yes please”.

Die Telstra, die.