Telstra split: first step on a long road

David Kennedy/Ovum
15 Sep 2009

The Australian government’s strategy on separation is to make Telstra an offer it cannot refuse. Separate yourself, or have separation done for you.

However, separation takes time to accomplish, because separation requires IT systems to be redesigned or even duplicated. While the Rudd government will seek agreement by year’s end, a separation process might take two years to fully execute.

Separation has only been accomplished in two other markets, the UK and New Zealand, so global experience is limited. There is no doubt that separation creates a more level playing field and a more dynamic market. However, it also increases static costs, and there are suggestions it reduces investment incentives. It remains to be seen where the long-term balance lies.

As far as pay TV is concerned, provided that Telstra separates, it may keep its cable network and its 50% stake in Foxtel.

But one unknown is whether Telstra’s cable will be caught up in the separation scheme, and whether Telstra will be required to provide regulated access to its upgraded 100Mbps cable network. This is crucial to the business case for Telstra’s national cable upgrade program.

We have always been perplexed by the attention paid to Telstra’s Foxtel stake. Telstra only owns 50% of Foxtel, and doesn’t control it. In fact, Foxtel is already “structurally separated” from Telstra, so the ongoing concern about Telstra’s Foxtel stake is hard to justify rationally. The government seems to have recognized this.

The National Broadband Network is another issue that still needs to be addressed. This package of reforms is an opportunity to articulate a transition strategy to the NBN. This is the perfect time to vend Telstra’s copper access network into the NBN Co., providing an immediate wholesale revenue stream for the NBN Co.

This would also reconfigure the NBN Co’s task: rather than building a FTTH network from scratch in competition with Telstra, its task would be to upgrade copper to FTTH. This would allow Australia to avoid a lose/lose competitive battle between the NBN Co and Telstra’s copper network.

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