Wholesale market going backwards
Friday, February 29th, 2008In the past Telstra has likened its wholesale customers to ‘leeches’ and ‘parasites’. Naturally this makes it difficult to take the company seriously when it now tries to convince the industry that it provides genuine wholesale services to these customers.
The wholesale companies spend $2.5 billion a year with Telstra, yet the company (or at least its American management team) treats them with contempt.
Telstra has, in no uncertain terms, indicated that it would like regulatory holidays in order to roll out new fibre-based infrastructure. This can only be viewed as an attempt to limit competition.
Telstra has also indicated that it wants to keep its EBITDA well above international telco level. This would lead, as it indicated last year to broadband charges of around $85-$95 per month, an amount that was flatly rejected by the then Minister for Communications, Helen Coonan.
Whenever it can get away with it the company will not provide wholesale services – such as is the case with ADSL2+, for instance. Other wholesale services that had been built up over the last decade by Telstra’s Wholesale Directors, Doug Campbell, Rosemary Howard and Deena Shiff (under a strikingly different regime) have been significantly wound down under Sol Trujillo. The company is now generating less revenue from this division than it received last year. And this is happening in a world where global wholesale services are rising by 20%+ per annum.
But, as proved by the latest financial results, this hasn’t done the company any harm. On the contrary, revenues and profits were up, and we believe this was achieved at least partially to the detriment of competition.
Telstra’s rhetoric has quietened down of late, but the remarks and actions mentioned above are all on the public record.
Are its wholesale customers genuine?
I am sure Telstra does have a point – that most of its competitors are trying to pick the eyes out of what is available to them. They are only going for the richest pickings. But do they have a choice? Telstra’s wholesale margins in the industry remain such that 90% of the industry profits go to Telstra and the rest of the 700 or so telcos have to squabble over the remaining 10%.
If they were to reach beyond the most lucrative parts of the industry they would very quickly go broke, as many players have done over the last decade.
How safe is it to invest in facilities-based infrastructure?
It is honourable and just that the ACCC encourages facilities-based competition, and we have seen that the key players are all very actively involved in that. But Telstra’s cooperation should be judged on the comments that the company has made over the last 2½ years. The competitors probably do dramatise the situation somewhat, but the fact remains that Telstra is very hostile towards them. Furthermore, we are on the brink of the launch of FttX networks, at which point these DSLAMS will become obsolete, and we have no idea what the next regulatory regime will look like.
To make the situation even more complex, all of these players depend on Telstra, in one way or another, for their survival. Even those with totally separate infrastructure are targeted by the company; these players are undermined via selective price competition – eg, when a new backbone service becomes available Telstra has been dropping prices by 60%-80% over these routes.
And the Pay TV overbuild of the 1990s looms large in the memory of any company giving consideration to building alternative infrastructure. There is nothing to stop Telstra from doing this again if somebody else were to begin rolling out competitive infrastructure. Currently the company is exploring its legal options to undermine the rollout of a competitive regional network proposed by OPEL. The threat alone will be enough to stop anybody from doing anything serious here.
The industry’s vision for the future
It was interesting to see that, in its presentation to the Minister, the Communications Alliance came out with roughly the same set of principles as those drafted by the industry’s FttH Special Interest Group. These reports were both presented to the Minister in the same week.
The only real difference between the two groups lies in the emphasis. The FttH SIG seems less confident of the ability of the market to deliver an efficient and fair outcome. From an economic perspective Communications Alliance’s position (opting for limited regulations) is a correct one; however, the FttH SIG does not believe that Australia has a sufficiently balanced market at this stage. Telstra is represented in Communications Alliance, so obviously some compromises were needed. On the other hand the incumbent decided not to participate in the FttX SIG, so the 140 companies involved there were not constrained in that respect.
It will be very interesting to see how the government and the industry as a whole will define open access. The future of our industry will totally depend on that single issue. If we don’t get that right we will see a continuation of the carnage and abuse and total disrespect for the regulator that we have seen over the last few years.
That is not a future I would look forward to.
If we do get it right, however, everything else will fall into place, as is happening in Europe.
The buck stops with the Minister, and that is an unenviable position to be in. Nevertheless he is the only person in the industry who can set the rules, and the last two and a half years have shown that self-regulation has not united the two camps – Telstra, on the one side, and the rest of the industry on the other.
Paul Budde
See also:
Australia – Industry – Wholesale Market – 2008
Australia – Broadband – Network Operators and Wholesalers
Australia – Competition Issues – 2008
Australia – Labor Government Policies – 2008
Australia – Broadband – ADSL – Overview and Statistics
Australia – Broadband – DSLAMs and ADSL2+
Australia – FttH and FttN Market and Industry Analyses
