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Nov 3 2009   5:14PM GMT

Telstra’s separate susidiary buzz: Government plan could zap ROI



Posted by: Tom Nolle
Telstra, Broadband, ROI, service layer architecture, access network

Telstra, Australia’s national carrier, remains locked in a dispute between its shareholders and the Australian government, which proposes to break Telstra up to support its broadband network initiative. Telstra believes it can play a role in NBN, as the network is called, without structural separation. Discussions on how that would be accomplished were proceeding nicely, according to Telstra, until the legislation for separation was introduced.

We are of the view that separation like this is not likely to succeed at its objectives and in fact is more likely to compromise them. In addition, it would clearly undermine the value of Telstra’s shares, which have been sold off to the public for some time through yet another government program. To take steps to devalue them now is not likely to create confidence in any new government process, including NBN.

Then there’s a very important truth, which is that competition always lowers price and always creates overbuild and thus always lowers net industry ROI. There are situations where that is reasonable; some geographies have ample demand density. Australia doesn’t appear to be one of them, according to our model.

If the government’s goal is to create competition in the interior or service portion of the network by making the access network into a shared utility, it should have clear indicators that the ROI in that service portion is sufficient to create real opportunity. Without that, there could be a lot of future failures in the center, which would undermine the profitability and sustainability of the new edge—whatever it turns out to be.

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Sep 16 2009   4:18PM GMT

Regulation in Australia — bellweather for subsidized services



Posted by: Tom Nolle
regulation, Telstra, Broadband, wireless spectrum

Australia is giving Telstra, its national carrier, an unusual ultimatum: Create a separate subsidiary structure or be barred from further access to spectrum. Needless to say, the move has raised howls of protest from many quarters, and it poses one of the most critical questions in all of telecom today.

One problem with a break-ups like this is the loss of shareholder value, and there has been no satisfactory answer to that problem in the Telstra case. Another more potentially significant problem is the loss of investment incentive in a market where everyone wholesales from a single player. That killed broadband growth in the U.S. for almost a decade after the Telecom Act was passed.

In Australia, a government-subsidized broadband build-out is the proposed solution, but nobody really knows if that will work. The government is presuming that investment can be guaranteed by taxpayer subsidy and that competition will force service prices down. The problem is that competition will then demand perpetual subsidies, since return on investment for service competitors is likely to be minimal, and they won’t contribute to building out a shared infrastructure.

Australia has always had the most pro-competition regulatory bias of all industrial nations, and how they cope with these issues will be the conclusive indictor of whether even subsidization can sustain such a regulatory model. We don’t think it can.

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