Telstra and Broadband in the AFR

In today’s Australian Financial Review [over the fold], I explore the Seinfeldesque nature of Telstra’s actions on broadband.

Finally, Telstra comes to the broadband party

Australian Financial Review, 12th February, 2008

At last there’s something in the great broadband show about nothing writes Joshua Gans.

The Great Broadband Standoff between Telstra and the Australian people is over. For many months, Telstra refused to ‘flip the switch’ on much of its high speed broadband network known as ADSL2+. To be sure, some localities had the Telstra product but only where there were other competitors in the mix. Where Telstra would have a monopoly, the equipment stayed off.

But last week something changed and Telstra relented; deciding to use the equipment it had left stand idle and to expand ADSL2+ to eventually 900 more exchanges. That is a big expansion and let’s face it, from an economic point of view, if the equipment was there, there were no winners – least of all Telstra shareholders – from so much delay.

But why now? Basic economics suggests that where someone is guaranteed a monopoly, that is a great place to supply a product. But Telstra shied away from monopoly and only supplied its service where there was competition. That policy seems to throw away money.

So we have to think outside the basic, ‘you sell a service, I buy it’ game. Telstra itself claimed it was worried about ‘regulatory risk.’ While the ACCC had given it strong indications that it was not going to regulate ADSL2+ by requiring a wholesale service to competitors (not the least of which because that wholesale service was already available for basic broadband), Telstra gave the impression that it the stick of regulation stood ready to strike.

Of course, this belies the fact that our Trade Practices legislation gave Telstra a route to receive more certainty than what the ACCC might be saying to it and publicly. It could have offered an undertaking that would have been subject to public evaluation and Court oversight. Such an undertaking could have granted it an ‘access holiday’ as, now, ACCC Commission Stephen King and I termed it some years ago. Indeed, the Productivity Commission in its review of telecommunications regulation saw access holidays as a good means of encouraging investment in new services while preserving future competitive potential. But neither Telstra nor any other company that whines of the uncertain regulatory environment has ever taken that route.

Last week’s decision by Telstra indicates that this wasn’t the whole story. Put simply, in a move that is very gratifying, Broadband Minister Stephen Conroy, reaffirmed to Telstra and the industry, his confidence in the ACCC and support for everything they had done to this point. He gave no guarantee that Telstra would be free of regulation on this service. This time around that was enough for Telstra but in reality, nothing had changed. Like Seinfeld, it appears that last year’s show was about nothing.

Of course, one possibility is that Telstra are now worried about their position with respect to the Rudd Government’s overall telecommunications plans. In that case, the Government has shown itself to be in a much stronger position to deal with industry than the previous one.

But also likely is that last year, Telstra stood to gain little in terms of profits from its idle equipment. After all, competitors and Telstra had provided a high speed service in many areas where wealth and demographics suited a high demand for broadband. The stuff that was neglected was likely far less lucrative commercially.

In addition, if it could do so, Telstra would like to price more aggressively where there was competition and higher were there was none. Being a national carrier, it can’t really do that and so it held back to see whether the competitive prices would stabilise at something worthy of a national roll-out.

But let’s look at those prices. Today, an ADSL2+ Telstra plan with a 12GB per month limit costs $89.95 (you need to have a Telstra phone as well). The closest equivalent plan on iinet costs $49.95 (again with their phone service). So Telstra are not meeting the competition but meeting the lack of competition. Their decision to roll-out their whole network now indicates that they believe that those high prices will sustain themselves for some time.

As it stands, this is not good news for localities where there is limited competition. But it also shows that there is plenty of room for the Government to move on broadband availability. Their plans for a fibre to the node network will either leave Telstra as a regulated provider (if it is selected) or facing competition (if it is not). The period of time where Telstra is able to price high speed broadband free of constraint will likely be quite limited. All we need to do is to continue to remind ourselves that it is not just about where broadband is available but its cost and conditions. After all, with 20Mbps speeds, you can chew through your 12GB allowance in a couple of days. You will spend most of your time on dial-up speeds wondering what the fuss was all about.

Joshua Gans is an economics professor at Melbourne Business School. He writes a blog on these issues at economics.com.au.

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