Telstra’s Formidable Opponent

Stephen Colbert has a bit called ‘formidable opponent’ where he wants a debate and the only person worthy of debating him is, himself. That was too remote a reference for my piece in The Age today but that is how I see the Government in its game against Telstra — the Government has acted like Telstra has previously. The article is over the fold.

Cutting Telstra’s Cord

Joshua Gans, The Age, 17th September 2009

Real competition and benefits for consumers might finally be realised.

THERE is a scene from National Lampoon’s Vacation where the hapless Griswold family, who are travelling by road across the US, are faced with their car breaking down with just a single dodgy mechanic available.

”How much do I owe you?” they ask. The mechanic replies: ”How much have you got?” He then proceeds to take all of their money.

That scene always reminds me of Telstra (at least up until a few months ago). Their attitude in dealing with their customers, suppliers and the government always seemed to be of the ”how much have you got” variety. This isn’t surprising; like the small-town mechanic, Telstra was indispensable. There was very little in telecommunications and internet access that you could do without them. And they knew it.

Indispensability is what gives a firm monopoly power. It is classic game theory. Ensure that, without you, people lose pretty much everything and it isn’t surprising that in negotiations they will have to give you pretty much everything.

Beginning with Kim Beazley (then communications minister) and Labor in the 1990s, successive governments have not changed that fundamental fact about the telecommunications industry. Each reform has left Telstra as virtually indispensable. Again, it isn’t surprising. For much of that time, the government owned Telstra and that indispensability added up to dollars in asset value.

The April announcement that this Government would build a national broadband network that could, in principle, supply consumers broadband and, indeed, telecommunications services without needing Telstra changed the game. At a worse-case scenario of spending $43 billion, Telstra could be made dispensable. Indeed, again using game theory, all the Government needed would be to be credible on that threat. So long as it was feasible for the NBN to be built without Telstra, in all dealings that followed Telstra would be dispensable.

The announcement now that Telstra will face at least functional separation and maybe structural separation is an indication of the complete game-changing nature of the NBN. The Government holds legislative power to regulate in the interests of promoting competition and it holds power over the allocation of common property rights. And it is willing to use these levers to get competition quickly.

I described the $43 billion as a worse-case scenario because, as everyone knows, much of the NBN – at least in terms of what will be useful to consumers in the short term – is there right now. It won’t cost that much. In particular, we have the cable network passing over 2 million households. With a bit of investment, that network can produce the desired 100Mbps speeds of the NBN. The Government could build over that network with shiny new optic fibre or it could acquire that network as part of the NBN family.

Telstra might want to sell the cable network for a high price but the reality is that it is no longer indispensable. The cable network may soon be worth little. The Government knows that.

And on the whole issue of structural separation – doing that would clean up the industry and allow some real unbundling (letting different firms provide, say, broadband and cable TV) that will likely improve the NBN’s ability to attract customers and to get other industry players to invest in it. The Government can’t legislate that but it can restrict access to something Telstra needs: wireless spectrum. Given that wired and wireless broadband are likely to be strong future competitors (something Telstra has long claimed), the Government can exclude Telstra from future spectrum allocations ”in the interests of competition”.

In reality, structural separation that is ”forced” in this way, is just bringing forward the inevitable. Elsewhere, competition has caused telcos to break themselves up so as to focus competitive energy. For Telstra, that option was available to them five years ago. They could have done a deal with the government to invest in high-speed broadband and, in return, allowed competition to work more freely on existing assets. What they chose was defensiveness (protecting the past) and aggression (resisting all change).

The outcome of that was the formidable opponent they face today. Telstra traded off a first-mover advantage for today’s weakened state.

There is some scope for Telstra to make amends. The regulatory morass of the past decade has occurred largely because of a lack of real, infrastructure-based competition. These regulations could be dismantled but to do so would require Telstra to offer something real in return. The NBN opens up the industry to that competition. Telstra could offer structural separation as a solution in return for removing regulatory restrictions on it, including restructuring the universal service obligation for telephony. In that respect, Telstra has the power to move the desired industry structure forward.

But to be clear, that requires the ”new attitude” Telstra to be more than just words. The changes have to be transparent and clear.

When you think about the Government is now doing, there is an air of familiarity about it. The Opposition is accusing it of not playing fair and not being co-operative. It is right. Indeed, the Government is acting like a ruthless business with a ton of market power. Remind you of anyone?

Fortunately, the Government appears to be doing it in the interests of consumers. And, moreover, it knows how to do it. After all, who invented Telstra?

How much have you got, Telstra?

Joshua Gans is an economics professor at Melbourne Business School. His blog is at economics.com.au.

3 thoughts on “Telstra’s Formidable Opponent”

  1. There are very few telcos in the World where “competition has caused telcos to break themselves up so as to focus competitive energy.”  Most have clung onto as much of their business as they can.  AT&T has put itself back together after being splintered in the US.

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  2. Joshua:
     
    Can you point to one single market friendly idea you’ve run with since you’ve run this blog. Everything I’ve read  have been  anti-commerce rants.
     
    And please don’t come at me with the perfect competition model unless we’re talking about wheat and even then it’s debatable.
     
     

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