Can Telstra save the NBN?

After more than 30 years of following the wrong road the Australian telecommunications industry has come to another crossroad, almost by accident. By working with the government and choosing the right path, long suffering Telstra shareholders will be big winners.

Telstra can save the government and the National Broadband Network.

Communications Minister Malcolm Turnbull recently told the Australian Financial Review that the government is considering changes to foreign ownership restrictions on Telstra, that limit individual foreign investors to five per cent and the total foreign ownership to 35 per cent.

Telstra chief executive David Thodey told The Australian on February 28, that Telstra’s foreign ownership restrictions had “served their purpose”. and went on to describe how Telstra’s competitiveness would need new investors to fuel new growth.

Thodey linked the introduction of the NBN with the need for the foreign ownership restrictions to be removed when he said “Over time, as the nation moves to NBN…I think it should be reviewed.”

Well why wait 10 years? Let me explain why Turnbull and Thodey need to get together and discuss mutually beneficial opportunities.

Australians want a prosperous and competitive telecommunications industry that provides customers with world leading facilities and fibre networks at the lowest cost to consumers. And at no cost to the public purse.

Sounds a bit pie in the sky right? But it doesn't have to be.

Structural separation

Telstra remains at the centre of the Australian telecommunications industry and for substantive change to occur its market dominance must be addressed. But that doesn't mean that Telstra should be sold down the river nor should mobile cellular competitors get a free ride on its mobile network infrastructure.

Telstra agreed to structural separation as part of the $11 billion deal with the government and NBN Co. The Australian Competition and Consumer Commission (ACCC) approved the deal in February 2012, which added considerable legitimacy to what was a long drawn out negotiation which ultimately led to Telstra shareholders securing an $11 billion windfall.

Thodey has thrown his support behind the change when he said “Telstra supports…a wholesale-only NBN and the progressive structural separation of Telstra.”

Telstra’s lead negotiator on the NBN, Tony Warren, an outspoken critic of structural separation, said “The shareholders voted on this and it’s what they support. We have crossed the Rubicon.”

So how can structural separation and lifting foreign ownership restrictions benefit both Telstra and the nation?

And then there were two

The Coalition government has been digging a hole for itself since the election and needs to find a way out fast. Turnbull’s NBN reviews and audits may be useful but ultimately the bad news for the Coalition government is the “gigabit fibre race” has begun and other nations are opting for FTTP at an ever increasing pace.

The complication posed by TPG Telecom and the legal loophole that has both Telstra and NBN Co up in arms is also proving to be a bone of contention. As the panel conducting the cost-benefit analysis considers its next move, untangling the current regulatory mess is eating into NBN Co's timetable.

Time is not on Minister Turnbull's side but he could pull a rabbit out of a hat by picking up the phone and suggesting to Thodey that they get together to discuss how Telstra can save the government and the NBN, and also make Telstra shareholders very happy along the way.

All Thodey would have to do is to agree to split Telstra into two companies and existing shareholders would get one share in each company for a single Telstra share.

Surely this would not be too big a request for Turnbull to make?

What are the benefits?

The government could offer to lift foreign ownership restrictions for Telstra Retail. This would permit Telstra Retail to gain the foreign investment necessary to seek out new market opportunities. It could potentially pave the way for foreign ownership of Telstra Retail but that's not necessarily a bad thing.

Telstra’s mobile cellular network and parts of Telstra’s fibre network would remain with Telstra retail, effectively leveling the playing field for Optus and Vodafone.

Telstra wholesale would pick up Telstra’s national fibre network, the government’s regional backbone blackspot network, all of the Telstra exchanges that host components of the NBN and the access network infrastructure including pits, ducts and traps.

Unless a third company is prepared to rollout a national backhaul network the need for the ACCC to regulate backhaul pricing will remain and as there is no likelihood of a third company coming forward the ACCC might as well regulate just the one company – Telstra Wholesale.

Telstra Wholesale would then be free to merge with NBN Co and push ahead with a FTTP NBN, because there would be no retail impediment stopping Telstra wholesale from focusing on a forward looking plan that focuses on optimising a range of wholesale offerings to retail service providers.

The Coalition government can achieve two positive outcomes. Telstra Retail becomes a smaller retail and mobile cellular company that can compete with Optus, Vodafone, iiNet and TPG without being the gorilla in the room. Telstra Wholesale becomes a monopoly wholesale provider which is regulated by the ACCC but is now privatised and working to complete a FTTP NBN, with HFC and fibre to the basement (FTTB) being used as interim fixed telecommunications infrastructure while the FTTP rollout occurs.

A cautionary note on how effective the HFC networks will be as interim networks is required though Turnbull’s reviews and audits will hopefully produce a useful outcome soon, and answer this question.

Telstra’s shareholders are the winners

Telstra shareholders would have a share in Telstra Retail and the share value should increase significantly as Telstra Retail would be seen to be a significant international takeover target. How much could Telstra shareholders get from a foreign takeover? Well, it could bring a smile to all.

And Telstra shareholders would retain a share of Telstra Wholesale, which would retain foreign ownership restrictions, but it would now be in a much better position to absorb the cost of the NBN rollout and remain income positive. Telstra wholesale would be regulated by the ACCC but this would not prevent Telstra wholesale from paying respectable annual dividends to shareholders.

The Abbot government could create a legacy that would be remembered by resolving to help the telecommunications industry find the path to success.

Turnbull must seize this opportunity and look for a balanced split of Telstra's retail and wholesale arms that will meet Telstra’s shareholder needs, achieve long sought after fair competition in a newly invigorated telecommunication industry and save the NBN.

Mark Gregory is a Senior Lecturer in the School of Electrical and Computer Engineering at RMIT University