Competition concerns over Telstra takeover deal

TELSTRA will learn on Thursday whether it is allowed to proceed with plans to turn a small Adelaide-based internet provider into its own Jetstar-like national broadband provider.

By InvestSMART · 20 Dec 2012

By InvestSMART ·
20 Dec 2012

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TELSTRA will learn on Thursday whether it is allowed to proceed with plans to turn a small Adelaide-based internet provider into its own Jetstar-like national broadband provider.

Telstra announced plans to buy Adam Internet for about $55 million in late October, but is still waiting for clearance from the competition watchdog.

There are concerns the deal will lessen competition in South Australia and that there are insufficient controls to stop Telstra giving Adam more favourable wholesale prices than other competitors.

Optus, iiNet and business telco Macquarie Telecom have all expressed concerns Adam Internet could undercut their prices if Telstra gives it cheaper access to the copper network.

The chief regulatory officer at iiNet, Steve Dalby, said its main concern was that Telstra would be able to offer "sweetheart deals" to Adam and at the same time absorb all its marketing costs.

"That's something no other telco can do and it's something that if approved could set a precedent for other takeovers," Mr Dalby said in October.

The Australian Competition and Consumer Commission has also raised concerns about this. "Adam Internet relies on Telstra Wholesale [to serve consumers], so you do not want [Adam] getting more favourable terms than other Telstra Wholesale customers," ACCC chairman Rod Sims said.

"We have got to make sure, that in [Telstra] having their wholly owned subsidiary, which was not envisaged with the structural separation undertaking, that there is some mechanism to make sure that Telstra cannot favour Adam Internet."

The problem is Telstra announced the purchase several months after the competition regulator finished writing new competition rules for Telstra, known as the structural separation undertaking. For the first time Telstra is forbidden from giving its own retail division cheaper wholesale access to consumers' phone lines than Telstra's competitors can get. However, the rules did not consider what would happen with a wholly owned subsidiary.

The other concern is competition in the fixed-line communications market in South Australia. Telstra supplies between 41 per cent and 47 per cent of broadband customers. Adam has fewer than 100,000 residential, business and government customers nationally, but has up to 20 per cent of the broadband market in SA and up to 25 per cent in Adelaide.

This means Telstra would have at least a 60 per cent market share in SA and close to 70 per cent in Adelaide.

Another independent Adelaide-based broadband provider, Internode, was bought by iiNet a year ago.

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Frequently Asked Questions about this Article…

What is Telstra’s planned takeover of Adam Internet?

Telstra announced plans in late October to buy Adelaide-based Adam Internet for about $55 million, with the aim of turning the small provider into a Jetstar‑like national broadband brand. The deal is subject to approval from the competition watchdog.

Why are there competition concerns about the Telstra‑Adam Internet takeover?

Competitors and the Australian Competition and Consumer Commission (ACCC) worry the deal could lessen competition in South Australia and allow Telstra to give Adam more favourable wholesale terms than other retail providers, potentially enabling Adam to undercut rivals.

Which telcos have expressed objections to the takeover and what are their concerns?

Optus, iiNet and business telco Macquarie Telecom have all raised concerns. iiNet’s chief regulatory officer, Steve Dalby, warned Telstra could offer ‘sweetheart deals’ to Adam while absorbing its marketing costs—an advantage other telcos couldn’t match.

What has the ACCC said about the proposed Telstra acquisition of Adam Internet?

ACCC chairman Rod Sims has expressed concern that Adam relies on Telstra Wholesale, and warned against Adam getting more favourable terms than other Telstra Wholesale customers. The ACCC has stressed the need for mechanisms to prevent Telstra favouring a wholly owned subsidiary.

How could the takeover affect wholesale pricing and competition among broadband providers?

The article highlights fears that if Telstra gives Adam cheaper access to the copper network, Adam could undercut competitors on price. That potential for preferential wholesale pricing is central to concerns about reduced competition.

What market share would Telstra hold in South Australia and Adelaide if it acquires Adam Internet?

Telstra currently supplies between 41% and 47% of broadband customers nationally. Adam has fewer than 100,000 customers nationally but up to about 20% of the broadband market in South Australia and up to 25% in Adelaide—meaning Telstra’s share would be at least around 60% in SA and close to 70% in Adelaide if the deal goes ahead.

How does the structural separation undertaking relate to this takeover?

The structural separation undertaking forbids Telstra from giving its own retail division cheaper wholesale access than competitors, but those rules were written before Telstra announced buying a wholly owned subsidiary. Regulators say the undertaking didn’t contemplate this scenario, prompting questions about whether existing safeguards are sufficient.

What should everyday investors watch for regarding the Telstra‑Adam Internet deal?

Investors should monitor the competition watchdog’s clearance decision and any ACCC findings, because regulatory outcomes could affect Telstra’s competitive position in South Australia and potentially set a precedent for future telco takeovers. The article indicates the deal’s competitive and regulatory risks—not immediate financial forecasts—are the main issues to track.