On hold, Telstra is shunted from 'brand Adam' to plan B

Its aborted attempt to acquire Adam Internet is probably the last time for a long time that Telstra will bother even contemplating a local acquisition within its sector.

Nine months after they announced the $60 million agreed deal, Adam, a small South Australian broadband and mobile services retailer, walked away from it, apparently frustrated, as Telstra was, by the extraordinarily protracted process of trying to gain approval from the Australian Competition and Consumer Commission.

The ACCC hadn’t rejected the acquisition, indeed Telstra appears reasonably confident it could eventually have secured approval, but the tardiness of the process suggests the ACCC was in no hurry to reach a conclusion.

The ACCC had expressed concern that Telstra would use its market power to favour Adam over other wholesale customers. It was also concerned about the impact of the transaction within the South Australian market, if indeed there is a South Australian (as opposed to a national) market for telecommunications services.

Given the size of Adam relative to Telstra and the other telecommunications service providers – Telstra is a $61.5 billion company – Telstra could be forgiven if it interpreted the ACCC’s handling of the process as a strong signal that it shouldn’t contemplate any acquisitions in the sector.

As it happened, it was Adams which decided to use the end-date of June 30 in its agreement with Telstra to put an end to the uncertainty and walk away. The privately-held Adam may now be acquired by one of the aggregators in the sector, like iiNet or TPG.

Telstra had planned to use Adam to build a national second brand, leveraging off the business’ low-cost but high-service model. Its interest in Adam wasn’t particularly in its business but in its business model and the fact that acquiring it would have given its national ambitions an existing base and expertise.

Now Telstra may have to resort to ‘Plan B’’ and build its discount brand from scratch.

Given its existing dominance it would be reasonable to question why it would bother creating a new brand and business.

David Thodey has made it very clear that Telstra faces several key challenges. It needs to continue to reduce its costs; it needs to significantly improve its customer service and it needs to develop new growth businesses as the national broadband network (whichever version is built) displaces its fixed line dominance and steadily undermines its competitive advantages in its core domestic fixed line business.

While Telstra does have some growth options offshore, through its network applications and services unit and within its mobiles business, the old copper core of its domestic business with its fabulous margin is shrinking rapidly and will eventually disappear as the NBN build ramps up and Telstra becomes essentially a retailer of fixed line services.

It needs to find low-cost growth niches to offset some of the shrivelling of revenues and margins that is occurring and that will accelerate within its domestic business as the NBN is built out.

Acquiring Adam was seen as a way to develop a new retail business without the legacy baggage carried by Telstra and in the process learn how to operate as a low-cost operator with strong customer service outcomes. It may also have helped attract customers unprepared to deal with the Telstra-branded businesses.

Now Telstra will have to consider whether it can achieve the same outcomes from activating Plan B and going it alone, building a new brand and business from scratch. The Qantas-Jetstar example is often cited as the exemplar for what Telstra might be able to achieve.

If Telstra does decide to press ahead with the strategy despite the setback on the attempt to buy Adam, there is nothing the ACCC can do to stop it from building a new business from scratch beyond the existing regulatory framework covering relationships between its wholesale and retail businesses.

As the NBN rollout continues and its competitors eventually gain access to a national wholesale-only network, of course, the restrictions on Telstra’s freedoms will eventually fall away.

Until they have Telstra now knows its freedom to make acquisitions, even those that don’t appear to have any real potential to substantially lessen competition, is compromised by the ACCC’s wariness about all things Telstra.