Telstra's budget broadband roadblock

Telstra's proposed acquisition of South Australian internet service provider, Adam Internet, has predictably prompted the telco's rivals to raise the banner of dissent, with Optus and iiNet both urging the competition regulator to block the deal.

Their opposition is understandable because neither would be happy to see Telstra's planned strategy of spinning out a budget brand, a-la Qantas-Jetstar, come to fruition. The acquisition of Adam, at a rather generous $60 million price tag, is the first step in the building a low cost offering. It's an area that Telstra has previously steered clear of but the telco is evidently hoping to put its NBN cash to good use. The likes of Optus and iiNet were never going to let this intrusion go unchallenged hence their warning to the Australian Competition and Consumer Commission that the deal will reduce competition. 

"We're very concerned that Telstra will use Adam as a vehicle to increase its market share in the price-sensitive end," iiNet chief regulatory officer Steve Dalby said in a submission to the ACCC

"Of course that's a rational approach to take if you're Telstra, but if Telstra is also able to offer favourable wholesale terms to Adam, then competition will suffer as a result."

Dalby's second comment is perhaps indicative of what Optus and iiNet are really worried about, because the marriage of Telstra and Adam Internet is unlikely to rock the boat as far as budget broadband is concerned.

What we will see instead is Telstra making a belated entry into the low-end market that it has until now chosen to ignore.

Ovum analyst David Kennedy says that the ACCC would have almost certainly closed the door on Telstra if the telco was proposing to merge an existing budget offering with Adam Internet. Instead, Telstra has decided to take a “short-cut”, as Kennedy puts it, which should see it fend off competition concerns.

“Adam Internet is a pretty small operator and even if the ACCC blocked the deal there is nothing stopping Telstra from rolling out its own low-end offering,” Kennedy says.

That is certainly an option for Telstra and it could still come to pass if the ACCC is inclined to side with Optus and iiNet. However, Telstra isn't just spending the $60 million for Adam's limited customer footprint but is more interested in the outfit's low cost service model and expertise.

At the end of the day, both Optus and iiNet are acutely aware that the ACCC is unlikely to block the deal on pure competition grounds. So, perhaps the best they can hope for is to compel the regulator to ensure that Telstra doesn't favour its new subsidiary with regards to wholesale access.

That's an oversight issue that has done the rounds for quite some time and there's nothing new about the fact that Telstra doesn't offer the same wholesale prices to every operator. However, in light of the lengthy structural separation discussion that predicated the breakup of Telstra, both the regulator and the telco would be aware of where to draw the line.