The Distillery: Telstra disconnected

Scribes say Telstra has missed a key opportunity as Adam Internet throws in the towel, with one pointing the finger at the ACCC’s sluggish assessment process.

South Australian internet service provider Adam Internet has pulled out of its takeover talks with Telstra after a nine-month wait on word from the consumer watchdog. Australia’s business commentators are in broad agreement that Telstra could have wreaked some havoc with Adam and the Australian Competition and Consumer Commission was correct to be wary.

But firstly, regardless of whether Telstra deserved to have its bid blocked, The Australian Financial Review’s Chanticleer columnist Tony Boyd makes the simple observation that the consumer watchdog’s tardiness on the matter was unacceptable.

“It is astonishing that it can take the ACCC nine months to work out a framework for a takeover by Australia’s largest telecommunications provider when it has been regulating that company for more than 12 years. We know the ACCC is busy. It has at least 30 investigations under way at the moment including more than 10 cartel investigations. But that is no excuse for putting in place a template for deals involving Telstra including a template that covers the possibility that it will launch its own ‘challenger’ internet brand from scratch. It should not be too hard for the ACCC to be able to say upfront what can and cannot be done by the company if it seeks to expand into areas that involve competing wholesale access.”

The Australian’s John Durie believes that the argument that Adam Internet amounted to a rounding error for a company of Telstra’s size and shouldn’t be of great concern “is nonsense”.

“The same line was suggested by Woolworths when it wanted to buy the corner store in Launceston not so long ago and the ACCC said no because that same store would mean Woolworths would have controlled 80 per cent of the liquor trade in the market. In the case of Telstra it is arguably even more pernicious, when you consider the company that controls the network wants to buy a small regional brand, take it national and along the way offer all sorts of incentives or competitive blocks.”

Durie says it makes more sense for Telstra to build a standalone brand. Fairfax’s Malcolm Maiden agrees, explaining how little Adam could have gone through quite a growth spurt with Telstra as the parent.

“Telstra wanted Adam not because it intended to run a niche business in South Australia, but because it believed Adam's ISP offer and its ‘light touch’ internet-based service model could be expanded into a national operation, riding on Telstra copper wire initially, and then on the new national broadband network, whatever shape it finally assumes. When Telstra went to the ACCC last October to seek clearance for the deal, it did so on the basis that Adam would not be covered by the earlier undertaking it had given the ACCC not to give its retail business preferential access to its copper network, or preferential treatment. For the ACCC and Telstra's competitors, that was akin to a large truck revving up to drive straight through an even larger loophole.”

So what’s plan B for Telstra? Business Spectator’s Stephen Bartholomeusz explains.

“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.”

The other corporate story that grabbed some serious attention yesterday was the stronger than expected production numbers from Fortescue Metals Group.

The Australian Financial Review’s Matthew Stevens says chief financial officer Stephen Pearce “might well deserve a medal for going above and beyond the call of duty”. The iron ore miner’s costs have been so radically reduced and its refinancing package so improved that Fortescue is now a far more secure company.

The Herald Sun’s Terry McCrann has an amusing take on projections from PricewaterhouseCoopers that the total state and federal budget deficits will total $583 billion by 2049-50.

“Projections one or two years into the future are dubious. Projections 10 years into the future are meaningless. Projections nearly 40 years into the future are…”

In reference to industrial relations, Fairfax’s Ross Gittins makes the astute, yet simple point that the word ‘reform’ in the phrase ‘legislative reform’ is a straight synonym for change. Constant changes to the industrial relations system is not a good thing, particularly if rules are being introduced, removed and then reintroduced.

And finally, Fairfax’s Adele Ferguson is writing about National Australia Bank boss Cameron Clyne under the headline: ‘Clyne fails good management test’. Naturally, the story is about NAB’s experience in the UK.

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