Vodafone suits up for a Telstra dressing down

Vodafone Hutchison's Bill Morrow and the Competitive Carriers Coalition have opened a new, post-national broadband network phase of the long-standing efforts of Telstra's competitors to use regulation as a complementary tactic to actual competition.

Morrow, in a speech today that was foreshadowed in this morning's newspapers, highlighted various government subsidies awarded to Telstra over the years to effectively argue Telstra has been given an unfair competitive advantage at taxpayers' expense.

The CCC earlier this week called for an urgent reassessment of digital content regulation, saying the current regulatory framework was out of date and that without reform would create the new anti-competitive bottleneck in telecommunications and entrench Telstra's market power.

In Morrow's speech he says successive governments have awarded more than $450 million of taxpayer funds to Telstra and cited the $39.2 million the West Australian government has committed to Telstra to increase mobile coverage in the Pilbara, Kimberleys, Mid-West and wheat belt regions of WA.

It's not actually a very good example, given that the WA government conducted a tender, with both Telstra and Optus bidding – but not Vodafone. Telstra won the tender and has committed $106 million of its own funds.

The $450 million is probably in the ballpark for funds Telstra has received in subsidies over the past decade or more for providing coverage in regions that would otherwise be uneconomic, some of which would also have been the result of successful tenders.

Those sorts of payments, however, are not gifts or competitive leg-ups but reflect government policy aimed at ensuring citizens in rural and remote areas receive services that the private sector would not otherwise deliver.

The reality is that Telstra, with the biggest and best network, is in a stronger position to win those tenders than Vodafone or Optus because it has invested in that bigger and better network.

Optus is now spending heavily to extend its coverage but is still playing catch-up while Vodafone has only itself to blame for being a distant third player. Morrow has been parachuted into this market to try to fix a broken business. The degradation of Vodafone's network as a result of under-investment has seen massive slabs of its former customer base fleeing the carrier, most of them to Telstra.

That's not the result of any policy or regulatory failures but reflects self-inflicted damage. Vodafone and Hutchison Whampoa are massive organisations that had, and have, the resources to out-invest Telstra and Optus had they chosen to.

The CCC position is more defensible. Telstra, primarily but not exclusively through its 50 per cent interest in Foxtel, does have a very strong position in content that it can leverage into both a wireless and NBN environment and it has the $11 billion or so (in net present value terms) it will receive from NBN Co and the federal government as a war chest to enhance its competitive position.

It is often forgotten, however, that Optus had a pay TV business before Telstra and a massive headstart in terms of the programming it had secured. Foxtel out-marketed Optus Vision, and tensions between the Optus Vision partners tore that group apart and ultimately Foxtel's triumph caused Optus to vacate that market. Telstra's position in content isn't the result of a failure of competition but of a failure of competitors.

The Australian Competition and Consumer Commission has already intervened (during Foxtel's acquisition of Austar) to ensure there is access to some core content and has made it clear it is acutely aware of the need to monitor Telstra's acquisition of media rights and take action if it believes they could have anti-competitive implications.

With the NBN, IPTV players already in the market, more inevitably coming and content creators likely to increasingly look to direct distribution the dominance and permanency of Telstra's strength in content shouldn't be over-estimated.

The parentage of Optus and Vodafone – Optus is part of the giant SingTel group while Vodafone is the world's largest mobile operator – means they could out-spend Telstra if they wished. To date they haven't been prepared to do so.

That's largely because in the pre-NBN era the regulatory regime provided incentives for regulatory gaming within the fixed line space. The regime was designed to reduce Telstra's dominance and shift customers and profit to its competitors and it was rational for those competitors to exploit it to develop capital-light businesses via the access regimes.

That game is almost over, thanks to the NBN and the structural separation of Telstra that will progressively occur.

Wireless is a truly competitive and lightly-regulated segment of the telecommunications industry mainly because the three big players started with a playing field that was roughly level.
Optus has done a far better job of competing with Telstra in that space, until relatively recently when Telstra's network quality advantage started to be better leveraged by more competitive pricing, but Vodafone was a distant third even before its under-investment trigger an implosion within its customer base.

The highly-credentialed Morrow (he has a reputation and record as a successful trouble-shooter for Vodafone) is now trying to turn the destructive trends within the business around and, provided he's given sufficient capital, almost certainly will.

In a market the size of the wireless market with only three players where competition rather than incumbency or regulation determines the outcomes Vodafone, with its parentage, ought to be at least a stronger third player than it is today.

Telstra would be well aware that with the long-standing focus of its efforts, and of its competitors, to game the regulatory regime for financial advantage effectively ending with its own structural separation there will be a shift towards an attempt to hobble it in the wireless segment.

Given that it is a truly competitive market, however, its competitors are going to find it much harder to gain a sympathetic hearing than they did during the debates about Telstra's fixed line dominance.