ADSL2+: A wholesale disaster for Telstra shareholders?

ADSL2+: A wholesale disaster for Telstra shareholders?

Summary: A guy I know runs a tiling business, which as far as I can see involves his drinking lots of coffee, making lots of phone calls, and making sure that around a dozen different tilers do the actual hard work. As long as they're busy, he's making money. If he finds enough new business to keep them all going for two weeks, he can take off for Hawaii -- and still be making money.

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A guy I know runs a tiling business, which as far as I can see involves his drinking lots of coffee, making lots of phone calls, and making sure that around a dozen different tilers do the actual hard work. As long as they're busy, he's making money. If he finds enough new business to keep them all going for two weeks, he can take off for Hawaii -- and still be making money.

Anybody with half a business mind knows this kind of situation is a great way to make money. It can go horribly wrong, of course, if your team lets you down; but if you have a reliable team, and assets that the team can use to generate money, it's possible to extremely well for yourself.

I couldn't help but be reminded of this after hearing of Telstra's decision last week to finally turn on ADSL2+ services for more than two million households. It was a major turning point in the steady push of broadband towards broader usage -- and, as expected, it sent Telstra's competitors into a frenzy that makes a court challenge over ADSL2+ declaration a virtual certainty.

All this fuss over wholesaling, which is a fundamental part of everyday business all over the world.

It's ubiquitous amongst telcos, of course, but also common in industries such as financial services, construction, retail, and anywhere else where the producers of goods and services understand others may have more success selling them to customers.

The reason wholesaling is so common, dare I say, is because it works; it's a way for a company to make money off of its assets without wearing the everyday costs of expensive activities such as customer care. It's also a recognition that no company is an island, and that growth in the overall market benefits everyone.

Telstra, however, wants none of this. The company has long said it wouldn't roll out ADSL2+ unless it could be guaranteed the regulators wouldn't force it to wholesale the services. This begged the question of whether Telstra is against wholesaling it full stop, or just against being forced to wholesale it at prices it didn't set.

To clarify this point, last week I contacted one of Telstra's press frontmen, who handed my enquiry to another company spokesperson. After a week of consideration, I received his response:

In regard to your question, there is no current wholesale ADSL 2+ offer. The 8mbps wholesale service continues to be available.

We will, of course, consider all commercial approaches to wholesale these services just as we have done with ADSL. The recent announcement is about providing better services to our retail customers. Our competitors have every opportunity to match our investment by installing their own DSLAMs in these exchanges or extending their own existing networks. Sustainable competition occurs when companies try to differentiate from their competitors by installing their own facilities and developing their own service offerings. This typically noncommittal statement suggests that Telstra is open to wholesaling access, but only on its terms. In other words, it's déjà vu all over again.

I have to ask whether in all this posturing and blithering Telstra isn't forgetting one of its main constituencies: its shareholders.

While Telstra may feel Senator Conroy's letter has given it some sort of moral victory, the fact remains that the company invested millions of dollars of shareholders' money to buy assets that it installed, then let lie fallow for what will have been nearly two years.

That's two years of missed wholesale revenues, two years of depreciation that would have converted tax into shareholder dividends, and two years towards obsolescence for equipment that has so far generated absolutely nothing for Telstra's bottom line.

Is this the kind of business the shareholders bought into? I'm not a Telstra shareholder, but I'd be upset if I bought into a company that was working this way.

It's not as if suggestions that Telstra wholesale its services are coming from left field; wholesale services are a major source of revenue for Telstra. In its latest annual report, we learn that Telstra has 7.78 million direct fixed-line customers and an additional 1.98 million wholesale customers (who are serviced through Telstra's competitors). On the broadband side, Telstra has 2.4 million direct customers and an additional 1.76 million wholesale customers -- a 23.5 percent increase on the previous year, by the way.

During the past year, wholesale Internet services generated AU$231 million in revenues for Telstra; wholesale broadband services generated AU$568 million, compared with AU$1.2 billion for Telstra's retail broadband services.

In other words, Telstra's wholesale business accounts for 42 percent of its broadband customers and 32 percent of its broadband revenues. This is quite a significant business, but it's one that by Telstra's own admission has been held back -- and will continue to be -- as long as it refuses to wholesale ADSL2+.

Judging from my many discussions with carriers and ISPs over the years, it is eminently clear that Telstra is the only company that flat-out refuses to offer wholesale access to its equipment. And when it does, as ISPs learned most painfully a few years back, it is more than happy to offer pricing that is utterly, commercially, impossible to compete with -- and favours its own retail arm, as when it offered competing ISPs wholesale ADSL that cost more than its own comparable retail service.

Expect history to repeat itself as Telstra trickles wholesale ADSL2+ in areas where competitors finally manage to sneak their own gear into its exchanges -- and begin wholesaling their own services. Senator Conroy may be happy that he's convinced Telstra to bring ADSL2+ to the masses, but shareholders should wonder when Telstra is going to stop playing chicken with the government and get back to using its excellent technological capabilities to grow its business.

Topics: Broadband, Telcos, Telstra, NBN

About

Australia’s first-world economy relies on first-rate IT and telecommunications innovation. David Braue, an award-winning IT journalist and former Macworld editor, covers its challenges, successes and lessons learned as it uses ICT to assert its leadership in the developing Asia-Pacific region – and strengthen its reputation on the world stage.

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  • ADSL2+ ; A wholesale disaster for Telstra?

    " Expect history to repeat itself as Telstra trickles ADSL 2+ into exchanges ......"

    You are completely wrong!
    Switching on 900 + exchanges is not a trickle.
    And that is the significance of the decision made 2 weeks ago.
    They are NOW no longer waiting for a competitor to activate a ADSL 2+ before Telstra make their move.
    The results announced today suggest the wait hasnt hurt them either.
    And the year ahead should now be even better.

    ADSL 2+ on Telstra terms or not at all. (if Telstra decides it so) And any other product or service it has.
    If that goes against the national interest ,ask the Govt to buy it back from the shareholders and have it subsidise the telco industry or the country as it sees fit.
    I'm sure there are a a few people who would happily sell it for the upto $7.40 they paid for it. (plus interest and a little something for their trouble.)

    Your point about, Wholesale is good for Telsta, may or may not be correct. The point is its now upto Telstra to decide. (At least for the services not covered by the regulations policed by the ACCC.)

    But you are quite correct about the competition being in a tizz.
    About the success of Next G, it's still growing momentum, and ADSL 2+ being rolled out.
    Not available to anyone but Telstra customers, wholesale and retail on anything but Telstra terms.
    anonymous
  • As a shareholder

    I AM HAPPY

    You write:
    "The reason wholesaling is so common, dare I say, is because it works; it's a way for a company to make money off of its assets without wearing the everyday costs of expensive activities such as customer care. It's also a recognition that no company is an island, and that growth in the overall market benefits everyone."

    Telstra already has a huge retail customer care capability and adding 1 or 100,000 additional retail customers to support is not a major issue and would only increase costs by a fraction of having to establish a new facility from scratch.

    Companies usually choose to distribute their services via a wholesale model when they do not have an established retail distribution model or when the cost to manage 100,000 clients compared to 20 clients is exorbitant. Don't forget that all these companies that buy wholesale from Telstra simply resell a Telstra service while all ongoing maintenance and repairs still need to be handled by Telstra. If these companies are willing to hire their own technicians, pay for their own vehicles and incur all associated costs then I would agree that Telstra should encourage a wider wholesale market but when they reduce their revenue without a corresponding cost reduction your argument holds no water.

    The only other argument to wholesale is to increase your overall market share by having different avenues to market, this is fine when there are dozens of manufacturers making the same or simular products but when there is only one or two manufacturers then your market share will not really increase if you add different avenues to market.
    anonymous
  • Spin or a Blog?

    Why is David even allowed to write? This is probably his most balanced blog and it is still one sided (anything but Telstra).
    anonymous
  • ADSL 2+ A wholesale disater for Telstra shareholders

    What nonsense.

    Did you even stop to think what background work needs to be done in order to deploy such a major upgrade across that many exchanges?

    ADSL2+ is notoriously less reliable than ADSL.

    Telstra have made sure that they did their homework before deploying, of this I am sure.

    Secondly, what incentive were they given from a business standpoint to wholesale it. None people want it at cost! Not likely.

    And I am not a Telstra Fan boy. Just someone who understands that business should not be steamrolled into delivering services at a loss or at the detriment of usability.

    Its always been and will always be about the profitability, and this can only come if you have the ability to deler what you claim to be able to do.
    anonymous
  • Because...

    It gets all the little Telstra fanbois worked up. See above and below.
    anonymous
  • Good article David!

    Well done David. Telstras actions are ridiculous (yet again). Telstra need to apologise to their shareholders for withholding this revenue stream ,and also for withholding retail ADSL2 for nearly 2 years just to try and score politcal points against the previous govt. Telstras antics show they arent interested in putting shareholders first or even listening to them. Just ask Sol how he got his payrise!
    anonymous
  • That's the problem

    David and the likes of you will always look above, below, left, right, front and back but will never look at yourselves.
    anonymous
  • ADSL2+ ; A wholesale disaster for Telstra?

    I have to disagree with the first poster's comments. If you are were a Telstra Shareholder, and knew what Telstra is doing, you would be furious!

    Telstra makes 32% (even under a regulated regime) of it's BB revenue off wholesaling their products to competitors. Telstra refusing to allow wholesale of their ADSL2+ hardware is doing nothing more than harming their shareholders profits.

    Within business, money is money. No matter where it comes from!
    anonymous
  • exchange access barriers

    David,

    There are two Telstra statements in your quoted response from them that I must take issue with.

    1) "We will, of course, consider all commercial approaches to wholesale these services just as we have done with ADSL."

    This is patently false, and its an insult to see this statement being peddled by Telstra.

    Telstra are refusing to negotiate on wholesale ADSL2+ wholesale. Yes, we have tried. They don't even want to talk about it, let alone provide us with even lip service conversation about it, the answer is a flat 'No'.

    2) "Our competitors have every opportunity to match our investment by installing their own DSLAMs in these exchanges or extending their own existing networks."

    This is demonstrably false. Telstra are obstructing the access that competitors should legally be able to engage - and as a result, the extent to which competitive ADSL2+ exists in Australia is a mere shadow of what it could be - and that competitiveness is being wound back increasingly in metro areas as a result of this continued obstruction.

    I have written a letter about those obstructive practices here:

    http://web.mac.com/simon_hackett/Site/Technology/Entries/2008/2/12_Barriers_to_ADSL2%2B_infrastructure.html

    ... and a formal complaint from a number of major ISP's including Internode was filed with the ACCC about these practices last week.

    Regards,
    Simon Hackett
    MD, Internode
    anonymous
  • Don't we have Operational Separation?

    Hi Dave,
    I was under the impression that Telstra had to operate under a charter of "operational separation".
    Why then do Teltra continually refer to "competitors" instead of customers?
    All the ISPs,including Bigpond are "customers" of Telstra Wholesale or Telstra Networks and it earns considerable money from them.
    The othjer ISPs are only competitors to Bigpond which under the charter of operational separation is just another ISP.

    For Telstra Wholesale or Networks to deny access to other ISPs, and allow it to only one customer is surely a "restriction of trade" under the Trade Paractices Act.
    anonymous
  • Questions for David

    David, as someone who one would assume is an intelligent person, your lack of understanding in relation to business astounds! I can understand the grubby competitors, all queuing up with their hands out and not understanding basic business principles, as they are only in it for any easy ride, but you?

    You say wholesaling is fundamental all over the world and it works. Not REGULATED wholesale! How convenient, you just happened to overlook the telling factor ~ regulations. Because of this, your entire spiel means absolutely nothing or conversely, you are in fact supporting exactly what Telstra has said. Theyll consider wholesaling through commercially negotiated agreements ~ thats how wholesaling is determined and why it may work ~ NOT via reguated prices. Sneaky omission!

    How can wholesaling work for the seller when they are forced to wholesale, with an access price at below cost! Yes below cost! Its official once and for all, pg 6 #11 ~Telstras half yearly results presentation pack, 21/2. "ULL and LLS priced below cost"! The graphs on p3 and 4 also clearly indicate -4.9% wholesale! No conspiracy theorists, this is not a now we are talking lie, it is part of Telstras official results to the ASX and they cannot officially claim this if it is not so!

    Ok David, since "regulated wholesaling" is so fair, answer me these four simple questions, please! Would you invest in a business, only to have your infrastructure forcibly opened to all of your (non-investing) competitors to use? Would you like them to resell "your product" re-badged as theirs? Would you like to still be liable for the cost of repairs? And finally would you like to be forced to do all of this "and receive fees determined by bureaucrats, at below your cost". Going by your article I expect you to answer yes, yes, yes and yes!
    anonymous
  • what nonsense

    Anthony,
    The equipment has been in the exchanges for a fair while. So how is it that they could just sort out ADSL2 in exchanges that have competition and not the others. Was it harder for Telstra to turn on exchanges in say Alice Springs? No it wasnt they just decided not too. But really because of the way Telstra have set up RIMS all over the place ADSL2 will be a joke in Alice.
    anonymous
  • you mised what he said

    Mr Hackett was indeeed talking PRECISELY about commercially negotiated agrements - Telstra refused to have said negotiations out of hand.

    correct me if im wrong here but we are talking about a service that is *not* regulated wholesale - ACCC have not declared dsl2? so i believe simon is correct, and he DOES know his business. Telstra wont even consider a conversation let alone a contract, so thats that.

    Telstra loves to complain it doesnt get to earn the money it should with DSL1 because it doesnt set the rates at which it sells regulated product. Well in this instance they HAVE the opportunity to set the rates. and they rebuffed it.

    it is more of their game playing and i have to agree with David if i was a shareholder id be a bit sick of it by now. its been installed and waiting there in exchanges 2 years now .. id like to see the business being run as a telco again not a party political.

    once again dsl2 currently *isnt* regulated like the DSL market is so the 'wholesaling doesnt work when the ACCC sticks it oar in' argument as below doesnt wash.

    when things change thats dfferent but the ACCC has staunchly reminded people again and again they see no need to change that policy. so again that sort of ACCC interference is not likely.

    so David's question is fair and valid: if you had the ability to _set rates you felt like_ and make some income on sunk capital, and you *refused* to take that opportunity in favour of playing a game with the government and competitors, is that a smart move? were i a shareholder i would say NO.
    anonymous
  • Phil Burgess

    Does anyone have an email address for Phil Burgess.?
    naught12
  • Re you missed

    Unfortunately we can play pedantics all day, if we so choose! You missed, I missed etc.

    Correct, ADSL2+ is not declared, BUT within hours of the announcement that it would be switched on, all the leeches crawled out of the woodwork, starting with Primus and followed by.... drum roll, Internode, demanding it be declared, so...

    Under these circumstances, and dont forget too, these companies are party to the likes of CCC & TTTT, which do nothing positive for telecoms, they are purely Telstra negative organisations - so ask why would Telstra even contemplate dealing with such companies? I wouldn't want a bar of them either.

    Whether it's declared or not, the same analogy applies. Simon and the rest of the them simply head off to the ACCC, kiss Graeme Samuels butt and "demand" access! This is the source of most of the problems from my perspective.

    Although I guess it's keeping the sports car business booming. I bet Simon drives the nicest car (Telstras) money can buy - LOL!
    anonymous
  • Email Phil

    Stuart, I doubt anyone would have email addresses of the Telstra execs, but it might be worth trying the Now We Are Talking site.
    Despite some of the content (whether you like it or not), they tend to respond pretty quickly.
    I would expect that if you posted a letter there and addressed it to Mr Burgess it would be responded to in some form.
    If the letter was compelling enough, it may even get to Phil.

    Alternatively, Telstra HC is 242 Exhibition Street, Melbourne 3000. If you actually wrote a letter and sent it addressed to Mr Burgess, this is another chance of a response.

    Good Luck.
    anonymous
  • Frustrated

    Thank you Telstra I can finally get ADSL2+ at my telephone exchange BUT at $89.95 for for 16Gig YOU CAN KEEP IT along with your compulsory Telstra landline at $19.95.

    As soon as a competitor offers ADSL2+ they'll get my business, I want sub $50 Naked ADSL2+ and let me run my own Voip setup with DID and you will receive NO revenue from me EVER
    anonymous
  • Buk Berrrk

    "ADSL2+ is notoriously less reliable than ADSL."

    Wrong. I've had ADSL2+ for three months. There was one dropout due to a power failure at the exchange, which was fixed licketty split by my ISP, which is not Bigpond I may add.
    anonymous
  • 3 Months?

    I have had bigpond ADSL for close to 5 years, the past 18 months with ADSL2+.

    One outage and that was because of my old netgear router, my d-link has never failed, the actual line 100% up time for 15 million seconds, not to bad from my perspective.

    It's amazing when there is a fault the isp will be quick to say it is an exchange or copper issue (Telstra responsibility) but is happy to take credit for the repair. It the power outage was in your ISP's equipment it shows how they cut costs, no redundant power supplies, no UPS, no diesel backup?
    anonymous
  • Wholesale thoughts from someone who does not work for an ISP

    my understanding is that if telstra agrees to set a wholesale price and that price is deemed uncompetitive then internode or another isp can complain about unfair pricing.

    an example telstra may retail adsl2+ for $50 per month but demand $45 for companies to obtain the service wholesale. those isp's would then run to the accc complaining about the offered price and the accc then sets the price or fines telstra.

    i would rather want to simply say no i will sell it at my price, if you are really the head of internode then why don't you waste your time trying to get free publicity and go out and connect more exchanges yourself. If not why not change your company name to INTO NONE.
    anonymous