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.

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, NBN, Telcos, Telstra

About

As large as the US mainland but with a smaller population than Texas, Australia relies on ICT innovation to maintain its position as a first-world democracy and a role model for the developing Asia-Pacific region. Award-winning journalist David Braue has covered Australia’s IT and telecoms sectors since 1995 – and he’s as quick to draw le... Full Bio

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