Bluff called, can Conroy still tame Telstra?

It can't really have come as a surprise to many, but Telstra's decision to fight Conroy's separate-or-be-separated mandate has thrown a spanner in the government's plans to turn lion tamer and pry the copper loop from Telstra's hands once and for all.

By next year's election, one assumes Conroy will want to be able to showcase his many achievements as minister — and the taming of Telstra would have to be high on his list.

Not only will Telstra not come quietly, it turns out, but the company seems set to throw its weight around in an ever-fiercer wrestling match that could easily drag into next year and taint Rudd's plans for a smooth re-election.

That is not to say Rudd faces much real competition from the Opposition as it is currently operating; Nick Minchin's hollow opposition to the NBN will be as irrelevant during the election campaign as it is now.

However, by next year's election, one assumes Conroy will want to be able to showcase his many achievements as minister for Communications — and the taming of Telstra would have to be high on his list. The Rudd Government has shown itself able to be big on vision when unlimited budgets seem to be suddenly available, but if it cannot deliver a legislative outcome to match, it will face some very real problems next year.

Widely-perceived nice guy David Thodey can only be laughing from his executive chair. Although he has shied away from the belligerent defiance that marked his predecessor's tenure, there was no way Thodey was simply going to hand over the keys to Telstra's empire. The company's submission to the government's legislative inquiry minced no words in proving that Conroy has a long, difficult fight ahead of him in his effort to become a lion tamer — and that Thodey is quite happy to join him in centre ring as the government's nemesis.

The irony: even though Conroy was quick to work the media with his claims that Telstra was welcome to stay the way it is now, he was agitating for change in no uncertain terms — and change of which Telstra was a part. After all, the market may be able to work around Telstra, but it's expensive and time-consuming. Now that Conroy clearly won't get the compliance from Telstra he seemed to think he would, he faces some difficult choices.

Foremost among these, of course, is drafting legislation that will actually freeze Telstra out of new wireless spectrum offerings and divest it of its Foxtel holdings. Although Conroy positioned these two Telstra businesses as tools for forcing Telstra to the table over separation, the reality of the wireless market is that Telstra is just about the only telco with the capital-raising capabilities necessary to buy large blocks of expensive wireless spectrum for nationwide service coverage.

Sure, smaller telcos or consortia may cherry-pick key markets like they did in the 3G auction, but the real-world interest in LTE and the so-called "digital dividend" to be available in 2014 is still anybody's guess. Excluding Telstra from the process may serve political objectives, but it's also likely to hamper competition during spectrum auctions and deliver lower overall licensing revenues to the government once the sale of that spectrum is complete. This is hardly ideal.

Ditto Foxtel: Telstra's warning that divesting the company of its share in Foxtel will see the content provider snapped up (and, by implication, muzzled) by media conglomerates is hardly far from the realm of possibility. Foxtel's ongoing success would make it an attractive target, and the government will have to consider how this scenario would affect its media ownership policies.

Furthermore, and correct me if I'm wrong, but there would seem to be little precedent for mandatorily divesting companies of their assets or shares in joint ventures when there have been no allegations of impropriety. This really is blue-sky territory for Conroy, with ponderous litigation and blown-out time frames a near certainty as Telstra resumes its official policy of foot-dragging and Conroy tries to find the right balance of kindly coercion and hard-nosed legislation.

Conroy can't back down now ... to flat-out cave to Telstra's demands would reposition Conroy as a toothless tiger beholden to Thodey's [whim].

The big problem is that Conroy can't back down now, although as I have already suggested he seems to already be treading that line. However, to flat-out cave to Telstra's demands — even its rather presumptuous attempts to influence the timetable by which government legislation is decided — would reposition Conroy as a toothless tiger beholden to Thodey's lion-hearted resolve.

This outcome would serve nobody but Telstra, perpetuating the status quo and forcing Rudd and Conroy back to the crisis table as they continue to try to deliver their NBN vision without bankrupting the country. Unfortunately, however, as always Telstra retains the power that inertia provides: it is Conroy's job to change the situation, and quick. If anything is actually going to change, it needs to be Conroy with the whip in hand.

Staring down a wild beast always carries risks, and Conroy certainly has his hands full. How well he handles this new challenge will determine whether we're hurtling towards a great new era in telecommunications — or fated to even more years stuck in the grip of Telstra's well-entrenched market position.

Were Conroy's separation terms just empty threats? Could an unshackled Telstra become a key election issue? What should Conroy's next step be?