Is Telstra the scorpion or the frog?

Telstra's competitors wasted no time in rushing to the ACCC after the company announced dramatic broadband price cuts. But with David Thodey under pressure to do things by the book and not all of Telstra's customers so quick to condemn it, is this round of price cuts really anti-competitive? Or is it just a harsh sign that the price of data is plummeting, and the ISP industry needs to do some navel-gazing or risk extinction?

Watching the industry's collective reaction to Telstra's dramatic weekend price cuts, I was reminded of the old story about the scorpion and the frog — but as the whinging wore on, I began to wonder who is the scorpion in our little telecoms allegory, and who's the frog.

Scorpion

Is Telstra the scorpion or the frog? (Black scorpion image by Per-Anders Olsson, CC BY-SA 3.0)

Telstra's competitors say the company is competing unfairly. The ACCC will no doubt approach this issue with the same concerned ineffectiveness with which it managed Telstra conflicts through most of the past decade (although I must say I was impressed to note some success in the ACCC's pursuit of Telstra over that nasty you-can't-access-our-exchange business a few years ago; but I digress).

The issue, of course, is one of retail versus wholesale pricing: the retail side of Telstra has chopped its prices dramatically, while the wholesale side of the business apparently has not. This is not entirely unexpected: Telstra is supposed to be, and claims it has been, managing its retail and wholesale operations at arm's length for some time. This means the retail arm could very well have chopped prices and the bosses of the wholesale arm read about it online at the same time as the rest of us.

Whether you believe that one or not, iiNet wasted no time going straight to the ACCC while Internode and Primus jumped on top of iiNet's car and climbed in through the sunroof while it was speeding on its way. Their $130 monthly plans for 200GB used to be good value compared with Telstra's $180 deal, but suddenly they are looking like the overpriced ones and are screaming that Telstra's pricing is launching a race to the bottom that will result in the extinguishment of small internet service providers (ISPs) everywhere.

As they say in the classics, et cetera, et cetera, et cetera.

Can we really blame Telstra for getting aggressive with pricing, no matter how out of character it is for the company to offer competitive prices? After all, the company spent several years negotiating terms of its Napoleon-like surrender and extracted a promise that the government would pay a finder's fee for every customer it transferred to the NBN. As a wholly private company, Telstra has an obligation to maximise revenue — and that means getting as many customers as possible before the switchover.

Companies like iiNet and Internode, which prize themselves on providing excellent customer service but need to build the cost of that service into their margins, now find themselves forced to maintain service levels while significantly trimming the cost of their services.

Is it doing this by a massive campaign of loss leading? Perhaps. If, as its competitors allege, Telstra has actually undercut its wholesale pricing and is screwing down the rest of the industry with unmatchable pricing — banking on months or years of delay while the ACCC does its thing to reel in customers — the ACCC should throw the book at it. This sort of thing has been an issue for years. It caused quite a headache when Telstra woke up from its last consumer-value discounting binge to find it had cut its ADSL pricing to $29.95 per month but neglected to do the same with its wholesale pricing.

But what if Telstra actually has lawyers who can read, and looked at its pricing models, and decided it could grow its market share as it needed to without repeating its ADSL indiscretions? Since bandwidth caps are actually marketing constructions that hardly reflect the near-zero cost of moving bits across Telstra's network, what if Telstra is simply deciding it's going to trim out the fat and shift its business model to be based on volume rather than cream? After all, Telstra has gone on the record saying that its competitors can access its network for as little as $2.50 per month.

Tough love for our ISPs

I'm told by reliable sources that this is a smoke-and-mirrors figure, and that it doesn't actually suggest the full cost ISPs pay or in any way reflect the actual margin that ISPs are making. But even if the real figures are higher, the reality of the situation is that, for now, Telstra's pricing shift throws down the gauntlet for the rest of the industry. It's a hugely pro-consumer outcome in terms of pricing, but a decidedly anti-ISP outcome in terms of market differentiation.

In an industry where the major players have built their entire businesses around Not Being Telstra, this is a difficult strategic turn indeed. In a capitalist market like ours that favours economies of scale, however, them's the breaks. And even as competing carriers go running to the ACCC in what has become a reflex action, it's worth asking whether their protestations aren't so much based on allegations that Telstra is behaving anti-competitively — but that they cannot compete with Telstra's latest pricing without compromising everything upon which they have built their reputations.

Companies like iiNet and Internode, which prize themselves on providing excellent customer service but need to build the cost of that service into their margins, now find themselves forced to maintain service levels while significantly trimming the cost of their services. Nobody expects good service from Telstra, after all, but if iiNet and its ilk are forced to scale back its back-end operations to match Telstra's new prices, customers may well decide there's no reason any more not to give in.

TPG, unlike its rivals, doesn't care because it's already offering better value than Telstra — and it's doing so in the same operating environment as its competitors.

Even Simon Hackett, no friend of Telstra, was taking a tone of pleading patience in his Whirlpool post on the issue, asking customers to stick with the company while it figures out its response.

ISPs naturally want their businesses to be maintained, but they also need to acknowledge that the cost of broadband is trending towards zero and those who can survive will need to diversify their businesses into new areas like streaming content, web filtering, small-business networking, hosted telephony, cloud-computing apps and other value-added services.

In a few years, bandwidth will cost so little per bit that those hoping to make money on it will have pared their operations to the bone and will be living on canned tuna and collected rainwater. The ISPs that will flourish will be those who successfully reinvent themselves and clamber higher on the ever-growing pile of bit-pipe carcasses. Until the NBN comes in to level the playing field, this may well also involve scaling back regional growth plans; it shouldn't, but it may.

The tricky part

I realise this all may come off as a bit tough-love for many people's liking. But before you rush off to the comments section to blast me for being pro-Telstra or anti-competition or whatever, let me remind you of one very interesting development that has come out since Telstra's pricing was announced.

I'm referring to comments from TPG, which is a sizeable ISP that has built a big user base around its hugely generous plans that currently max out at around 500GB per month for $59.99. That's a massively more-competitive offer than what Telstra has announced — and it is running over the same Telstra wholesale services, at what we can assume are the same wholesale prices, as the services of iiNet, Internode, Primus and everybody else.

Speaking with iTnews, TPG general manager of marketing and sales Craig Levy was nonplussed about Telstra's new plans. That's right: TPG, unlike its rivals, doesn't care because it's already offering better value than Telstra — and it's doing so in the same operating environment as its competitors.

With that in mind, I ask you: is this yet another case of Telstra using anti-competitive behaviour to expand its market share — making it the scorpion in our story — or is Telstra simply challenging the market with pricing that will challenge ISPs to reinvent themselves? And are those ISPs annoyed not because they can't match Telstra's pricing, or because they can't do so without undergoing extensive and painful soul-searching and reinvention?

Telstra has certainly proven itself to be no saint in the past, but the company under David Thodey's leadership is doing nothing if not reinventing itself. One would suspect that he's too shrewd to blatantly repeat behaviour that has landed Telstra in hot water time and time again — which means we need to consider that maybe, just maybe, in this case Telstra is the frog — and the rest of the industry, the scorpion, stinging simply because it doesn't know what else to do.

What do you think? Is Telstra launching a predatory attack to boost subscriber numbers pre-NBN, or is it just raising the bar so high that competitors will start tripping over it? And should the ACCC force it to charge higher prices?

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