Optus chairman calls for Telstra break-up amid NBN rollout

New Optus chair Paul O'Sullivan has warned that Telstra's continuing control over the copper network needed for the Coalition government's National Broadband Network (NBN) rollout scheme is like "putting the fox in charge of the hen house".

Speaking at a Trans-Tasman Business Circle event in Sydney on October 8, O'Sullivan said that unless Telstra is broken up, Australia's telecommunications landscape is likely to suffer severely as a result of its market dominance and potential future earnings from the taxpayer-funded NBN rollout.

"First and foremost, we need to break up Telstra," said O'Sullivan. "If Telstra's going to have a key role to play in the NBN, because we're now dependent on their copper in order to get from the node to the home, that is a huge conflict of interest if they're maintaining and operating that network. So, it needs to be taken away from their operational control.

"Putting a company that competes in the market in charge of internet access is like putting a fox in charge of the hen house. It is five minutes to midnight; competition is more threatened by the way the NBN is now structured than it has ever been since competition was introduced in 1992," he said.

Not surprisingly, O'Sullivan's comments mirror those of Optus' head of regulatory and corporate affairs David Epstein, who said at Melbourne's Communications Day Congress on October 7 that the move to a multi-technology mix for the NBN means that Telstra's structural separation should be reviewed.

As part of Telstra's original AU$11 billion agreement with NBN Co and the then-Labor government, the incumbent telecommunications giant agreed to structurally separate its wholesale fixed-line and retail businesses.

Since then, the company has moved to separate a number of systems and staff into two divisions so that in theory, Telstra's retail business has no advantage over its competitors in using Telstra's services.

Referencing a KordaMentha study, O'Sullivan pointed out that over the next 30 years of the NBN, Australia can expect to see Telstra potentially receive up to AU$90 billion in payments.

"Telstra's going to have a lot of cash coming its way," he said. "And, in fairness, it's going to have a strong commercial incentive to use that cash. It's only fair they're going to want to use that money to bolster their market position."

O'Sullivan argued that splitting Telstra into independent companies would be an effective mechanism with which to prevent Telstra from effectively monopolising its position and squeezing out other players from the market.

"No amount of regulation can overcome the conflict of interest that will exist for any company in having to provide access to its competitors to its network in order for them to compete against it. You simply cannot regulate for it," he said.

The country's political leaders are letting Telstra get away with leveraging its dominance and infrastructure portfolio, argued O'Sullivan, because the government requires its assistance in the NBN rollout.

"There is always the risk that political leaders on all sides really face pressure on the urgency to get the NBN rollout under way from the electorate, and are also confronted with very short electoral cycles," he said. "Governments feel themselves under enormous pressure to provide the incentives for Telstra to play along, regardless of what political party those governments are from.

"In the process, the consequences for competition, the consequences for the modernity, and the efficiency of the services you're going to receive in the next decade plays second fiddle to the urgency of being able to get a rollout under way and announced," he said.

O'Sullivan said that he backs the proposals of the Vertigan report, which included the suggestion that NBN Co also be broken up, with the proposed separation of the company down technological lines.

"The Vertigan report has come out and reflected the same thing; Vertigan has said that having a wholesale-only company that's a monopoly is a bad idea ... you need competition in wholesale," said O'Sullivan.

While O'Sullivan was vocal about the trajectory he believes Telstra and NBN Co should take in order to preserve competition in the local marketplace, he remained tight-lipped about Optus' approach to the NBN.

"We want to see clarity around what are the rules of the game, and, once we know they're abundantly clear, then Optus will make a final decision on how it wants to operate," he said. "If we get the rules right, we get the settings correct, we can still have a great result with NBN, but we must make change from the direction it is heading right now."

A Telstra spokesperson told ZDNet that despite O'Sullivan's call for the company to be broken up, it is committed to its existing structural separation scheme.

"We remain committed to structural separation and a new future for our industry where competition, investment, and innovation can flourish free from endless unproductive debates over regulation," said the spokesperson.

O'Sullivan's comments come as Paul Fletcher, parliamentary secretary to the minister for communications, labelled the former Labor government's proposed NBN rollout scheme as a politically driven approach.

"As the Vertigan Review has confirmed, Labor's politically driven approach resulted in a network that was vastly more expensive than it needed to be," said Fletcher in a statement. "The cost-benefit analysis conducted as part of the Vertigan work found that the Coalition's multi-technology mix NBN has net economic and social benefits of about AU$18 billion in today's dollars, compared to a baseline in which there is no further rollout of super-fast broadband."

Despite O'Sullivan's assertion that the Coalition's mixed-technology NBN rollout could, in fact, hamper competition — given Telstra's copper ownership — Fletcher said that the former administration's approach to the program also damaged competition.

"While these are all very serious consequences of the chaotic and rushed public policy process, in my view, the single most serious consequence of Labor's approach was the damage it did to competition," he said.