Does Thodey have a deal in the CAN?

Does Thodey have a deal in the CAN?

Summary: As Telstra CEO David Thodey and CFO John Stanhope fronted a mob of concerned investors at the company's Investor Day this week, it became clear just how far removed the Telstra of today is compared to the Telstra of a year ago.


Winston Churchill is credited for a whip-smart exchange with a woman that ended with the kicker "we've already established [what kind of woman you are]. Now we are haggling about the price."

(Laying cable image by Library of Congress, No known copyright)

Churchill's bon mot seemed apt as Telstra CEO David Thodey and CFO John Stanhope fronted a mob of concerned investors at the company's Investor Day this week. Over the course of the morning, it became clear just how far removed the Telstra of today is compared to the Telstra of a year ago.

Among the revelations at the event: Telstra concedes its pricing is too high and is set to lower broadband prices, uncharacteristically conceding the need to compete on price and value in a market it has so far ruled by sheer size alone.

Also significant: apart from a few choice ADSL2+ upgrades, Telstra is refusing to invest more than the minimum necessary to keep its customer access network (CAN, aka the copper loop or PSTN) ticking over. "We won't be doing anything we don't have to," Thodey said.

Thodey was reiterating a position that more and more seems to suggest Telstra is distancing itself from the contentious network. Indeed, the Thodey-Stanhope show confirmed that Telstra is indeed ready to sell off the CAN if it's offered the right price — and if the government backs down on its demands that Telstra divest itself of its Foxtel stake and HFC network, and lift the ban on Telstra eventually acquiring wireless spectrum to support next-generation LTE mobile services.

The Telstra Thodey presented to investors at the meeting seemed stalwart yet humbled

"If those conditions are met, structural separation appears to be a win-win for shareholders, the government, NBN Co and the nation," Stanhope said with the clarity and confidence of someone who had been saying this sort of thing all along.

But, of course, Telstra has been saying no such thing all along: it has remained vehemently opposed to the idea of separation in any form. Even Stanhope has been party to the FUD campaign against separation, warning in August of the risks of "extreme" forms of separation. This is the same John Stanhope that sat alongside Sol Trujillo at countless events as he railed against separation "stupidity" and said "shareholders should shoot management if they ever agree to something like that".

Draw your weapons, shareholders. A year later, Trujillo is out of the picture and the Thodey-led company is taking a much more conciliatory, realistic posture than ever. The Telstra Thodey presented to investors at the meeting seemed stalwart yet humbled, somehow, as it fights to preserve its dignity and interests while seemingly losing ground in its knock-down, drag-out battle with the government.

It has no other choice: debate over the Telecommunications Legislation Amendment (Competition and Consumer Safeguards) Bill 2009 now seems certain to happen before the year's end, and stonewalling is only going to dilute Telstra's ability to walk away with something it wants. Instead, it seems Telstra now considers the sale of the CAN inevitable; its main concern, in Churchillian style, is how much the network goes for — and how the consideration is structured.

That the dialogue has moved past questions of whether Telstra will part with the CAN, reflects a major shift in posture that Conroy must be credited with extracting, especially given Telstra's previously-staunch determination to fight the current legislation.

Just how things are going to change, however, is still up in the air. There has been rampant discussion about NBN Co buying the CAN — which would give the government access to the infrastructure it needs to make the NBN work — but an investor's question to Thodey made clear that the government and Telstra may still be poles apart on the acceptable terms of such an exchange.

Does the government understand that equity in the NBN is completely unacceptable for [Telstra] shareholders?

"It's very clear that if you do vend assets into NBN Co to enable the build, that you cannot accept equity in NBN Co as consideration," the question went. "Does the government understand that equity in the NBN is completely unacceptable for your shareholders?"

Thodey's answer was measured but firm: "Does the government understand that? Yes, I think they do. But have they accepted that? I'm not sure they've accepted that. I could not come to the board or to the shareholders with anything unless it's very clearly defined in terms of what returns we would get. We've made that point to the government and will just have to see how that plays out."

This puts Conroy in an uncomfortable position: Telstra is willing to negotiate, but is drawing Conroy into a contentious argument about fair compensation for the CAN — in cash, not empty promises about the NBN's theoretical potential revenues. If Conroy refuses to give ground, Telstra will look like the gentle giant and Conroy like the tyrant; if NBN Co pays vast sums to acquire the CAN, Conroy will face the politically unpalatable situation of having paid handsomely to buy a major Telstra asset from its shareholders. Such a move would only compound the NBN's tenuous financial situation, especially if the government can't dangle NBN Co equity to offset the cash outlay.

And that, as anybody can guess, is a far from ideal outcome — especially since by Thodey's own admission the CAN is not being actively updated at any great pace. Such a deal would add a major cost to the NBN's price tag, although just how much that cost would be is up in the air after Conroy's claimed-to-be-accidental-but-nobody-believes-it leaking of Telstra-confidential information finally put the disputed figures into the public forum.

There's a big gap between $8 billion and $40 billion, although Telstra has naturally distanced itself from both numbers. Figures aside, it seems the wheels are now well and truly in motion: despite its initial defiant stance, Telstra is coming to grips with reality and steeling itself — and its investors — for major changes ahead.

Does Telstra's new pragmatism suggest Conroy has won the battle? Or has Telstra just secured the upper hand and cut straight to the chase?

Topics: Government, Broadband, Government AU, Networking, Telcos, Telstra, NBN


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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  • Here's a script for a comedy

    Conroy wins battle for Telco Bill debate, Minchin is disappointed with the cross-benchers' decision, but accepted the weight of numbers.

    Both Ludlam and Xenophon objected to Conroy's handling of the documents relating to the first NBN proposal.($4.9 B) but Conroy clarified that the government would not push for a vote on the ($43 B) matter until 16 November, the last week of the Senate's sitting year because he would be in Egypt at a UN conference on Internet Governance.

    Meanwhile, The Rudd government has opened the bidding on who will build the first electricity smart grid and Environment Minister Peter Garrett said that if smart grid applications were adopted across the country they had the potential to lower carbon emissions by at least 3.5 mega-tonnes per year. Consortia have until late January 2010 to submit their bids.
  • Don't get carried away Mr Conroy.

    If it is the Rudd Governments desire to build a FTTP Network to all Australian premises that is admirable.

    Get the shovels, dig the trenches and lay the cable. But to demand that an opponent be forced to self-destruct by blackmail is not something that Australians would expect from an Australian Government.

    Surely it would be fairer for the FTTP Network to, when created, compete with Telstra to the advantage of the Australian consumer. Why should Telstra an Australian company be sacrificed to help create a Government monopoly?

    If those with authority at Telstra decide to abandon assets to Government, those assets must be paid for at full current replacement value and the Telstra shareholders must give their opinion by vote.

    With rapid change in technology, build cost escalation and the uncertainty of customer acceptance the FTTP roll-out will prove a very dangerous gamble for the Rudd Government.
  • Sydney, it's so funny I even misspelled my name!

    Telstra are going for cash in the hand.

    By the time the NBN is built, 80% of retail consumers will be mobile. Classic diminishing return scenario for NBN Co.
  • funny I even misspelled my name!

    At least you have a name, which is more than can be said for RS.
  • replacement value

    "those assets must be paid for at full current replacement value"

    umm no Sydney... sure Telstra need to be remunerated BUT paid for at a reduced cost dependent on the condition, age and taking into account depreciation of the "asset" .... not at full replacement value lol

    I suspect that's where the big variation prob is between the Telstra $40B price and the ACCC $8B figure!
  • ......replacement value

    How much would you expect a hole in the ground to depreciate ?

    Much much would it cost to dig a new hole ?
  • Value

    Good point Anonymous.

    It's not a straightforward transaction.

    If agreement is reached, the price must reflect the current value of the network in situ. NBN Co cannot pick and choose bits and pieces it wants. That is why Telstra should have been commissioned to transform the network and migrate its traffic progressively to NBN Co.

    Importantly, Telstra shareholders must not be required to invest in NBN Co simply because Telstra will ultimately become a service provider with no control over the running of NBN Co who will no doubt take over the universal service obligations which could be a drain on resources if not handled efficiently. We all know how governments mismanage things.
  • ......replacement value

    "How much would you expect a hole in the ground to depreciate ? "

    ok i was reffering to actual physical things such as the cable itself etc

    a plain hole in the ground is not an asset... but the ducts the cables that lie in the hole are... Telstra would have claimed or be claiming the ducts as a tax deduction as part of their business and claiming depreciation on them wouldn't they???

    so if they were or have in the past then you need to take that depreciation off the total cost of what the renumeration is for the ducts... otherwise it is doubling up in my eyes.

    also another way to look at it would be for the potential purchaser to be charged full price for ducts that are full and ones that are not full have a reduction in price because the government has the rights to access those ducts (as outlined in the sale of the telco from public to private hands) if there is space available

    so a comment by Sydney stating that all the assets should be paid for at replacement value is not correct imo
  • value and depreciation

    Can someone explain is the CAN viewed like property (buildings) that generally go up in value over time or like a car that depreciates in value over time?

    does the potential income the CAN can generate come into the valuation or is it just the cost of digging the hole and laying the cable?

    I would imagine the perspective on those points explains the difference between 8b and 40b.
  • Value and depreciation.

    Simon, 'CAN' merely means ... customer access network, a variety of telco things BUT the ACCC managed to turn the process into a can of worms. No wonder Telstra is refusing to invest more than the minimum necessary to keep its customer access network ticking over. "We won't be doing anything we don't have to," Thodey said.

    God help us...the blind are leading the bland!
  • Quote

    Your quote is from George Bernard Shaw, not Churchill.
  • ......replacement value

    Thanks for the clarification mate.

    I agree that the actual civil works, electrical and optical elements of the CAN will depreciate over time, and any such depreciation can and may have been claimed as a tax deduction. In fact, a lot of the CAN was built a long time ago. I am not sure what value was put on the CAN when Telstra was floated.

    But the valuation of the CAN cannot be as simple as working out the initial capital costs,
    minus the depreciation, can it??? Maybe someone can help me out.

    We are not taking about a used car here. We are talking about an asset that is producing income for the owner.

    The question then is how do one put a value on such an asset. Perhaps, one may value the asset based on the return that such an asset generate, minus maintainance costs, etc.

    Now, there may be copper pairs in the ducts that are not used (like the ones to my house, since I am on cable). And there may still be capacity in the ducts for new cable to be pull through, both of which are a potential source of revenue for any carrier who wish to access. The un-used copper pairs are subject to ULL and LSS fees off course.

    I'll give you an example. You built a factory on a block of land, and starting selling goods from from that factory. The factory is part of the business that produce income for you. Now, do you sell business based on the value of the brick and morter. You'd be very silly to do that.
  • Quote

    Gerry, maybe so but here is a genuine exchange.

    Conroy: My dear Nick, I hope that despite being adversaries in the house, we could be Friends outside of it.

    Minchin: Ah Stephen, I have no quarrel with you, but in my experience, when you see something that's big and works well, you tend to want to nationalize it!

    With apologies to Atlee and Churchill
  • Simon asks a simple question and ...

    What a surprise, Simon asks a simple question and gets the typical burned shareholder soap box rhetoric.

    Vasso, only a few months back on NWAT, you asked - "is PSTN the same as HFC"?

    Please leave the tech stuff to the experts (no I am not one) and stick with your Business Spectator blog, where greed is the order of the day and where you'd feel more at home and slot right in!
  • Consequences

    I wonder a little if the Optuses of this world really understand what the seperation of Telstra is going to do to them.
    The end result will see a highly cashed up Telstra let loose to further invest on whatever they chose and smash them even further. All the operators are making most of their profits out of mobile these days, that's where you'll see Telstra invest further both in spectrum (where a cashed up Telstra could easily outbid and wharehouse digital dividend spectrum from the other operators, Optus is very short of spectrum holdings as it stands today) and infra. and we'll see the competition start to bleat about wanting cheaper wholesale access to their mobile and/or backhaul networks as per their fixed infra. today. There's simply no unwinding of the publicly owned monolith that Telstra has become without hammering their shareholders. And that is simply not going to happen. Hawke & Keating missed that chance 20 years ago when they created Telstra back then.
  • value

    These days its both - cars and buildings are both dropping in value. Although we in Australia are lagging Europe and the US by about a year, expect 10 - 20% drop in housing prices by the second quarter 2010.

    As with all things, asett value depends in part on demand, replacement cost and any good will(revenue). If the pstn component is run down and maintenance has been minimal, the cost would be very low. The only real assett in the CAN is the exchange properties, underground easments and right of ways. The rest is just a bunch of depreciated hardware with little value.