Govt to break up Telstra: All the details

Govt to break up Telstra: All the details

Summary: If Telstra does not voluntarily structurally separate, a new telecommunications reform package will permit the government to impose an oppressive functional separation framework on it, the Federal Government announced today.

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If Telstra does not voluntarily structurally separate, a new telecommunications reform package will permit the government to impose an oppressive functional separation framework on it, the Federal Government announced today.

Stephen Conroy at the ATUG Awards earlier this year
(Credit: Suzanne Tindal/ZDNet.com.au)

"It is the government's clear desire for Telstra to structurally separate, on a voluntary and cooperative basis," Minister for Communications Stephen Conroy said in a statement today, outlining the reform package.

It is the government's clear desire for Telstra to structurally separate, on a voluntary and cooperative basis

Communications Minister Stephen Conroy

Telstra has two choices: voluntarily structurally separate within about 13 weeks, which will leave Telstra as two separate commercial entities; or have the deed done for it under the more mild functional separation regime which would be imposed on it by the government along with stringent reporting requirements and compliance measures.

The telco was also likely going to be forced to divest itself of its share of Foxtel, or else be banned from acquiring spectrum that Telstra has been eyeing to launch 4G wireless services. Telstra has not issued a statement, but has said it was examining the response.

The Bill that would realise Telstra's functional separation alters the Telecommunications Act (1997) so that Telstra must operate its network and wholesale functions "at arm's length" from its retail business.

It would also require Telstra provide equivalent price and non-price terms to its retail business and non-Telstra wholesale customers. Greater operational transparency would be required to aid regulatory oversight by the Australian Competition and Consumer Commission (ACCC).

At a media briefing in Canberra this morning, Conroy said he was confident the proposition would not lead to the government being sued by Telstra shareholders. The outcome, whatever form of separation occurs, will be expected to happen over the coming eight to 13 weeks, said Conroy.

"There will be some very hard-nosed negotiations... We've got Mike Quigley, we've got McKinseys, we've got some seriously well-briefed and understanding telco analysts who are working for NBN Co. And Telstra, well they speak for themselves; they're as hard-nosed as they come," he said. "Telstra will only agree if they see it as a win-win," he said of Telstra's voluntary structural separation.

Conroy said Telstra's decision to separate would benefit Telstra shareholders because the telco's copper access network (CAN) was "collapsing" while maintenance of it was increasingly becoming a financial burden.

Henry Ergas has just been structurally separated from his company

Communications Minister Stephen Conroy

"Every time there is a heavy rain, there is further degradation of Telstra's copper access network. There's incredible maintenance required to maintain this network," he said.

Despite its extensive coverage, Conroy noted that even Telstra has conceded its ADSL broadband footprint only reached around 50 per cent of Australia's population today, largely because of the poor state of Telstra's CAN.

Yesterday NBN Co chief, Quigley, announced five new key executive appointments, who will assist the NBN Co in its negotiations with the telco over the crucial issue of what exactly Telstra will vend into the new network in order to reduce its overall cost.

Conroy reiterated his belief that the government would not need to fork out $43 billion for the NBN. The worst would be $22 billion over eight years, he said, and it would eventually sell a 49 per cent stake.

Conroy took a swipe at the vocal chairman of now bust economist consultancy, Concept Economics. "Henry Ergas has just been structurally separated from his company." Ergas had released a recent cost-benefit analysis which claimed the costs outweighed the benefits by up to $20 billion.

As for the cost consumers would be expected to pay in an NBN world, Conroy referred to ISP Internode's current offer of 100MBps speeds for $100 per month, while Optus' research had indicated a price of $60 per month.

While functional or structural separation regimes will hit Telstra's vertical integration, the Bill was also set to break Telstra's horizontal integration by restricting its ability to acquire all-important spectrum to launch, for example, Long Term Evolution (LTE) or 4G wireless technologies.

Specifically, it will be prevented from acquiring spectrum if it remains vertically integrated, owns a hybrid fibre-coaxial cable network, or if it maintains its interest in Foxtel.

At its recent annual earnings announcement, Telstra chief financial officer, John Stanhope, said the company was seeking spectrum currently tied up by television broadcasters. The government intends to auction the appropriate spectrum by around 2013.

The telecommunications reforms will also target restrictions faced by the ACCC in regulating the sector, which have in the past resulted in court fights between Telstra and others. Broadly speaking, the ACCC's decisions will be binding in terms of rules of conduct to address conflicts over the supply of regulated wholesale services.

Universal Service Obligations, which were designed to ensure ubiquitous equitable access to telecommunication services, have been tweaked temporarily, to allow the Communications Minister to specify the standards, terms and conditions, connection and repaid periods, and reliability requirements of phone services, including pay phones. Failure to comply by Telstra will expose it to fines of up to $10 million.

If pay phones were removed and the decision was objected to by locals, they will be able to request intervention by the Australian Media and Communications Authority (ACMA). ACMA will be able to issue Telstra an on-the-spot fine if it does not comply with an order.

This, however, was set to change once the NBN has been launched. USO levies, paid by carriers to assist fund Telstra's USO requirements, will remain until then.

Telcos with revenues of less than $25 million will benefit from the Bill via its exemption from the Carrier Licence charge and reduced reporting requirements to ACMA. The reason given was that compliance costs more than the fees themselves. Reporting requirements, for example, on the state of a carrier's network will be reduced if performance benchmarks were met.

The government will remove the requirement on Telstra to provide technical assistance to enable customers to achieve 19.2 kilobits per second internet services, as the Australian Broadband Guarantee offers broadband speeds of 512 kilobits per second or higher to Australians who cannot access metro-comparable broadband services.

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

Liam Tung

About Liam Tung

Liam Tung is an Australian business technology journalist living a few too many Swedish miles north of Stockholm for his liking. He gained a bachelors degree in economics and arts (cultural studies) at Sydney's Macquarie University, but hacked (without Norse or malicious code for that matter) his way into a career as an enterprise tech, security and telecommunications journalist with ZDNet Australia. These days Liam is a full time freelance technology journalist who writes for several publications.

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10 comments
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  • Telstra Separation

    The move by Conroy and company in the Labor party to structurally separate Telstra without any compensation from government for the costs smacks of totalitarianism and very unfair government. Government under Howard was happy to take a premium for the sale of Telstra as a vertically integrated company, which was the model developed by the previous Labor government. The public service that underwrote this policy now seems to be hell bent on correcting its massive f*** up but only at the expense of the Telstra shareholders. So, a company is to be restructured for the benefit of the Australian consumer, as seen by Conroy and his advisers, but a small section of the community is going to have to pay for it (twice). That doesn't sound like a government that has ethics or morality in its dictionary. Not only that, but the recent actions by the Future Fund smack of cronyism and insider trading. Forget about Chinese walls! They are as this as paper!!!
    Tidakmengerti
  • Conroy The Amateur

    So what is this twit up to now?
    Is he threatening to regulate Telstra out of the 4g market using the ACCC if they do not cower to his demands?
    Surely this debacle contradicts the constitution where it stands to protect free trade between the states.
    anonymous
  • I wonder

    "At a media briefing in Canberra this morning, Conroy said he was confident the proposition would not lead to the government being sued by Telstra shareholders."

    Has he already spoken to Slater & Gordon?
    anonymous
  • Telstra's breakup

    Telstra shareholders are not a "small" section of the community. There is a huge number of shareholders, most of whom are probably Australian voters. Conroy did not do this without the OK of Cabinet, and that includes Rudd, his deputy and the rest of the Ministers.

    The idea that Telstra is being blackmailed into selling key assets such as its Fox pay TV holding, which has nothing to do with the telephone services it offers to other telephony providers, is just mindboggling in the Australian context.

    This sounds more like a Chinese communist party strategy than a strategy of a government that believes in open, honest and ethical dealings with the private sector. But then again, Rudd's actions in receiving the ute and then covering up demonstrate that actions speak louder than words.
    Tidakmengerti
  • Public servants screw the private sector

    Conroy's strategy to fix the mess created by the public service and the Labor party when Telstra was privatised is typical of a public service that sees itself as pure and the private sector as somehow "grubby" and deserving to get screwed.

    They forget that Telstra's pricing and activities are regulated by their own ACCC and ATC and that monopolies are supposed to be able to exist under such a regulated environment without causing undue harm to the end consumers.

    It seems that the public service believes that it can get a free lunch at Telstra shareholders' expense to fix the mess that it created in the first place in its grubby speed to grab the money from privatisation.

    The cost of the NBN was considered by Treasury and DOF as too large for government to fund and this is one way for them to get what they want without having to pay for it. It's about time Department of Finance and Treasury had their pathetic performance indicators revised to make them truly accountable for their actions
    Tidakmengerti
  • Was always the axe hanging over Telstra's head

    This was always expected.

    Even back at T2, this inevitability prevented the share price ever being maintained at the artificial price the previous Government set to suck as much money out of Australians.

    Telstra was given the keys to the city when they were given the copper network, allowing them to artificially control access to the basic infrastructure.

    When the various state electricity utilities were broken up, the basic infrastructure was not given to a specific retailer, but kept separate to allow a level playing field. The same should have been done with Telstra at the beginning.

    It has been a long time coming, but now the whole industry can now start to move forward with more even-handedness, and competition should be able to give us a chance to get cheaper broadband.
    anonymous
  • That's what you get when you buy into a heavily regulated market

    The telecoms market is heavily regulated all around the world; when you buy telco shares you're not participating in a free market. You are instead betting that the regulatory framework that allows the company to exist in the first place will maintain it in the style to which it has become accustomed.

    Around the world there are monopoly telcos that are not hated, because they are not perceived to be abusing their monopolies. Shares in one of those might be an OK bet.

    In Australia we had a monopoly telco that was losing its monopoly; that was widely despised and blamed for any faults in the system or underfunding of infrastructure. In this environment it has been obvious for many years that Telstra would one day face a less favourable regulatory environment.

    The government's job is not to remove risk for investors. It must regulate in the interests of the people. The fact that investors are taking a risk is the only moral justification that exists for the profits they sometimes accrue. To insist that government regulators should consider the welfare of investors is pure command economy stuff, and has nothing to do with capitalism.
    anonymous
  • Competition, yeah sure.

    Viveka no matter what way you put it the blackmail of Telstra is to remove a competitor from the Government NBN.
    anonymous
  • I also wonder

    Conroy should at least be sued for pretending to know what he is doing. And answers as to why this news has come so close on the heels of the Government sell off of Telstra shares need to be addressed immediately. Especially when one saw what happend to Rene Rivkin for selling a handful of QANTAS shares, at very little profit.
    anonymous
  • Let's have that real competition!

    Telstra should not have any involvement with the physical aspect of the FTTH. It is about time they played the ball from the other end of the field for once, that way they will end up realising how hard it is to be a customer of a wholesale operator.

    Additionally there will be some real competition for the first time as there will be two seperate national networks.
    anonymous