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ACCC decisions to cost Telstra AU$430m revenue in FY16

Decisions by the Australian consumer watchdog to cut wholesale pricing in fixed-line and mobile networks could impact Telstra's forecast FY16 revenue by more than AU$400 million.

Recent decisions by the Australian Competition and Consumer Commission (ACCC) to slash both wholesale pricing for receiving calls and SMS messages as well as fixed-line wholesale pricing will affect Telstra's FY16 revenues by up to AU$430 million, according to the telco's chief executive.

The decision on Mobile Terminating Access Service (MTAS) -- under which the ACCC reduced the rate that mobile network operators can charge each other and fixed-line network operators for calls by more than half, from 3.6 cents per minute down to 1.7 cents, and regulated SMS pricing for the first time to 0.03 cents per SMS -- was handed down in August.

Telstra CEO Andrew Penn said on Thursday morning during Telstra's Investor Day presentation [PDF] that this would translate into an estimated net reduction in revenue of AU$350 million for FY16, with the company to adjust its capex accordingly.

The ACCC said at the time that it had based its MTAS decision on comparative charges around the world.

"In Australia, the majority of mobile calls and SMS are carried on 3G networks, which are more efficient than the 2G networks which are used to a larger extent overseas," ACCC commissioner Cristina Cifuentes explained.

"The mobile networks in Australia also carry a much larger amount of data traffic than overseas networks. These features reduce the cost of terminating calls on Australian networks and have been taken into account in the decision."

Cifuentes added that this price could drop even further once voice-over-LTE (VoLTE) technology services are rolled out in the future. Telstra activated its VoLTE capability in September.

The ACCC had announced its public inquiry into the MTAS in May last year, after a lengthy review into the service. The consumer watchdog revealed its intention to regulate SMS pricing at the time, with Telstra objecting to this.

"We see little benefit in regulating wholesale SMS, as our customers already have access to unlimited SMS on our most popular plans and can choose from a host of alternatives with the emergence of smartphones, message applications, and social media," a spokesperson from Telstra said last year.

According to rival telecommunications providers Vodafone Australia and Optus, however, Telstra would have benefited by any other MTAS decision to the detriment of all other carriers, as the incumbent telco did not have to pay access charges for calls between its own fixed and mobile networks.

Vodafone highlighted in its submission to the ACCC that Telstra had not passed on MTAS reductions to its customers, after wholesale costs had fallen from 21 cents per minute to 3.6 cents per minute between 2003 and 2014.

The new pricing will take effect from January 1, 2016, and will remain valid until June 30, 2019.

The ACCC's other recent decision was to slash the prices that Telstra can charge its wholesale customers for use of its legacy copper network during the transition to the National Broadband Network (NBN) by 9.4 percent.

While the ACCC had originally planned to reduce prices across seven of its fixed-line wholesale services by just 0.7 percent, its revised draft decision on the price cut, announced in June, said the amount that Telstra charges retailers for use of its broadband internet services would be cut by 9.6 percent from October 2015.

According to Penn, the price cut is expected to reduce revenue by up to AU$80 million from November 1, when it comes into effect, until June 30.

"We are disappointed in this decision, given that it does not follow the ACCC's own fixed price principles we have relied on in making key decisions for shareholders in relation to the NBN. We are therefore considering our options for appeal," Penn said.

Telstra spoke out against the draft decision in July, saying the price slash could impact the migration of customers onto the NBN, as retailers would "have a profit motive to keep their customers on the higher-margin copper network for as long as possible".

"This would make migration to the NBN even harder to achieve, and put important revenue to NBN Co at risk. In this way, a cut to prices on the legacy network poses a serious danger to the success of the NBN policy," Telstra warned in a blog post.

The government released its draft Migration Assurance Policy detailing the process for customers to be migrated from Telstra's legacy copper network to the fixed-line NBN in July. An estimated 3.27 million premises could be serviced by the hybrid fibre-coaxial (HFC) networks being taken over from Telstra and Optus, with customers beginning to be connected from March 2016.

ACCC Chairman Rod Sims argued that customer migration to the NBN was precisely the reason why it had opted to slash prices, as customers stuck on Telstra's legacy copper network during the transition should not be forced to pay higher prices while waiting for an NBN connection.

"Importantly, users of Telstra's network should not pay the higher costs that result from fewer customers as NBN migration occurs. If there is no adjustment for these higher costs, then customers who have not yet been migrated to the NBN will ultimately pay significantly higher prices for copper based services," Sims said.

"The ACCC has taken this approach because it considers that users of the fixed-line network have not caused the asset redundancy and under-utilisation, and will not be able to use those assets and capacity in the future. It would not be in the long-term interests of end users for costs to be allocated to users of the network who do not cause them, particularly when Telstra has an avenue to recover those costs."

It also accused the ACCC of misrepresenting its AU$11 billion deal with the Australian government, saying the amount detailed in the revised agreement relates to "a loss of future revenue after services are disconnected from the copper network, not the cost of maintaining our network for those customers who remain on it as the NBN is rolled out".

The Department of Communications mirrored Telstra's perspective in its own submission [PDF], saying that the ACCC's decision should be amended, both to allow Telstra to recover its costs, and to prevent cost discrepancies from dissuading customers from migrating to the NBN, while every other Australian telco applauded the decision.

Despite the effects of these decisions on Telstra's forecast FY16 revenue, the company is still predicting that it will see mid single-digit growth in total income, and low single-digit growth in earnings before interest, tax, depreciation, and amortisation (EBITDA).

Telstra's full-year results for FY15, announced in August, saw the telco report a net profit after tax of AU$4.29 billion, down AU$260 million or 5.8 percent year on year from last year's AU$4.55 billion, and an EBITDA decrease of 3.5 percent, down from AU$11.1 billion to AU$10.7 billion.

Australia's dominant telco attributed its loss in net profit to the sale of its Hong Kong mobile business, increased price competition from its rivals, and significant reinvestment in its mobile 4G network.

"The 2015 financial year saw Telstra continue to perform strongly, growing revenues, adding fixed and mobile customer services and continuing to invest in our network advantage," Penn said at the time.

Mobile revenue increased by 10.2 percent year over year, from AU$9.7 billion last year to AU$10.7 billion in FY14-15, adding 664,000 mobile retail customer services to bring the total number to 16.7 million.

The telco added 113,000 post-paid handheld retail customers in the year, bringing its total to 7.3 million customers, with revenue in this sector increasing by 7.7 percent to AU$5.4 billion. Average revenue per user (ARPU) increased by 5.5 percent, from AU$58.70 to AU$61.94 -- though it flagged on Thursday that ARPU has since slowed, and is slightly down for Q1 FY16.

Telstra earlier this week said that it is aiming to have 99 percent of the Australian population covered by its 4G network by mid-2017, with the company investing AU$5 billion in its networks over the three years to June 2017.

"We will also start rapidly deploying the next generation of LTE technology, including voice over LTE, LTE Broadcast, and the next stage of LTE Advance, which is delivering peak network download speeds of up to 600Mbps," Penn said at Telstra's 2015 Australian Digital Summit in Sydney on Monday.

"By leveraging our superior spectrum holdings, we will create new levels of coverage and performance leadership for 4GX."

Telstra began switching on parts of its 700MHz 4GX network in 2014.

The telco is also making moves into becoming a media company, this month launching its video-streaming device Telstra TV.

"The next wave of media ecosystem disruption is coming from telcos and media companies coming together," Joe Pollard, Telstra chief marketing officer and group executive of Media, said.

"They're beginning to integrate, be overtaken by each other, so what we are seeing is the need for world-class content with world-class distribution mechanisms -- ie, the power of a great network -- and scale to deliver the next wave of shareholder value. So what we're seeing around the world is telcos becoming media companies, and media companies becoming telcos."

Penn reiterated this during the Investor Day briefing.

"Telstra is no longer just a telephone company; technology pervades everything we do. We have access to some of the best technology and technology thinking from around the world," he said.

However, Penn conceded that network is still the backbone for Telstra.

"There is virtually no technology innovation today that does not fundamentally rely on an underlying communication network. Today, virtually all technology is connected, and the performance of that technology is dependent on the quality and speed of the network."