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ACCC shoe thrown, Telstra puts it on other foot

ISPs are enthusiastically embracing the ACCC's decision to declare Telstra ADSL services, but Telstra is understandably less excited. Now that wholesale ADSL is nearly as cheap as wholesale NBN services, will internet access get even cheaper?
Written by David Braue, Contributor

You may or may not remember William Hurt's 1991 movie The Doctor; if not, let me recap its plot briefly here for you: successful, insensitive doctor learns humility after he's diagnosed with throat cancer, becomes an aggrieved patient, and finally realises US healthcare is as successful and insensitive as he is.

It doesn't take much of a mental leap to figure out why that movie popped into my head after news of this week's dramatic change of events for Telstra hit the proverbial airwaves. Long accustomed to having its way, Telstra has been brought into line by the Australian Competition and Consumer Commission (ACCC) in a move for which its rivals have been agitating for the better part of the past decade.


The ACCC has put the boot into Telstra over ADSL, but how long will Telstra wear it on the other foot? (Safety footwear image by Francis Flinch, CC BY-SA 3.0)

Whether the long delay in the declaration of ADSL services represents the government's enduring faith in the power of the private market to sort out telecoms issues, or is simply a damning byproduct of a regulatory system so inefficient it takes a decade to effect real solutions to widely known problems, is perhaps a topic best discussed at loud volume over beer and snags this weekend.

So, too, are the ACCC's intentions in declaring ADSL wholesale prices of $25.80 and $30.80 that are both higher than NBN Co's promised $24 wholesale price. Are Telstra's copper-based services — based on a network that the company has itself admitted will have zero value by the end of this decade — really more expensive and valuable than NBN Co's brand-new fibre network? Or is the ACCC just setting up ADSL to gradually fail when internet service providers (ISPs) do their NBN-vs.-ADSL cost-benefit analyses?

What is most relevant to the market is that the declaration has finally happened and all eyes are watching to see how the industry will reshape itself accordingly, as in a big game of musical chairs.

Will prices immediately drop, as some observers have assumed? Well, not necessarily; even if wholesale costs are reduced, ISPs will have to weigh up the effect of cost changes on their revenues before they can commit. They'll also have to factor in the fact that the ACCC's determination will be up for review a year from now; this means that if an ISP drops its prices to sign up customers now, the two-year service contracts it enters into could actually become liabilities if the ACCC reverses its determination and wholesale prices subsequently rise.

Are Telstra's copper-based services really more expensive and valuable than NBN Co's brand-new fibre network?

This sort of backflip has happened before: remember how the ACCC exempted 248 Telstra exchanges from competitive requirements in 2008, then recently reversed those exemptions last year when it realised, after three years of ISP struggle, that things weren't nearly as competitive as it would have hoped? This is a great example of just how slow the current regulatory system works and hints at why the ACCC has taken so, so long to do something so seemingly obvious as to declare Telstra's ADSL services.

There are other questions worth asking. For example: had the ACCC's decision to declare ADSL been taken five or 10 years ago, would the NBN have been necessary at all? Or would ISPs have been incentivised to invest more heavily given the pricing certainty that would have let them adopt a more adventurous risk profile? And will new-found certainty around ADSL wholesale pricing spur further investment in the market?

Such questions will linger. The effect of the ACCC's declaration on ISP roll-out plans over the next decade will be interesting to say the least. With the NBN still about 10 years away as a pervasive competitive threat and a three-year rule of thumb on getting a return on investment on new DSLAMs, ISPs will be looking to the next seven years of certainty and considering how much they want to invest in DSLAMs to create new business opportunities before the ADSL network becomes a figment of our collective memories. Internode, for one, is betting that its new presence in Darwin will deliver returns — and it can't be hurt by a move that lowers its delivery prices in the area.

However the ACCC's move changes the dynamics of the market, one thing is already clear: Telstra may have to get used to not necessarily getting its own way. Witness the silly conflict that has come to a head in Tasmania, where Telstra has stamped its foot and said it won't sign any customers to the NBN unless NBN Co upgrades their equipment to be in line with current NBN technologies.

On a level playing field like the NBN, this shouldn't matter one iota: all other ISPs are connecting to customers with the same early-stage infrastructure, and none of them are refusing on technical grounds to sign up new customers. For Telstra to do so suggests either that the company is still trying to leverage its monopoly in that state — where its ADSL footprint is largely uninterrupted by competition — or that it is trying to trigger its hundredth or so showdown with NBN Co.

NBN Co has pointed out that Tasmanian customers are free to sign up with Telstra's competitors, which would be a perfectly acceptable position but for one thing: Telstra is contractually committed to moving its customers from its ADSL services to NBN Co's fibre services. If Telstra is saying it refuses to do so, is it then in breach of contract? Or is NBN Co to blame because it has delivered a service onto which Telstra has decided its customers should not be moved?

Telstra is committed to moving customers from ADSL to NBN fibre ... If Telstra refuses [in Tasmania] is it in breach of contract? Or is NBN Co to blame?

The spirit behind this seemingly petty conflict — the latest in a pattern of brinkmanship on both sides — will surely manifest in many ways as Telstra goes through the transition of learning to be the patient, in my current Hollywood metaphor, and not the all-powerful doctor as it has been for so many years. The big question now is whether Telstra can reassert itself and continue to stall the end of its ADSL price-gouging — or fall into line under orders of the industry's nurse. That nurse — the ACCC — has previously tried to mollify Telstra with inconsequential sponge-baths, but finally got it to sit upright in bed with a big needle jab to the bum.

What do you think? Will the new pricing regime push down prices, pad ISPs' margins, drive Telstra to stonewall, or prove that the ACCC finally has teeth? And, while we're stretching a metaphor, is more regulation the illness or the cure?

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