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Telco separation: more than meets the eye

Regulatory submissions to the federal government's AU$4.7 billion national broadband network mostly only paid lip service to the complications and risks of separation in the telecommunications industry, analyst firm Ovum said today.
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Written by Suzanne Tindal on

Regulatory submissions to the federal government's AU$4.7 billion national broadband network mostly only paid lip service to the complications and risks of separation in the telecommunications industry, analyst firm Ovum said today.

The government last week published more than 80 of the submissions from telcos, other corporates, state governments and other industry groups and individuals, with most calling for structural separation of whatever group won the rights to build the network, although Telstra was a notable dissenter from the idea.

"Separation is being bandied around quite a bit at the moment, but people are being very, very vague about what that would entail," said Ovum research director David Kennedy. "None of them really say that the hard thinking's been done."

Any form of separation, be it structural — which has separate companies set up to administer the network — or operational — where the different divisions of a telco are isolated from one another — would be painful for Telstra, which Kennedy believes has the highest odds of winning the bid.

Although Telstra is already operationally separated into retail, wholesale and other divisions, it's nowhere near as strict as the separation being currently imposed on Telecom New Zealand, which has had to increase its staff numbers significantly so it could have separate management for each of its sections, Kennedy said.

Getting the details right for the New Zealand telco's split took the island nation 15 months and three rounds of negotiations, the last of which was "micro-managing down to the level of setting executive payment", Kennedy said.

In this work, the problems which separation is supposed to fix needs to be set out in detail, as well as how exactly it would remedy them, according to Kennedy.

With the Australian government wanting to have the tender process wrapped up towards the end of this year, it has significantly less time than New Zealand did. In fact, if the process was to be done properly, the building of Australia's broadband network will most likely have to be set back, according to Kennedy.

"When you're gambling at this level you want to make sure you've got the settings correct," he said.

The separated party would likely agree, as its stakes in the game would be high.

When the New Zealand government announced its reforms, including the operational separation of Telecom New Zealand, the company's share price dropped around 30 per cent.

"You tend to see the losses up front. The market's immediately factored in the impact this is going to have," Kennedy said.

"If 30 per cent of Telstra's capitalisation was wiped off, it would affect their ability to raise capital," he said, with the telco's debt equity ratio shifting, possibly changing its debt ranking. This could lead to less investment in innovation.

"It's not really the government's job to protect the incumbent," Kennedy said, but stressed that "those sorts of impacts need to be looked at". The federal government's Future Fund still held a significant amount of Telstra stock.

Exactly how severe Australia's competition problem was also needed to be put under the microscope, according to Kennedy: "By the standards of our region and globally, Telstra doesn't stand out as having large market share. It doesn't stand out as a villain."

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