Separation of Telstra, a key issue

David Kennedy (pictured), research director at advisory and consulting firm Ovum believes the Australian Consumer Commission's (ACCC) submission to the Government's regulatory review, harkens back to the days of Roman times.

"During the Punic Wars, Roman Senators ended every speech to the Senate - on whatever topic - with the words "Cartago delenda est": Carthage must be destroyed," he said.

"This sentiment is evident in the ACCC's submission, which is reasonably representative of non-incumbent views."

 Kennedy told CRN in an interview that Telstra can't ignore the groundswell for separation.

 "Between 1996 and 2006, Telstra was gradually being privatised," he said.

 "The Government at the time was reluctant to consider a disruptive separation during the sale process. 

 "In 2005, some light-handed operational separation rules were imposed, and the Government waited to see if these would be effective."

Kennedy believed the model that is now being widely discussed in the industry would achieve structural separation in the short-term, while creating a sustainable access operator with an established revenue stream.

He said the theory is that separating Telstra's last-mile copper network would create a new entity that was not controlled by any competitor in the market.

"This would ensure that all competitors got equivalent access to the copper network," he said.

"The access is crucial to Telstra's broadband competitors and they believe that Telstra is currently giving itself preferential treatment and disadvantaging them.

"There are degrees of separation as well."

He said they range from a very light-handed operational separation, which imposes some administrative and management rules, right through to a forced divestiture of the copper network (i.e. a sale).

A higher degree of separation would help to ensure equivalent access, but imposes larger costs on Telstra.

Kennedy said in order for this to be attractive to Telstra, it would need to get a lot of equity and some kind of guarantee on the financial return on that equity.

"Telstra's fears that the move would be costly and disruptive, experience in markets like the UK and New Zealand suggest that the costs (e.g. new IT systems) are manageable, but the commercial disruption can be significant," said Kennedy.

"For instance, Telecom New Zealand's competitive performance was hard-hit while it was pre-occupied with the separation process.

"The process seemed to have less impact in the UK and much would depend on the degree and pace of separation, and how willingly Telstra cooperated with the process."

If the NBN must build its network and fight Telstra to peel away customers (separation takes away Telstra's copper, not its customers), then the Government's subsidy costs will be vastly inflated.

This model reduces the FTTH upgrade from a commercial challenge to an engineering one to be managed by the NBN, said Kennedy.

"Customers will be cut over to the new network automatically rather than having to be captured. This will allow NBN to focus on growing new revenue as FTTH is rolled out," he said.

"If acceptable parameters for such a deal can be found, then the Government will have pulled off a remarkable coup. If not, then a lose/lose scenario seems inevitable.

"In the long run, the Government's FTTH last-mile network would supersede the old Telstra copper network. However, this might take more than a decade."