nbn doesn't need telstra?

* MARTIN COLLINS: John Durie
* From: The Australian
* March 13, 2010 12:00AM

"Conroy must draw a line in the sand for NBN doesn't need Telstra

AMID all the politics, come Monday the national broadband network will start offering retail services in Tasmania through independent providers such as iiNet, Primus and Internode.

This is a pilot program, but it underlines the fact that the government is getting on with delivering the project while the politicians in Canberra are talking.

This is true up to a point because, clearly, at some point Communications Minister Stephen Conroy must draw a line in the sand and declare he will go it alone or he has a deal with Telstra.

After three months of negotiations behind closed doors, both sides report little progress, in part because Telstra places too much value on its existing network.

The $8 billion figure floated recently would be a bargain from the government's perspective, but Telstra is looking for much more.

The company thinks talk should start at the $12bn mark, but if you are Mike Quigley at NBN Co, you look at the Telstra cable ducts from a different mindset than a John Stanhope, who thinks the copper cable is almost as valuable as the Geelong football team.


The Telstra chief financial officer is a Cats tragic.

Quigley, of course, also wants and needs Telstra's customers.

Much of the market focus this week has been on the progress or otherwise of the Telstra bill through Parliament.

In fact, the legislation is something of an irrelevance and in many respects its defeat would be a bonus for Conroy.

He wants it passed, but largely as a threat to get Telstra talking and a little more realistic about valuations.

The legislation is a means to an end, not an end in itself.

Conroy was handed the McKinsey/KPMG report on March 5 and while the opposition wants it released before next Wednesday, the minister will need to get Cabinet clearance to do anything, so the timing of whatever he releases will be dictated by him.

The pity is, when in opposition Conroy rightly lambasted the government for lack of transparency in talks with Telstra, and he has engaged in exactly the same nonsense.

The Tasmanian launch will obviously come with pricing, but Quigley is likely to say that what is being charged in Tasmania is no guide to what will be charged nationally. This is just a pilot, with minimal costs.

Tasmania is a convenient trial project and the fact that the retail network is being launched on the eve of the state election underlines the politics behind the NBN.

Working from the proposition that the government needs Telstra as much as Telstra needs the government, the danger is Conroy is using too much muscle to get a compromise.

He no doubt would not agree with that proposition. John Stanhope is the lead player in the Telstra team, which spent almost $300 million to upgrade its Melbourne hybrid fibre cable network, which at last count had a couple of hundred customers.

On those sorts of returns, it makes you wonder how Telstra can question government spending on the NBN.

Kim Beazley, the man who left Australia with its uncompetitive telecommunications industry structure, once said of Conroy, "he prefers a fight to a feed" and he has a point.

The industry is hoping he can prove Beazley wrong by drawing the lines on the $250m subsidy to the free-to-air television networks -- the anti-competitive sports programming policy that allows free-to-air networks to block sports broadcasting through the anti-siphoning rules -- and the NBN program.

Conroy asked McKinsey and KPMG to tell him how to build the NBN, not how to deal with Telstra, and obviously it will conclude it is better to have Telstra in the tent than outside.

They will also tell him the NBN works without Telstra, and at prices that will surprise many in the market.

As much as the Stanhope forces within Telstra are stuck in the incumbent integrated mindset, there are plenty who actually think not only that the NBN is a real opportunity but the threats to divest Foxtel et al are not such big threats anyway.

Back in 2004 the company closely considered Project Millennium, which would split it into five pieces so shareholders would own shares in a regulated monopoly network company, a mobiles company, a retail services company, Sensis and Big Pond.

The board said no and the opportunity cost would have paid for the NBN many times over.

On Goldman Sachs' numbers Telstra is trading at 4.5 times earnings before interest tax and depreciation, compared with Austar at 7.5 times and the media cum advertising plays, which start at eight times.

Even at today's more depressed prices, shareholder value would be increased by divesting these businesses.

Over the past three years Sensis has increased the percentage of its digital media revenue from 18 per cent to 30 per cent and is operating on 57 per cent profit margins.

Ask yourself what value Telstra gets from maintaining the integrated company and the answers are mostly negative, such as preventing Foxtel from accessing broadband telephony.

Imagine how Telstra could exploit its market power by using the NBN to run wild without worrying about Graeme Samuel at the Australian Competition and Consumer Commission calling a halt to proceedings whenever it burps at the wrong time.

Suffice it to say the Stanhope forces within Telstra are still calling the shots, so the revolution is yet to see the light of day.

The NBN program is proceeding apace with the Tasmanian launch, backhaul projects and, soon, inner-city programs.

The time, then, is drawing near for Conroy to call Telstra's bluff and simply put an end to the talks and declare the government is going it alone."