Telstra's path to NBN profits Business Spectator-News
Is David Thodey being just a little too nice towards the Rudd government and its planned $43 billion national broadband network? Is he trying to position Telstra to exploit the government’s somewhat cavalier attitude towards big numbers, sometimes sloppy attention to detail and a political commitment to the NBN that is now too entrenched to be withdrawn?
In Hong Kong for the announcement of plans to upgrade its CSL business’s wireless network, Thodey told the Wall Street Journal that Telstra was open to any option in co-operating with the government, including assets sales. While waxing lyrical about the government’s broadband vision, he added his usual qualification that Telstra’s support was conditional upon protecting shareholder value.
The NBN, and the parallel process of regulatory reform, are generally seen as inimical to Telstra shareholders’ interests because the ubiquitous fibre-to-the-premises network would eventually render Telstra’s fixed line monopoly redundant. It would also appear that a significantly greater demarcation between Telstra’s retail and wholesale operations is integral to the government’s plans in the meantime.
There are at least two reasons for Thodey to present a friendlier face to the Rudd government.
One is largely political – the need to ratchet down the levels of hostility generated by Sol Trujillo’s combative regime and reduce or defuse the threat of massive and value-destroying regulatory retaliation.
The other is that, while the NBN represents a threat, it also creates opportunities.
The NBN is, apparently, going to be built regardless of its cost or economics, which appear shaky – although the economic and business case for the NBN has yet to be developed by the government. Goldman Sachs’ telecommunication analysts, however, last month assessed the net present value of the NBN at negative $9 billion.
Telstra has known from the moment Stephen Conroy committed the government to building the NBN that it would eventually render its own copper network obsolete, or rather greatly accelerate the obsolescence of a high-maintenance network that is degrading and steadily shedding customers as they migrate to wireless and cable platforms.
With the Australian Competition and Consumer Commission also relentlessly lowering access prices for Telstra’s competitors, revenue and margins on the fixed-line network are already being steadily eroded and the NBN will exacerbate the trends.
The opportunity for Thodey and his shareholders is to convince or manoeuvre the government into making Telstra an offer too good to refuse.
If Thodey accepts, as he appears to, that the status quo is indefensible and also that the demise of the copper network will accelerate, it is possible to construct a win-win deal.
The best and least-disruptive approach to building the NBN would be to use Telstra’s existing ducts, pits and pipes. An aerial roll-out is possible – it is happening in Tasmania – and would ultimately strand Telstra’s ‘last-mile’ infrastructure, but would meet community resistance.
The Goldman Sachs analysis suggested that the cost of the NBN build could be reduced, and Telstra could be dealt into the process, if the government acquired that infrastructure, with Telstra leasing back access in order to maintain the copper network until the bulk of the customers have eventually migrated across to the NBN.
The copper network, while slower, would be significantly cheaper than the NBN’s fibre, particularly in the roll-out and ramp-up years. There will, therefore, be substantial continuing demand for copper-based ADSL broadband from retail and wholesale customers for years to come.
For Thodey, the most interesting deal would be one where he monetised the sunk investment in the last mile infrastructure by selling it to the NBN while retaining the customers and most of the margin (less the cost of leasing back access) from the network. The ducts, pits and pipes generate no revenue but were valued by the Goldman team at $12 billion.
The challenge for Telstra will be to convince the government to give it cash, or something akin to cash, for assets it vends into the NBN. No-one in the sector believes the NBN will have the positive equity value that would enable the asset-for-equity swaps Conroy originally envisaged to minimise the government’s cash outlays.
Conroy wouldn’t want to buy the entire fixed network, copper and all, because the price-tag would be closer to $20 billion yet more than half the assets being acquired would be devalued by the NBN itself.
He might, however, see appeal in lowering the cost and shortening the time frame (by years) for the build, acquiring the platform on which Telstra’s fixed line dominance has been built and being seen to have forced Telstra to co-operate with the process. He would be aware that Telstra will have to convince its shareholders that any involvement with the NBN is value-positive relative to the outcome for them if it resists the process.
Turning trenches into a pile of cash and capital while retaining the copper business and managing it in run-off mode pending the eventual migration of the customer based to the NBN would appear the most obvious way to reconcile both Thodey’s imperatives and Conroy’s. They could negotiate a deal that, in the circumstances created by the NBN and the threat of punishment-by-regulation, was too good for either to refuse.
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