30 November 2004 by Richard Chirgwin

Are Wholesale Services `Up to Scratch’?

The lawsuit between Crazy John’s and Telstra is, in my mind, just as important to the privatisation debate as the ongoing and pointless discussion about whether services are ‘up to scratch’.

When Australians think of telecommunications services, they’re apt to think of what reaches the retail consumer. However, in a contestable market, with a wholesale-retail split, services are also what reaches the retailer from its upstream wholesaler.

What’s sold at wholesale is quite different from retail, and not just in volume.

The retailer buys a lot of things from wholesalers, but they all add up to this: retailers are buying the ability to make money. They’re buying the services themselves (mobile, fixed, or data); they’re sometimes buying a supply of physical products; they’re buying some level of tech support to keep the services running.

And most of all, they’re buying an income stream.

That income stream depends on accurate record-keeping – a point brought home years ago in the One.Tel collapse – but it’s still one of the most difficult and challenging parts of the wholesale-retail relationship.

In part, that’s because Australia is still relatively new to the wholesale-retail business. The Telecom of old had no need for the kind of wholesale business IT systems it now needs: there was no retail sector.

That changed throughout the 1990s, but we’re still only into perhaps the second or third generation of wholesale business process in this country.

The retail business, however, continues to change much faster than the systems which support it. This is partly because the wholesale market has become so contestable. When Telstra was the only source of wholesale business, products were available in ‘any colour, so long as it’s black’. Wholesale competition has brought with it the need to differentiate products; this, in turn, makes the products and the relationships more complex.

Herein lies the importance of the Telstra-Crazy John’s court case.

It’s possible that Australia’s telecommunications market is too monolithic for true contestability, at least for another decade to come.

Whether or not that’s true, a contestable market demands that the wholesale-retail relationship functions properly.

In trying to determine whether or not Telstra’s services are ‘up to scratch’, the federal government is gazing with a fixed stare at rural and regional services – not even the whole of the carrier’s retail business.

As a result, the government is ignoring whether or not the carrier’s wholesale services – upon which the storefront retailers depend – are also ‘up to scratch’. This seems strange, because most retailers (by number if not by value) are the kind of business which is supposed to be the Liberal Party’s core constituency: the owner-operated, probably franchise-based SME.

The Crazy John’s lawsuit is more important than the industry thinks.