Tag: telstra

TELSTRA VS CRAZY JOHN’S –

Communications, Technology

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.

IN DEFENCE OF ZIGGY

Business, Communications

02 December 2004 by Richard Chirgwin

The Low Share Price is Structural, Not Personal

If nobody’s listening, I’ll tell you a secret: it’s not Ziggy’s fault.

Some things were Ziggy’s fault – the Asian expeditions, the Fairfax follies, the conviction that Telstra should become a dotcom.

But the share price? Only a brain donor blames the share price on Ziggy. A brain donor – and an institutional investor.

For a while now, a rumour that Ziggy was going to leave Telstra would send the share price upwards; this was the institutions’ signal that they wanted Ziggy gone. The reasoning, instantly seized upon by the business pages that the institutions were blaming Ziggy for the low share price.

They wanted to send that signal, but they were lying through their teeth, and worse still, they’re lying as a cartel. With the lie endorsed by all the institutions (whose representatives can be relied to ask the most clue-free questions any journalist can ever hope to hear), all they need do is act in concert and cast their vote.

The reason Telstra’s share price is between $4.50 and $5.00 is because that’s what the company is worth . The reason it was sold for a much higher price is that the government fudged its value, because the buyers were captive to the stupid idea that a utility stock was somehow magically transformed into a growth stock by the Internet; because the world believed that ‘Internet traffic is doubling every 180 days/three months/six months’. All of this was endorsed by the same goons who now play with the share price to punish an individual.

Three lies, put together, inflated the share price, which the government liked because it let them pay down government debt.

Back to Ziggy. He went along for the ride, and therefore deserves his share of the criticism, but for the institutions to personalise the share price in this way is reprehensible; particularly because it lets the institutional fee-farmers continue pretending they had nothing to do with the whole Telstra share debacle.

Why are the instututions lying to us?

First, because they don’t want the blame sheeted home to the government. They’ve eaten well at the hands of Canberra, and don’t want to ever close a door in Parliament.

Second, because blaming the CEO lets them divert attention away from their own role. The institutions were just as enthusiastic at priming the “Telstra is worth $10” as anyone else. They were either suckers or knaves.

Third, because most of all they want the Telstra privatisation to keep yielding fees for the financial industry.

Hence the share price rose on the news of rumours.

Strangely, when the reality came the first response was a fall in the share price.

My bet is that the institutions knew damn well that a change at the top is not going to help any of the things they want. It’s not going to roll back the competitive market, which caps Telstra’s growth capacity. It’s not going to materially affect the schedule of the privatisation fee-fest. It’s not going to change the economy of telecommunications, or the need to spend money on network upgrades, or the fact that there’s only so much fat you can cut from the carrier before you cut services.

In other words, with Ziggy’s departure, the truth becomes clear: it was personal. On rumours of his imminent resignation, the institutions gave the world their view of Ziggy the person, and pumped up the share price. When the rumour became fact, the real view became clear, and the share price went down.

Ziggy is responsible for some things. But the depressed Telstra share price? The institutions are far more responsible – and they don’t resign.

MIDWAY BETWEEN “ACCOUNTING SEPARATION” AND “STRUCTURAL SEPARATION”

Business, Technology

06 December 2004 by Richard Chirgwin

Telstra’s Wholesale-Retail Split

If you wanted evidence of Australians’ mal de tete, run through the Telstra sale process. The population were skinned for half the value of the shares they bought, but they still elected a government committed to skinning them a third time.

This is relevant, given last week’s events. The consensus about Ziggy Switkowski’s successor is that whomever gets the gong, he’ll have to be a salesman. As Kate Askew and Colin Kruger put it in Saturday’s Sydney Morning Herald, the next CEO will be expected to “beat the drum” to relieve the carrier’s supposedly inadequate share price.

If that doesn’t scare you, it should. Drum-beating will only serve political interests. It won’t change any of Telstra’s value propositions as an investment – the structural limits on its growth.

What the market now expects, and accepts without even breathing hard, is that regardless of Telstra’s real value, the company will get a CEO willing to pump the share price so the government can sell its 51%.

All of this makes the proposed “wholesale-retail” split a fascinating move.

It’s a couple of years now since the federal government swore that such a split was impossible and unfeasible; and since a federal opposition, cowed by lobbying from the money markets, backed away from a Senate inquiry designed to investigate the structural separation of Telstra.

Back then, the market was dead against any notion of a structural separation – and the investment community was the only sector to speak with one voice. Nearly all of the submissions made to the ill-fated structural separation inquiry were in favour of such a move, a trend which froze the government’s blood. Its response was to write to various institutions, asking them to put the investment community’s case, and was rewarded with a unanimous vote against the proposal. At this point, the ALP lost its bottle and the inquiry was canned.

The thrust of the opposition was simple: Telstra, the investors argued, is only valuable as a vertically-integrated business. As a sop to Telstra’s competitors, which were unanimous supporters of structural separation, the government instituted the “accounting separation” regime which the ACCC has been working to implement for the last year.

Last week’s announcement takes Telstra much further down a path which it (and Ziggy) had strenuously resisted. It’s a “best of both worlds” approach that goes further than accounting separation, without sacrificing Telstra’s capacity to act as an integrated carrier.

Exit the ACCC (As If!)

Telstra’s fervent hope is that the move will appease the ACCC – and that might give us some idea of how the carrier plans to approach the job of “drum beating” in the lead-up to the sale.

I predict its most immediate strategy will be to explain to investors that the more Telstra is able to satisfy the ACCC, the more its share price will rise. This message will be put in a simple, but relentless, media placement strategy to the doyens of the dailies.

That also goes part of the way to explaining why the share price had to be personalised to Ziggy: the thorny relationship between Telstra and the ACCC can now be sheeted home to a departing CEO.

The wink-and-nod of the private briefings will be that the wholesale-retail split was impossible to implement sooner, because it was resisted by the soon-to-be former CEO – an explanation which is probably true, but incomplete.

The other side of the wholesale-retail split goes back to the ACCC. It’s spent a year on the job of implementing the accounting separation regime, and last September it issued a new – and much more detailed – set of record keeping rules for the separation process.

You can bet that the RKRs were the subject of much board debate, and I’ll bet that once the RKRs were fully understood, the board decided that the now-approved split was the easiest road to compliance.

The same restructure will, if the weekend reports were accurate, also create a media group which is to inherit the “sick man of Telstra” – the 50% stake in the loss-making Foxtel which commits the carrier to an ongoing subsidy of the pay-TV business.

Telstra’s never going to sell Foxtel, because to do so would create a ready-made competitor with last-mile access; and as anyone who’s read an Optus annual report can tell you, the best way to sell a pay-TV network is to have it carry phone calls as well.

If Foxtel is to stay with Telstra, then the media division will stay with Telstra. But if those assets are rolled up into a separate division, the carrier can probably convince the markets (and the ACCC) that a separate float is possible.

It’s a scenario which fits with the wholesale-retail split: give the appearance of division, without having to put the integrated business at risk.

I don’t think the ACCC will be fooled. And I hope the public isn’t fooled either.


ISPS OPPOSE BUT COPYRIGHT AMENDMENT PASSED

Info Tech

08 December 2004 by Richard Chirgwin

Bumpkin Negotiators Sell Out Australia, Claim Victory

Article body.

Facing opposition from the telecommunications and Internet industries, Parliament has passed the Copyright Amendment Bill 2004 to push through the Australia-US FTA.

Having originally held back the text of the letters exchanged between Mark Vaile and Robert Zoellick in November, the government introduced the legislation in a rush, and it was only at the beginning of this week that the Internet Industries Association made public its opposition to the legislation.

Supported by Ozemail, Telstra and Optus, the IIA warned that sections 11 and 13 of the amendment would import a regime from America, in which the copyright industries send thousands of automated take-down notices, with little regard to the accuracy of their accusations.

In its public statements, the industry passed over Section 3 and Section 7, which put much more onerous restrictions on the status of proxies and caches (putting tighter ropes around the use of “temporary reproductions” needed to transmit or use copyright material).

Australia has already seen the impact of automatic copyright policing, with the copyright industries trying to dazzle Justice Murray Wilcox in their pursuit of Kazaa (if CommsWorld had staff, I would love to spend some time in the courtroom – RC). The same industry is also working to extradite the alleged leader of the DrinkOrDie group of pirates, Hew Raymond Griffiths; the case currently awaiting publication of the judgement.