Telstra and NBN Co's futures are linked but performance is poor.

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Telstra and NBN Co have both posted poor performance figures in recent weeks and if NBN Co was a listed company its share price would be mirroring the spectacular fall of the Telstra share price.

Telstra is in a world of pain right now the Telstra board does not appear to have a plan to turn around the situation which will take major surgery to rectify.

Telstra shares fell to $2.87 on 15 May, a seven-year low, at a time when increased competition in the mobile and fixed-line telecommunications markets is eating into its core business.

But what is Telstra’s core business today?

Does Telstra really know and is it prepared to confront reality?

NBN Co is a wholesale provider created by the Labor government in 2009 because Telstra refused to upgrade its wholesale ADSL network after negotiations with the Howard government in 2005 broke down.

In 2007, the new Rudd government tried to get Telstra to change its mind and was rebuffed.

By 2010, when NBN Co was created, it was evident that copper-based technologies were obsolete, unreliable, expensive to operate and Australia needed to move to Fibre to the Premises (FTTP) to ensure that we would have universal wholesale access to the modern telecommunications needed to make Australia a leader in the global digital economy.

NBN Co was setup with several objectives in mind and one of the objectives was to increase competition in the fixed-line market. This outcome has been achieved as there are about 180 retail service providers competing today for NBN customers.

Telstra still maintains and operates what is effectively a wholesale division that mirrors NBN Co and provides facilities and infrastructure to NBN Co. Over time this legacy division will become an anchor around Telstra’s neck, if it isn’t already.

Telstra is responsible for the Universal Service Obligation (USO) until 2032 and this adds to the infrastructure burden, and confusion about what Telstra’s role after 2020 should be.

The government has indicated that it will replace the USO with a new program in 2020 and it is likely that Telstra’s role in the new program will not be comparable to the existing USO.

Telstra once enjoyed a near monopoly in national transit links, but this monopoly has been whittled away over time and today transit link competition exists everywhere. To make matters worse, where there are only two transit link providers the price is regulated by the Australian Competition and Consumer Commission (ACCC).

Telstra has been forced to provide access to its mobile network infrastructure to the other providers and this year TPG Telecom entered the mobile market in a move that will place further pressure on Telstra’s bottom line. Vodafone unsuccessfully tried to convince the ACCC to introduce domestic mobile roaming, but in doing so has focused attention on the unsustainable prices Telstra has been charging for infrastructure sharing access. The outcome will inevitably see a reduction in Telstra’s mobile revenues and market share.

Slowly but surely, Telstra’s infrastructure advantage is being whittled away, and there will come a point when Telstra must ensure that it is not duplicating what is being provided by NBN Co and the government through other programs.
Telstra has been the government’s telecommunications partner of choice and it is only a matter of time before increased competition in this market segment sees Telstra battling on another front.

NBN Co might have achieved all of its objectives, but for Prime Minister Malcolm Turnbull’s decision to turn the NBN into a second-rate broadband network back in 2013.

NBN Co is now facing a $50 billion bill for an obsolete network that is plagued with reliability problems, poor performance, rollout delays and cost blowouts.

The poor financial performance at NBN Co is caused in part by consumers who are refusing to pay for the unreliable and poor performance offered over most of the NBN today. Only a reduction in monthly charges has permitted retail service providers to move customers to the 50/10 Mbps tier.

Projections that ARPU would need to increase rapidly from $43 to $50 per month or more to enable NBN Co to balance its books are starting to look like a work of fantasy.

Within 18 months 5G is going to increase competition for the consumer dollar and NBN Co could lose between 10-15 per cent of its potential customer base if the cost of fixed-line access does not come down quickly.

NBN Co is forced to make payments to Telstra annually of about $1 billion to lease infrastructure from Telstra and this makes the cost of operating the NBN more expensive than it would be if Telstra was building the NBN.

To add to NBN Co’s woes, CEO Bill Morrow has resigned and is due to leave the company later this year when a replacement is found. The replacement will be facing a daunting task, and it is likely that this appointment will not be made until after the next Federal election.

Consumer anger about what NBN Co is providing is increasing and in 2022, when the NBN rollout is complete – at the earliest, there will be two classes of Australians – those with fibre and those with copper.

Over the past decade, I’ve written several times about the rationale for Telstra to split into two companies, similar to what has happened in New Zealand where Telecom NZ split into Chorus (wholesale) and Spark (retail).

At what point will the Telstra board entertain this move? Telstra’s shareholders would get a one for one share offering in the two new companies.

There should be no doubt that the Turnbull government would offload NBN Co in an instant to the newly formed wholesale company and it is likely this outcome would gain bipartisan support.

The telecommunications industry should also support this move, as it mirrors New Zealand and what is happening in the UK with BT and Openreach. It provides the industry with certainty whilst the remainder of the network is upgraded to FTTP.

In a move like New Zealand, the government could provide a tiered schedule for the new wholesale company to pay back the $50 billion loan. The new company would be making a significantly larger profit than what NBN Co is making now and would be able to source investment from the market.

The new retail company would be smaller and focused on products and services that are not encumbered by legacy constraints.

Spark and Chorus have found their feet since the split and are performing well. Spark and Chorus have a focus and as smaller businesses they’ve become more agile and able to compete in the rapidly changing telecommunications market.
Spark’s share price today is $3.25 after falling to $1.50 in late 2011 when Chorus was split off. In late 2011, Chorus was $2.53 and after a period of consolidation, investment and growth it is now at $3.76.

Over the same period, Telstra’s share price has risen from $3.12 in late 2011 to $6.59 in February 2015 and fallen back to $2.87 on 15 May.

A key dissenter to this logical and pragmatic approach appears to be ACCC Chairman Rod Sims who has called several times for the government to bring forward the sale of a dismembered NBN Co. Fortunately, the Coalition government is not likely to be able to get Senate support for a change to the sale conditions section of the NBN Companies Act 2011 before the next Federal election.

Telstra should be focused on 5G and new products, yet is being pulled down by its monolithic structure, loss making businesses and failure to divest itself of the infrastructure and facilities affected by the advent of the NBN. Only major surgery will turn around Telstra’s fortunes over the next couple of years and it is time for Telstra’s board to start making decisions.

Dr Mark Gregory is an Associate Professor in the School of Engineering at RMIT University and is the Managing Editor of the Journal for Telecommunications and the Digital Economy.