September 21, 2009

Horse 1037 - Structural Separation of Telstra

I'm going to choose my words very carefully here, and produce the reasons why I think that Telstra should undergo a structural separation.

Telstra is a very highly vertically integrated company that exists within a natural monopoly. That is, they are the biggest player in terms of scale and therefore are able to control prices; they are what economists call "price makers". They own the infrastructure, the wholesale rights to that infrastructure and the retail business which is attached to it therein.
If this was a road, they'd own: the Road, the Traffic Lights and something in the order of 90-95% of all of the Cars on the road.

My esteemed collegue the Noble Prawn had this to say:
"Yet this morning, the Australian government has decided that it doesn’t like an Australian company being too successful. After all the the time, money and effort that Telstra has invested into becoming the leaders, the Government has decided that it’s time to slow it down."
Sep 15, 2009

The basic question that needs to asked here is "What is the definition of successful?". Success for every private company is mainly defined by a single outcome - profit. Unfortunately, that profit is extracted from none other than the consumer.

The consumer on the other hand doesn't really care who their provider of services are. What the consumer's basic desire is, are reasonable services at a reasonable cost. Is Telstra "successful" because it genuinely provides reasonable services at a reasonable cost, or is it using its position which it inherited as a natural monopoly to overcharge its consumers?

That question can not be answered currently, because in coming up with a charge model, Telstra which also owns the infrastructure and the wholesale rights is able to shift costs around its accounts internally. What a structural separation would do would actually force the company to track costs through itself, rather coming up with a generic wholesale charge rate.

There is another issue contained within the Prawn's post, and that is an ethical question which is wrapped up with a closing paragraph:
"Bring on the comments telling me that Telstra is a big bully and that it’s the right thing for “competition” and for Australia – I’d love to hear them and I’m ready for a fight. Cos you try and tell me that the government isn’t being the biggest bully of them all right now."
15 Sep, 2009

A company by its nature is essentially an amoral organisation, that is not to say "immoral" which implies "not right" behaviour, but "amoral"; that is, without morals. The company even said as much within its 2003 Annual Report:
"Rather than being on the superhighway most of us are limping along a two-lane road and the rest, mainly but not all in the country, are still on a dirt track - let Telstra go and do what it wants. At the very worst we will end up with a world class piece of infrastructure."
The 2003 Telstra Annual Report

If you let a company "do what it wants" then the inevitable outcome is one of maximising profits, which again are extracted from the consumer. Does that imply reasonable services at a reasonable cost? The direct answer is no. If a company was able to "do what it wants" it would invariably charge the consumer as much as it could possibly get away with (which from the company's perspective is entirely fair and reasonable). But this is in stark odds to the wishes of the consumer, and it's not like they can easily go elsewhere when the the infrastructure and the wholesale rights to that infrastructure are owned by the same company.

So then, is the government acting like a bully? Quite frankly it is, but it should in theory be acting on behalf of the electorate, rather than unnamed shareholders. They of course have the basic right at law to exercise this right as well:

Commonwealth Of Australia Constitution Act (1901)
51.The Parliament shall, subject to this Constitution, have power to make laws for the peace, order, and good government of the Commonwealth with respect to:
v. Postal, telegraphic, telephonic, and other like services.
xxxi. The acquisition of property on just terms from any State or person for any purpose in respect of which the Parliament has power to make laws:

What is of course the definition of "good government"? Admittedly that has never been tested in the High Court of Australia, but anything which is for the betterment of the Australian people must surely fit that definition.
As for whether Telstra should be compensated for the loss of its assets if that's how this proposed National Broadband network is to come about, then the answer is obviously "Yes" and on "just terms" whatever that would happen to be.

Horse 1037 - Aside:
The European Union when it came to the issue of functional separation produced a hideously massive document extending into just over 12,000 pages, but it was quoted in the House of Reps this afternoon:
Functional separation has the capacity to improve competition in several relevant markets by significantly reducing the incentive for discrimination and by making it easier for compliance with nondiscrimination obligations to be verified and enforced. In exceptional cases, it may be justified as a remedy where there has been persistent failure to achieve effective non-discrimination in several of the markets concerned, and where there is little or no prospect of infrastructure competition within a reasonable timeframe after recourse to one or more remedies previously considered to be appropriate.
However, it is very important to ensure that its imposition preserves the incentives of the concerned undertaking to invest in its network and that it does not entail any potential negative effects on consumer welfare.
Directive 2002/21/EC of the European Union on a common regulatory framework for electronic communications networks and services.


James said...

I'm not gonna add more comments here - you already know my thoughts on everything.

I'm simply going to point out that only PART of Telstra's product range is Australia-wide infrastructure that it has to wholesale.

Their mobile network and their IP backbone are all their own creation and work, and there's plenty of competition out there for those if consumers want. Yet more than 50% of customers who have a private IP network have it with Telstra. And Telstra has the highest market share in the 3G mobile world.

So would you call that success then, Rollo, seeing as it's got nothing to do with Australia's copper network?

Rollo said...

Success never has to do with what a company does.
As contained within the post, success for a company is determined by how much profit it generates, not by what it actually does. In that respect, Telstra is a highly successful company. I asked "why" and what are the ethics of that success?

The Government's concern is what is best for the people, not by how profitable a company is.