Telstra given stark separation choice
Rose Major

Australia’s government has presented incumbent telco Telstra with a stark choice: voluntarily separate your wholesale and network functions from the rest of the company, or have a “strong functional separation framework” imposed in legislation and see your wireless broadband ambitions stunted. Telstra could also end up having to sell its 50% stake in pay-TV platform Foxtel.

Communications minister Senator Stephen Conroy announced that legislation would allow Telstra to voluntarily submit an enforceable undertaking to the Australian Competition and Consumer Commission to structurally separate. The Minister can provide guidance to the ACCC on the matters it would take into account when considering whether to accept the structural separation undertaking.

If Telstra chooses not to structurally separate, the legislation provides for the Government to impose a strong functional separation framework on Telstra. This Bill proposes implementing a functional separation regime by altering the law to require that: Telstra conduct its network operations and wholesale functions at arm’s length from the rest of Telstra; Telstra provides equivalent price and non-price terms to its retail business and non-Telstra wholesale customers; and this equivalence of treatment is made transparent to the regulator and competitors via strong internal governance structures.

Rivals and consumer groups unanimously welcomed the government move, although shareholders’ groups and those in the financial community were not so pleased.

The legislation will also seek to promote competition across telecoms platforms. The company will be prevented from acquiring additional spectrum for advanced wireless broadband while it remains vertically integrated; and owns a hybrid fibre coaxial (HFC) cable network; and maintains its interest in Foxtel (currently 50%).

The legislation provides scope for the Minister to remove either or both of the second and third requirements in the event that Telstra submits to the ACCC an acceptable undertaking to structurally separate.

In other words, should Telstra decide to separate, the company could still hold on to both its HFC network – the vehicle for the company’s high-speed broadband ambitions – its Foxtel stake, and push on with advanced wireless network plans, but only if the government agrees.

But should Telstra decide its wireless business is its main focus and still doesn’t want to separate the business, it will definitely have to sell its Foxtel stake as well as its cable network, bringing two of the most valuable properties in Australian pay-TV on to the market.

Telstra’s chief executive David Thodey responded with a measure of caution to the announcement. He said that while “disappointed”, the company “remains committed to working with the government to find a solution that is in the best interests of the industry, the nation, Telstra and our shareholders.

"It is Telstra's view that many aspects of this package are unnecessary and need never be implemented if a mutually acceptable outcome can be reached on the National Broadband Network.”

But while it may not be Telstra’s, or the company’s shareholders’ first choice to separate, the government’s restrictions should it not do so would make business hard to conduct with much flexibility.