There was an interesting exchange during yesterday’s Telstra analyst briefing on the mountain of documents it released in preparation for its shareholder vote on the deal with NBN Co that demonstrated how complicated the process of gaining Australian Competition and Consumer Commission approval for the deal is.
RBS’ Ian Martin asked Telstra’s chief financial officer John Stanhope about a “condition precedent” in Telstra’s deal with NBN Co that committed NBN Co to entering an arrangement with arch-rival Optus that would result in the closure of Optus’ HFC network. What would happen, Martin asked, if the ACCC disallowed that deal?
Stanhope made the point that the NBN Co deal with Optus had occurred, satisfying the condition.
On the same day that Telstra and NBN co-signed their deal, NBN Co announced it would pay Optus $800 million to shut down its cable network. As part of the Telstra deal, its HFC network will also be closed to all services except for the existing pay TV services carried on the cable — Foxtel and independent channel operators.
Stanhope said that, although the condition had been satisfied, the NBN Co deal with Optus still had to be approved by the ACCC and Telstra was hopeful that it would be. If it weren’t, it would have a minor impact on the value of Telstra’s deal, but not to the extent that it would render co-operation with NBN Co worse than competing.
The impact on Telstra, but more particularly the NBN, wouldn’t necessarily be immaterial. Telstra wanted that network taken out of service because, given that it will progressively exit fixed-line services, it wouldn’t want its major competitor to remain an integrated operator (albeit quite a small one) and able to compete for customers on a different basis to those telcos operating on the NBN.
For NBN Co, any fixed line competition is a threat to its ability to maximise its customer base and to get to a critical mass of customers as early as possible. That’s why it wants to effectively shut down the HFC networks as prospective competitors and migrate their customers — self-evidently high-value broadband users — onto its network.
Like the 20-year prohibition on Telstra promoting its wireless broadband services as a substitute for the NBN, or the provision in the agreement with Telstra that its HFC cable cannot provide services to any new operators, there are obviously anti-competitive elements to some of the deals NBN Co has struck, something the ACCC recognised in its discussion paper on Telstra’s structural separation undertakings that was issued this week. (Those could, of course, be seen as an inevitable and unavoidable consequence of creating a new and complete monopoly).
The condition precedent in the Telstra/NBN Co deal explicitly prevents NBN Co from incorporating the Optus cable into its own network, although the ACCC did note that it appeared unlikely that it would even if it could, given that the HFC would have to be upgraded, and in any event wouldn’t meet the government’s specifications for the NBN.
While they might not be deal-breakers, there are myriad issues that the ACCC will look at within not just Telstra’s structural separation undertaking, where the responses to ACCC concerns are within Telstra’s control, but within NBN Co’s access undertakings.
At the moment the structural separation undertakings and NBN Co’s access undertakings aren’t directly linked — there are not inter-conditional in any formal way.
It is conceivable, however, that the ACCC might reject some aspects of the access undertakings that bear on either the Telstra undertakings or on the value it expects to gain from the deal with NBN Co. There could be collateral damage for Telstra from the NBN Co dealings with the ACCC — or some adverse changes to NBN Co’s strategy and value from changes to Telstra’s undertakings.
As discussed earlier this week (NBN Co walks a competition high wire) the most serious threat the ACCC’s consideration of NBN Co’s proposed undertakings (once they have been tabled) is probably a delay that puts NBN Co even further behind in its roll-out schedule and delays and devalues the initial flows of cash to Telstra that the deal envisages.
The discussion about the Optus network at yesterday’s briefing, and several analogous issues in the NBN Co deal with Telstra that the ACCC has identified as warranting closer scrutiny, goes beyond simple delay to potential changes to the structure and value of the deal.
At this point none of them individually appears to be a deal-breaker, particularly given the scale of value involved for Telstra if the broad structure of the deal gains ACCC approval and it is able lock in the $4.7 billion gain from co-operating with NBN Co, relative to competing against it, that its independent expert, Grant Samuel has said is available.
The layers of complexity and detail yet to be resolved, however, means that there is a lot of to-ing and fro-ing to occur between Telstra and the ACCC, NBN Co and the ACCC and perhaps even Telstra and NBN Co (again) before the final shape of the deal, the timing of its implementation and the precise impacts on Telstra and NBN Co are locked in.
*This first appeared on Business Spectator.