As the National Broadband Network process continues, the call for separation of Telstra guarantees media headlines. In the case of one JP Morgan analyst the headlines have been created, never mind that two reports in recent weeks have been based on factually incorrect assumptions.
First, Telstra is already operationally separated: our Retail and Wholesale divisions operate independently, separated by regulation. JP Morgan is talking about even more costly and value-destroying separation and of a type we know has failed elsewhere and will do little to bring Australian businesses and families the broadband speeds they want and need.
In one of the JP Morgan reports, its author suggested I recently presented information to the market that was “not…factually correct”. This information that I referenced about returns expected by investors on major investment projects was publicly available data from the respective investors or broker reports.
As a Chief Financial Officer it is important to correct such false assertions from analysts who are often considered beyond reproach. But I think it also gives me moral justification to comment on other inconsistencies and inaccuracies in the reports.
The analyst argues that further operational separation is required because “there is not a truly competitive market environment in the Australian fixed line market”.
This is contrary to what the same analyst said in January of last year:
“both the mobile and broadband segments are highly competitive” and his dire prediction for Telstra’s declining fixed line revenues in the face of this competition, claiming “the inflexion point is along way away”.
What’s the basis of the change in mind? You have to wonder.
The JP Morgan analyst does make one good point. The separation of Telstra would destroy shareholder value saying:
"As a result of operational separation, Telstra would be losing the benefit of full integration, losing retail market share, wholesale revenues, loss of speed to market advantage, etc...which would translate in a -A$0.93 per share valuation downside."
How this shareholder value destruction is for the greater good of Australia is beyond me.
Notwithstanding the legion of loyal retail shareholders who would suffer, all the evidence is that separation would be extremely complex and expensive, whilst failing to achieve the central policy goal – the development of a world-class National Broadband Network delivering services that improve business productivity, health services, education and lifestyle.
In the UK, this type of separation has not resulted in any significant National Broadband Network investment and the UK continues to slip down the OECD broadband league tables.
In Ireland, it is ironic that the proposal for structural separation of the incumbent telco was proposed by the telco itself and it is the regulator who called for a consultation into the implications for competition before the proposal was withdrawn.
In New Zealand, a model spruiked by JP Morgan, Telecom New Zealand’s shares have been significantly de-rated and shareholder value destroyed. The share price has fallen 30 per cent since the NZ Government put separation on the table. In addition, more than $300 million in operational separation costs will be incurred over four years. On the other hand, this has not resulted in any significant network upgrade for the people of that country. Indeed the planned ‘cabinetisation’ process – so called FTTN - being undertaken by an operationally separated TNZ will deliver a far inferior service to that expected by the Government for consumers on this side of the ditch. Be careful what you wish for.
I’ll finish with one final comment – perhaps it’s a Freudian slip. We thought both reports were making sense when we read the heading describing operational separation as the only possible “placebo” for alternative infrastructure. Since it cures nothing it’s definitely a placebo, but it’s no panacea to Australia’s broadband demands.