full opinion/analysis by Renai LeMay
26 July 2013
opinion/analysis The Federal Government’s rollout of the National Broadband Network is the greatest show currently playing in Australia; with constant gaffes from high-profile politicians, a war of words that would make make toughened bikies wince and giant red buttons that set off fibre-optic fireworks, at times it has seemed that all the NBN needs to be a complete circus is a canned laugh track. But under the cover of this madness and media hype, there’s another high-wire act under way: The nation’s other telco monopolist, Telstra, is successfully concentrating its market power; and that’s not good news for anyone.
Many Australians will remember well the last parting words which outgoing Telstra chief executive Sol Trujillo had for the nation, upon his departure from the role in mid-2009. Australia, Trujillo told the BBC at the time, was racist, backwards compared with other first-world countries such as the United States, and living here was altogether like “stepping back in time”.
At the time, Trujillo’s comments generated outrage from everyday Australians and prominent figures right around the country.
Coming from a more respected source, they might have been taken more seriously. After all, it’s true that Australia, as a nation, has at times struggled with not only our relationship with the first inhabitants of this great land, but also with the multicultural nature of our current society. One need only closely examine the fraught and ongoing debate about asylum seekers, or events such as the 2005 Cronulla riots, to find threads of racism woven throughout the proceedings.
Then, too, Trujillo’s own nationality — the executive is of Mexican stock but was born in the United States — was indeed raised as an issue during his four years in Australia from mid-2005. The then-Telstra CEO was caricatured constantly in the local media with Mexican stereotypes, and the cadre of executives which he brought in to reform Telstra’s operations were labelled “the amigos”. The final insult came when Prime Minister Kevin Rudd, when asked to comment on Trujillo’s depature, responded curtly: “Adios”.
But an onlooker well-versed in Australian culture might also very likely observe that it wasn’t Trujillo’s heritage which earned him such levels of hostility from the Australian population. After all, Australia is a nation of individuals who claim backgrounds from countries all over the planet; we are truly multicultural, and generally accepting of difference. No, it was the arrogant way which Trujillo stewarded Telstra through those four years which earned him such censure.
Australians have always had a love/hate relationship with Telstra.
Throughout the years up until the 1990’s, the company then known as Telecom was seen as a necessary evil. Its high prices and abysmal levels of customer service were legend amongst the Australian population; particularly its long-distance rates, which severely limited the ability of many Australian families to maintain close links over this far-flung continent. And yet, up until the early 1990’s, there was no other game in town. If you wanted to place calls, or even use basic Internet services, you really had to have a Telecom line.
The formal entrance of Optus into the market in 1992 changed much of this, with its impact being felt increasingly throughout the 1990’s, as did the success of a growing cadre of Internet service providers, especially early dominant player OzEmail. And Australians have continued to get more options for telecommunications services over the several decades since; including through new mobile players such as Hutchison (‘3′) and Vodafone, as well as through the increasingly cashed up bunch of ISPs led by iiNet and TPG. Optus’ rollout of HFC cable in the late 1990’s; the DSLAM explosion in telephone exchanges throughout the 2000’s, and of late, the proliferation of new mobile infrastructure; all of these factors have played a role in reducing Telstra’s dominance.
But two key facts underlay all of this activity.
Firstly, courtesy of its decades-long ownership by the Federal Government and the fact that many of its shares are still held by individuals (the so-called ‘mum and dad’ investors), most Australians still view Telstra as being fundamentally, in some ineffable way, theirs. They may pay their monthly fees to Optus or iiNet, but there is still an underlying belief that Telstra, one of the most Australian brands in existence and still one of our biggest companies, has a strong duty to do right by the mother country which gave it birth. Telstra is Australian — more so than Optus or Vodafone could ever be. And so, like other brands such as Qantas and Woolworths, we expect more from it.
Secondly, there is the fact that most people are aware that Telstra’s infrastructure — its copper and fibre networks — still underpins most of Australia’s other ISP and telco players. No matter if you’re using services from Optus, Vodafone, iiNet or TPG; the fact is, if you’re using any telecommunications services in Australia at all, you are eventually using Telstra’s infrastructure in some point; usually by virtue of a complex regulatory agreement with the Australian Competition and Consumer Commission.
Trujillo never really understood these facts; never felt them in his gut instinctually. Grown in the fires of American capitalism, the executive was hired by Telstra’s board, then led by Donald McGauchie, to take an aggressive, market-based approach to its business, rather than the more conciliatory stance it had taken previously under Federal Government ownership, and which most Australians would prefer to see it enacting. In some senses, this suited Telstra well at the time. In the last throes of being privatised (the last tranche of Telstra shares was sold to the public during Trujillo’s tenure in 2006), Telstra needed to demonstrate to the market that it was no longer a government vehicle, and it also needed to aggressively reinvest in its business; building out a new 3G network, revitalising its core network infrastructure and moving onto a more entrepreneurial footing.
However, the approach also backfired. Trujillo’s arrogant, US-style approach to running Telstra was never received well by the Australian public or its media, which resorted to low blows about his Mexican heritage in order to get its point across. Trujillo never understood Telstra’s responsibility to the rest of the telecommunications market; in fact, he attempted to re-monopolise its fixed-line broadband business through a contentious fibre to the node proposal at the time, as well as refusing to upgrade telephone exchanges with DSLAMs where rivals didn’t have their own infrastructure; in the fear that the ACCC would force Telstra to provide open access to its infrastructure. And he never quite understood why Australians still feel a sense of ownership with respect to the telco; the executive didn’t grow up with Telecom’s paper bills taped to his fridge.
Eventually, of course, Trujillo tired of struggling with an Australian public, an Australian Government, and very likely even an Australian company which didn’t really want him. His successor, long-time Telstra and IBM executive David Thodey, has mainly reversed Trujillo’s approach; taking a conciliatory and cooperative attitude with the Federal Government and its National Broadband Network project, opening Telstra’s Next G network (somewhat) to third-party access, rapidly sanitising Telstra’s customer service capabilities and overall, putting a human face on a company which the Australia public had started to love to hate.
As Thodey’s paternalistic, reassuring approach has taken hold at Telstra, backed by a supportive board, Australian attitudes towards Telstra have rapidly changed. The company’s name has faded from the headlines, its share price has rebounded, it is marching in lock-step with the Federal Government towards a glorious NBN future, and things would all seem to be hunky dory. Hell, even Optus has broadly stopped its regular attacks on the big T. The only question Australians seem to be asking of Telstra these days is: How much will the next iPhone cost? Or, rather, how much will 500,000 iPhones cost?
Over the last 12 months, NBN Co has replaced Telstra as the great evil in much of Australia’s media. Articles that used to quote senior Optus or iiNet executives about Telstra problems now quote Opposition MPs about NBN Co. Attention has turned from regulatory debates about access to Telstra’s network and towards the contractual debates about the rollout of the NBN. And customers are no longer frustrated about why Telstra won’t fix their broadband worries; now they are frustrated about why NBN Co is taking so long to fix them, why they will only get wireless — not fibre — when the NBN does come to town, or even why NBN Co seems determined to put a tower in their back yard, blocking out all the serenity.
The effect that this massive shift of media and public attention away from Telstra has had has been extraordinary.
Take for instance, the case of Telstra’s shadowy deal with the FBI. At midday on 12 July earlier this month — a Friday — independent media outlet Crikey revealed that back in 2001, Telstra had signed a secret agreement with US Government agencies such as the FBI and the Department of Justice that provided American law enforcement and national security organisations with an extremely broad level of access to all of the telco’s telecommunications passing in and out of the United States.
The wide-ranging nature of the arrangement was remarkable. It gave the US Government complete access to all of Telstra’s telecommunications going in and out of the US — data and voice. When you consider the fact that a massive proportion of Australia’s international telecommunications traffic goes through the US (as that’s where much of the Internet’s major content hubs and Internet backbone pipes are located) in the first instance, and that back in 2001, Telstra was one of the only carriers to operate international submarine telecommunications cables out of Australia to anywhere, the implication is that for a period, virtually all of Australia’s international voice and data traffic was subject to surveillance by US law enforcement.
Telstra is still the telco of choice for most of Australia’s government departments and corporations. It provides international voice and data service for organisations with sensitive roles, such as the Department of Defence, the Australian Taxation Office, the Department of Foreign Affairs and Trade, as well as major banks such as the Commonwealth Bank of Australia and Westpac, retail giants, mining giants, manufacturing giants, state governments — the list is endless. And since 2001, all of those organisations’ international voice and data traffic to the US — unless it was encrypted — has been subject to access by US law enforcement authorities.
The number of implications from such a deal are staggering. The Sydney Morning Herald has already exposed the fact that Australian intelligence agencies are able to gain access to data from the PRISM spying program controversially operated by the US National Security Agency. Are they also able to gain quick and easy access to the data collected by US law enforcement agencies from Telstra’s fat pipes across the Pacific? It seems logical that this would be the case, given the fact that Telstra, in 2001, was still majority-owned by the Federal Government, and the historically close links between US and Australian law enforcement and intelligence agencies.
Then again, one might question whether Telstra still provides the US Government with this access. One very much suspects that it does — after all, it seems unlikely that the US Government would relinquish this access, once it had it. Has Telstra re-signed this agreement over the years? Expanded it? What’s the current situation?
None of the countless questions about this dubious and secret arrangement have been answered. Telstra made no executives available to comment on the matter. It held no press conferences. It took no questions from the media. Instead, Telstra glibly played down the issue with a one paragraph statement to the media at the time Crikey published its secret agreement, alleging that the agreement merely reflected necessary compliance with US law. Never mind the fact that the deal affected the privacy of all Australians and has been kept secret for a decade. There’s no problem, according to Telstra.
By Monday week after the news broke on the Friday, the story was already dead. Where the media would have once hounded Telstra to death for months on the issue, the debate had already returned to the latest comments by politicians Malcolm Turnbull and Ed Husic about the NBN. In fact, most of the media ignored Crikey’s revelations to start with, and Telstra was able to exit the situation with minimal damage. The only people still interested, it appears, were fringe groups such as the WikiLeaks Party, which has filed a formal complaint with the Privacy Commissioner, which will doubtless ignore the issue as it does so many others.
We’ve seen this situation repeated time and time again over the past several years, as Telstra’s actions, or inactions, have been clouded by the ongoing political warfare over the NBN.
Another prime example relates to the issue of asbestos. As those familiar with the NBN debate will be aware, in June 2011 NBN Co and the Government signed a comprehensive deal with Telstra which allowed, among other things, “immediate access to Telstra infrastructure, such as pits and pipes” — to support the rollout of NBN Co’s fibre infrastructure throughout Australia. By pits and pipes, we’re referring here to the underground infrastructure which allows Telstra’s existing copper and fibre-optic cables to run along streets and deliver telecommunications services today.
Now, let’s be clear here: NBN Co is not buying Telstra’s pits and pipes, by any means. NBN Co is merely gaining access to the infrastructure, so that it can deploy its own fibre cables through them. It’s a bit like renting a house. You use the house, you install your furniture in it, and you have constant access to it. But if something goes substantially wrong with the house (for example, the toilet starts leaking), you don’t try and resolve the problem yourself. You call your landlord and they send someone out to fix it.
Well, in late May this year something did go wrong with Telstra’s house. It was discovered, in a variety of locations nationwide, that Telstra’s house contained asbestos — an extremely dangerous material which hasn’t been used in construction since 1989. If it is released into the air and people breathe it in, it has the potential to cause serious long-term health consequences.
But do you think the Australian media, and the Australian public, pinned the blame on Telstra? No. In the eyes of virtually everyone involved, it was an NBN issue. Comments made by Shadow Communications Minister Malcolm Turnbull at the time indicated the general mood. Turnbull told Sky News that he acknowledged that Telstra had an obligation to safely remediate its old pits and pipes to allow the NBN’s fibre to be installed. However, he added: “But I don’t think NBN Co can wash its hands of this.”
“The fact is that the asbestos issue has been known for some time and it’s worse than that, it’s always been on the table, and NBN Co should have been more vigilant in overseeing this. And of course there is work being done with that old infrastructure on NBN Co’s account where it actually has to be expanded or as they say augmented, so I think both management at NBN Co and at Telstra should have paid more attention to this.”
This accusation — that NBN Co, a company formed at least three decades after Telstra constructed its pits and pipes, should share some responsibility for their condition — is clearly ludicrous. This is Telstra’s infrastructure and Telstra’s responsibility. NBN must train its contractors to deal with the asbestos situation, as is standard for any such rollout, but ultimately the house belongs to Telstra. However, after Telstra’s David Thodey made a brief appearance in Canberra on the problem, and the company issued a media release noting it was taking action, it was able to exit from the media spotlight on the asbestos issue. The torch-bearing witch-hunt immediately returned directly to NBN Co’s door.
A media release issued by Nationals MP Luke Hartsuyker at the time on the issue mentioned Telstra precisely once — and then only to defend the company. “The Government and NBN Co need to come clean about where asbestos has existed and where it has been removed,” Hartsuyker wrote. “It’s simply not good enough to blame Telstra when the asbestos threat extends way beyond its existence in ducts.”
As with Telstra’s spy deal with the US Government, if the asbestos issue had arisen before NBN Co had been formed, it would have been Telstra in the media spotlight over the issue, Telstra who unions would have attacked, and Telstra which would have been dragged into Parliament so that politicians could demand answers. But in this case, despite the fact that the asbestos problem was one of Telstra’s making, and despite the fact that responsibility for remediating its pits remains in Telstra’s hands, the telco largely escaped scrutiny on the issue.
We’ve seen this scenario play out time and time again with Telstra over the past several years. In June 2012, the telco’s Orwellian move to track and analyse the websites visited by mobile customers was dramatically exposed; but the media quickly turned its attention back to the NBN. The year before, Telstra imposed a mandatory Internet filter on its customers to block ‘worst of the worst’ child pornography — a system with no oversight or transparency — but the media didn’t notice. When the Australian Securities and Investments Commission arbitrarily asked telcos to block a range of sites, using Section 313 of the Telecommunications Act to do so, other telcos raised their eyebrows, but Telstra merely obeyed ASIC’s request without protest and has never commented on the matter, despite the fact that ASIC’s notice resulted in massive numbers of innocent sites being blocked. The media spotlight in that case turned to the Government — but Telstra’s participation was barely mentioned.
The trend is clear: Telstra is regularly exposed as being a key player in questionable activities, and its corporate ethics are suspect. But the telco has been extraordinarily successful over the past several years at diverting the public’s attention away from its failures and towards other industry players, particularly NBN Co. It has developed a habit of quickly addressing the issue with the media and then exiting, stage left. But often — as is the case with the asbestos and FBI spy scandals — the issue is still a hot potato behind the scenes, out of the public eye.
There are also other reasons to be concerned about Telstra right now.
Throughout the 2000’s, the key issue for Australia’s telecommunications media was Telstra’s market power in the sector. As a former incumbent, the telco enjoyed a level of market share that was overwhelming compared to that of its rivals, and it didn’t hesitate to use its incumbency infrastructure strengths to maintain that power. Telstra was criticised in that decade repeatedly for blocking or delaying competitive access to its exchanges, charging ludicrous prices for backhaul to rural areas, and even cutting retail prices below the price it was charging its wholesale partners. Those with long memories will recall that the ACCC spent a great deal of time and effort constraining Telstra’s market power in that decade, so that competition in the sector could survive and thrive.
After the Howard Government failed to separate Telstra’s operations, it fell to Rudd’s Labor Government to deal with the issue. Labor’s answer was the NBN — a revolutionary model which would separate Telstra from its copper network by building a new fibre one on top of it. It was, and is, a nice idea. But in practice, the rollout of the NBN has been drastically delayed, with NBN Co hitting only a few hundred thousand premises in the last four years and leaving barely a dent on telecommunications market dynamics.
In the meantime, if you speak to ISPs, what becomes clear is that Telstra still has the same dubious approach to competition now that it did back in the 1990’s. Its wholesale division is still a nightmare to deal with. It still charges ridiculous prices for backhaul, essentially locking ISPs out from competing in rural areas. And, perhaps most ominously, its market share is not decreasing; in fact, in some sectors it’s growing.
Take the mobile sector, which has only three key players — Telstra, Optus and Vodafone. Vodafone revealed this week that it had lost a colossal 551,000 customers in the first half of this year (8.4 percent of its total customer base), as its #Vodafail episode continues to hit its operations hard. It lost 443,000 in calendar year 2012, meaning that its customer losses are rapidly increasing. So where are these customers going? They’re certainly not going to Optus, which has consistently shown only modest or even flat mobile growth for several years running.
As Telstra’s Thodey said in February at the company’s half-yearly financial results briefing (PDF): “We also continue to gain share in key products, adding 607,000 new domestic mobile customers.” In short, Telstra is funneling massive numbers of Vodafone customers its way right now — clawing back market share in a huge way in Australia’s mobile sector and winding back hard-won competition.
But wait, there’s more. Again, if you speak with ISPs in the fixed broadband space, what you’ll find is a not dissimilar story. Telstra’s not clawing market share back quite so fast in fixed broadband as it is in mobile, but it has indeed emerged as a revitalised competitive force in the sector. Right now, the telco is nicking customers left and right from retail ISPs such as iiNet, Optus, TPG and M2. It’s also losing some customers, but it has succeeded in reversing a decades-long downward trend and is now adding customers once again. “Our fixed broadband business also performed well, with 85,000 retail fixed broadband customers added,” said Thodey at those same financial results.
The situation is a little less visible, but still trending the same way, when it comes to large enterprise customers. While we still do see major companies and government departments buy services from Telstra rivals such as Optus and Macquarie Telecom (see this contract by ANZ Bank with Optus, for example), in general the trend is clear: These large organisations are, by and large, choosing to stay with Telstra, and competition in the business sector is not increasing. It is stagnating, or, at worst, it is gradually being wound back.
The problem is, essentially, that the rollout of the NBN has taken too long, and, because it was never structurally separated as BT was in the UK, Telstra continues to hold all the cards. In the mobile sector, Vodafone and Optus find it very hard to compete with Telstra because, firstly, the telco won’t let them co-situate their mobile infrastructure in its towers, and secondly, when Optus and Vodafone build their own towers, they often have to pay Telstra exorbitant rates to get backhaul to connect up the towers. Then, too, Telstra is easily able to cross-subsidise the construction of its mobile network with funds from other areas of its business — such as its fixed-line copper network, a massive revenue generation machine which, let’s not forget, companies like Optus pay Telstra squillions to use.
In the fixed sector, again the main issue is backhaul. Companies like iiNet are still unable to reasonably compete in many areas of Australia because there is only one way to get backhaul access out to telephone exchanges in those areas — pay Telstra’s expensive backhaul prices. The rollout of the NBN is supposed to eventually fix this problem … but again, the NBN has not yet affected this issue in any meaningful way. And, of course, Telstra is also able to leverage its bundles in a way most other telcos can’t. It can offer customers bundles of services consisting of mobile, fixed broadband, telephone line and entertainment (Foxtel) packages. No other telco has quite the same service offering in the market, and all this gives Telstra an inherent advantage against its rivals; an advantage which it is exploiting. As Vodafone chief executive Bill Morrow said in July last year:
“No other jurisdiction allowed a company to have Telstra’s level of market dominance in fixed, mobile, and cable network infrastructure and to own half of the largest pay TV company. This anti-competitive playing field has undermined the incentive for the broader telecommunications market to invest, resulting in less choice for consumers and a lack of innovation. Outside the capital cities there is virtually no fixed-line competition and mobile competition in regional areas has been hamstrung by Telstra’s regional backhaul dominance.”
“The changing nature of the telecommunications market does not require a change in policy frameworks, but it will require a change in regulatory focus. Traditionally, regulators have treated ‘fixed’ and ‘mobile’ as separate markets. Regulatory assessments have not acknowledged that Telstra’s dominance in fixed telephony has significant impacts on the mobile industry. In a converging world this siloed approach is no longer tenable.”
On the one hand, you can’t blame Telstra for this activity. It’s a corporation, and has a responsibility to its shareholders to maximise its returns. But that also doesn’t solve the situation. If Telstra continues to suck customers from Vodafone at the current rate, within a year or two, Vodafone’s business model will no longer be viable, and the company will collapse, leaving Australia’s mobile sector with only two players. And that would be a catastrophe for competition in the space; a catastrophe which would have a marked impact on customers. The situation cannot be allowed to progress this far.
The perfect demonstration of the strength of Telstra’s market position occurred over the past several years when the telco was forced to upgrade its fixed-line network surrounding the South Brisbane telephone exchange to fibre, due to the forced construction of a hospital in the area. Telstra used the rollout as a test case for deploying fibre of its own, and the rollout proceeded according to schedule. But along the way the telco was also successful in winding back competition in the area. The way it set up its fibre network blocked certain competitive services from being deployed on it; its wholesale division proved intractable during the process, and its prices were so exorbitant they caused retail ISPs such as TPG to drastically limit the services they provided in the area.
Like so many other aspects of Telstra’s position in the market, the South Brisbane situation has not changed. Right now, the maximum quota which TPG, known for its unlimited plans, offers on a South Brisbane fibre service is 300GB; the maximum speed, 30Mbps.
So how does Telstra get away with all of this? There are two answers. The first is obvious: As a project, as a policy, as a political debate, the NBN soaks up all the oxygen. In a time when journalists are receiving daily media releases (usually I get at least half a dozen per day from politicians alone) and seeing daily political debate on the NBN as a key election issue, there really is no incentive to go beyond this and pay attention to yesterday’s monopolist, Telstra. The NBN is a much higher profile issue.
However, there’s also another reason, and it relates very much to the personality of Telstra’s chief executive, David Thodey.
It’s easy to guess that if Sol Trujillo was still in charge of Telstra, then Telstra would not be able to escape being held much more strongly accountable for its current actions than it is now. Trujillo’s brash personality, which verged upon arrogant when he led Telstra, the aggressive corporate stance with which he positioned Telstra, and even his nationality as an American; these were all factors which positioned Telstra at the forefront of the public consciousness.
In contrast, Telstra’s current chief executive, David Thodey, does everything he can to keep Telstra out of the media. With his quiet, paternalistic manner, Thodey resembles nothing so much as someone’s middle-aged father, calmly overseeing a mild debate at a parent’s and citizens’ meeting at a local high school on a Wednesday night.
If you’ve seen Thodey hold a press conference or give a speech, you’ll probably agree that butter probably wouldn’t melt in his mouth. The executive smiles often, chuckles gently when pushed on irrelevant issues, and dons an air of quiet attentiveness when pushed on serious issues such as the asbestos situation. He is an absolute expert in defusing tense situations and deflecting troubling questions. After speaking with him, you usually walk away feeling as though everything is being taken care of, and your problems addressed. With this manner and the advantage of the NBN distraction, Thodey has been able to get Australia’s media squarely on his side when it comes to Telstra; in a way that Trujillo was never capable of.
Then too, Thodey understands what Trujillo never did — that Australians fundamentally feel that they still own Telstra, and that Telstra’s infrastructure is at the heart of the whole telecommunications industry’s operations. What this has meant in practice is that Thodey has gone to great lengths to deal with the pain points which Australians have had with Telstra; remediating its customer service operations, resolving its relationship with the Government (seeing Telstra and the Government argue is like watching your parents fight), and dampening down the arguments between Telstra and its client ISPs so that they occur primarily behind closed doors.
In Thodey’s hands, Telstra has stopped being the Big Bad and become your kindly uncle — here to help.
But the problem for the executive (and, in fact, the entire telecommunications market and its customers) that Telstra’s new image is largely a facade, and underneath this glossy exterior, nothing has changed. As this article has demonstrated, behind the scenes, the telco is still very much the same bad old ugly beast it was under Trujillo. It is still organising secret arrangements to give law enforcement agencies access to its customers’ data. It still has massive asbestos issues. It is actively working to roll back competition in the sectors it operates in, through borderline anti-competitive practices. It still deals with its wholesale customers only reluctantly, and it still needs to be restrained from abusing its power by the ACCC. And it still has no intention of acting in a transparent and open way about its operations — even keeping its own customers in the dark as to what’s really going on. All of this is quintessential Telstra to a capital T.
While the NBN circus continues to distract Australia’s media and the public, and while Thodey can maintain his fatherly smile, Telstra’s activities may largely escape notice. But as the NBN continues to be delayed, inevitably attention will turn back to the company which still, after all this time, dominates Australia’s telecommunications market in much the same way it always has. And when people do start taking a closer look at Telstra, they may not quite like what they find.