This is what happens with vertically integrated monopolies



blog If you were under any illusions about Telstra’s nature as a vertically integrated telecommunications monopoly being wholly intact in Australia, just case your eye over what’s happening with the ongoing attempts by Foxtel to launch its own broadband service in Australia. According to the Financial Review (we recommend you click here for the full article), Foxtel and Telstra have failed to broker a deal which would let Foxtel enter the broadband market … despite a year of talks:

“News Corporation and Telstra have been in secret negotiations to launch a Foxtel-branded broadband service for more than a year but talks are stuck on the price Telstra would charge for access to its network.”

Let’s step back from this situation for a second and look at it from a ten thousand foot view. We have a vertically integrated, former incumbent telco, which simultaneously owns Australia’s copper telecommunications network, as well as being the nation’s largest retail ISP. It has a joint venture with Australia’s dominant media empire on pay TV. Now the joint venture wants to enter the broadband market and compete with its part owner, but the part owner doesn’t want to sell it wholesale telco services at decent rates, because it would be creating a retail competitor. Meanwhile, nobody in the whole situation has bothered asking why consumers would want to buy broadband from Foxtel anyway, given they can already get broadband/telephone/pay TV deals from Telstra and Foxtel, because of the joint venture relationship.

Still with me? Do the words “market failure” ring a bell to anyone? Seriously. Sometimes Australia feels like the biggest backwater on earth, dominated by a clutch of greedy telco and media corporations fighting each other for scraps when they’re not collaborating to screw us out of equitable access to broadband and content. I mean, Telstra part-owns Foxtel, for God’s sake, and it’s not even capable of negotiating with it. You can imagine what kind of hard ball Telstra plays with actual competitors like iiNet.

Image credit: Star Trek


  1. Oh, to have been a fly on the wall when Telstra presented their opening position for the copper network price… Given their form in negotiations like these, (as on display here) I think it would have been quite entertaining. :-)

  2. So, let’s see here. After a year of wrangling, Telstra can not agree on a price for wholesale access to a company it co-owns. And this is the same company that Malcolm Turnbull expects to get the whole CAN from for free in order to build his Atomic Banana. And he has to do so in a timely fashion if he has any hope of meeting the goals outlined in his own policy. Mal would have better luck walking on water.

  3. And people were surprised it took two years for NBNco to negotiate settlement with Telstra?

    Look, the only way the WIzard of Wentworth can secure a sub-two-year negotiation with Telstra is to both rescind cherry-picking legislation, and neuter ACCC when it, inevitably, raises it’s hand on the competition concern.

    That’s going to remove virtually all expectation of NBNco being a viable business. It will become an on-budget expense, before inevitably needing to be sold (to Telstra).

    To be honest, Malcolm may be in the Middle, but I doubt he’s that insane, frankly.

  4. Just because I haven’t seen it explicitly mentioned, FOXTEL a 50-50 joint venture between Newscorp. and Telstra.

    • “FTTH NBN would be a godsend to Newscorp and Murdoch.”

      How so?
      On FTTH’s level playing field with open competition from the much cheaper overseas players offering far superior quality content than Murdoch’s overpriced ad riddled monopoly i would imagine the profit margin would take a serious hit.
      Many overseas services are already gearing up for 4K UHD TV & Netflix is already planning on streaming content of 50GB files within 2 years which I would suggest could place little too much strain on FTTN?

  5. “…part owner doesn’t want to sell it wholesale telco services at decent rates, because it would be creating a retail competitor.”

    Actually, the ACCC would take a very dim view of TW selling Foxtel DSL wholesale at “decent rates”, since wholesale DSL (tails and backhaul) is declared. Everyone gets the same price.

    I kinda think that’s a good thing, no?

  6. The question is would Telstra behave any better if they were only a monopoly wholesale provider?

    • A company that is only in a single business area such as wholesale broadband has no commercial incentive for favouritism of one customer over any other, assuming there are no below-board ‘incentives’ at play. But Telstra will never be that in that position.

      As for how Telstra operate when in a monopoly wholesale position, just look back at their practices pre-ADSL2+ competition; plans only allowed for 256k, 512k and 1.5mbps, even though the technology was capable of up to 8mbps. They drastically reduced maintenance staff and budgets and stopped performing routine maintenance to ensure faults were minimised, instead preferring to let the network run until it fell over and then fix actual outages. It’s not like they were legally obliged to provide minimum service levels for anything but a basic voice service, after all.

      They installed pair-gain, charging customers for a full line but only actually sharing a line between two properties. They charged some of the highest access prices in the world because they had no competitors. They practically invented data usage charges on fixed line networks – almost no one in Europe, Asia or the US charged consumers based on download quotas until the advent of mobile broadband.

      That doesn’t even touch on the difficulty they caused other ICT companies and ISP’s. Limiting access to exchanges, limiting the amount of equipment that could be installed in exchanges, refusing to allow new exchanges to be built or upgrading old ones that were inadequate… Just the tip of the iceberg.

      • A wholesale company may prefer a reseller because they are easier to work with, cost less to support, deliver higher value customers or increased volume.

        You mention speed tiers, yet NBNCo has implemented very similar pricing structures to Telstra.

        What I don’t see is a commercial incentive for NBNCo to be efficient or innovative. They are effectively operating on a cost plus basis.

        • I don’t have a problem with speed tiers, I have a problem with speed tiers that artificially limit performance for one Technology to enable them to sell inefficient and exorbitantly expensive business products such as ISDN well past its use by date. NBN Co aren’t doing that, they all releasing plans at a range of performance tiers right up to 1,000/400, and even allow RSPs to provision bandwidth such that they can guarantee dedicated 1:1 pipe for those customers who need that.

          Does that mean NBN Co plans are 1:1 for everyone for a low entry point price? No, of course not. The network will cost $45bn to build, and I believe it’s prudent for it to be designed in such a way that it can pay for itself. Don’t you think so?

          The brilliant thing about it remaining a government monopoly is the potential for it after it has realised all its repayment and interest obligations. It could generate enough cash to make fibre deployment to 98% of the country cost neutral. Or it could use that cash to upgrade the network to point-to-point instead of GPON. Or cost of access could be reduced to the point where it covers OPEX, maintenance and upkeep plus some conservative contingency, allowing Australians to have world class telecommunications at world leading low pricing (further promoting universal access).

          A commercial company is not only expected to return a profit, that profit should maximise returns for investors, pushing costs as low as possible and prices as high as the market will bear before breaking. Like putting the cheapest aftermarket parts in a car and only performing maintenance every two years, but loading it up until it’s riding on its axles every day for 12 hours a day, that is a recipe for disaster. Commercial entities don’t just have to return a profit, the market expectation is that that profit will grow year to year. How you can consider that a better scenario for anyone but investors is utterly beyond me.

          BTW, did you fail to notice that the NBN Co have ongoing efficiency measures and internal reviews in place that constantly analyse costs and look for ways in which they can improve performance and reduce expenses, which over the last 12 months resulted in $700million in savings. If they had ‘no incentive’ to find efficiencies, where did the best part of a billion dollars in improved efficiencies come from?

        • “A wholesale company may prefer a reseller because they are easier to work with, cost less to support, deliver higher value customers or increased volume.”

          This assumes the wholesale company is entirely dependant on sales to survive. Telstra has never been in this position.

          Speed tiers exist because of a combination of ACCC involvement, and to ensure there are product options that allow people whom do not want, or perhaps more relevantly cannot afford an unlimited 1Gbps service.

          In a “perfect world” neither would be needed. A single flat-rate for all you can eat.

          The problem is the market hasn’t come to that conclusion yet – there is still a non-zero demand for fixed cost services. They are still considered “cheaper” than simply using as little or as much as needed.

          This is why a lot of flat-rate services fail to gain traction, and we’ve seen more “unlimited” plans appear with a fixed cost and ‘fair use’ clauses.

          The market doesn’t work the way you presume, mathew.

  7. “Do the words “market failure” ring a bell to anyone? Seriously. Sometimes Australia feels like the biggest backwater on earth, dominated by a clutch of greedy telco and media corporations fighting each other for scraps…”

    Absolute gold Renai… succinctly and perfectly described.

    But not to worry of course, we’ll be saved from such market failures and from being a backwater by (drum roll) FttN…

    Another face-palm please!

    • “Do the words “market failure” ring a bell to anyone? Seriously. Sometimes Australia feels like the biggest backwater on earth, dominated by a clutch of greedy telco and media corporations fighting each other for scraps…”

      It’s not just the telcos and corps, it’s the people that keep voting for the governments that allow it….

  8. Wouldn’t it be the ACCC playing a part in pricing? If Telstra is charging the other telcos more than it would charge an ISP it half owns?

  9. What it’s missing from this analysis is a bit of history. Telstra went into the Foxtel partnership as a defensive strategy and were quite naive about the PayTV business. The profits all flowed into the content companies (Fox Sports and Movie channels) which were not part of the Telstra/News/PBL JV. So Telstra had to pump money into the loss-making Foxtel, while Murdoch made money out of content.

    So now when Foxtel (operated by Murdoch) decides it wants to enter the broadband business, the shoe is on the other foot. It’s pay back time for Telstra!

    I don’t think that you can draw conclusions about Telstra’s future negotiations with third parties based on these Foxtel negotiations. There’s so much history between the two organizations.

  10. However, this telecom monopolies thing begins (and would end) with the state’s meddling in bandwidth/frequency affairs. Were it not so, then market forces would determine who gets what and new technology would constantly, like in software, like in hardware, like in bookselling etc. etc. gnaw at the roots of every little trying-to-form monopoly. Mind you, there ARE ‘natural’ monopolies, like in railroads or electricity – no one’s going to lay down the same track or cable twice into the same area (unless the incumbent provider would deteriorate his service/raise his prices to unconscionable levels.

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