Does Thodey have a deal in the CAN?

Winston Churchill is credited for a whip-smart exchange with a woman that ended with the kicker "we've already established [what kind of woman you are]. Now we are haggling about the price."

(Laying cable image by Library of Congress, No known copyright)

Churchill's bon mot seemed apt as Telstra CEO David Thodey and CFO John Stanhope fronted a mob of concerned investors at the company's Investor Day this week. Over the course of the morning, it became clear just how far removed the Telstra of today is compared to the Telstra of a year ago.

Among the revelations at the event: Telstra concedes its pricing is too high and is set to lower broadband prices, uncharacteristically conceding the need to compete on price and value in a market it has so far ruled by sheer size alone.

Also significant: apart from a few choice ADSL2+ upgrades, Telstra is refusing to invest more than the minimum necessary to keep its customer access network (CAN, aka the copper loop or PSTN) ticking over. "We won't be doing anything we don't have to," Thodey said.

Thodey was reiterating a position that more and more seems to suggest Telstra is distancing itself from the contentious network. Indeed, the Thodey-Stanhope show confirmed that Telstra is indeed ready to sell off the CAN if it's offered the right price — and if the government backs down on its demands that Telstra divest itself of its Foxtel stake and HFC network, and lift the ban on Telstra eventually acquiring wireless spectrum to support next-generation LTE mobile services.

The Telstra Thodey presented to investors at the meeting seemed stalwart yet humbled

"If those conditions are met, structural separation appears to be a win-win for shareholders, the government, NBN Co and the nation," Stanhope said with the clarity and confidence of someone who had been saying this sort of thing all along.

But, of course, Telstra has been saying no such thing all along: it has remained vehemently opposed to the idea of separation in any form. Even Stanhope has been party to the FUD campaign against separation, warning in August of the risks of "extreme" forms of separation. This is the same John Stanhope that sat alongside Sol Trujillo at countless events as he railed against separation "stupidity" and said "shareholders should shoot management if they ever agree to something like that".

Draw your weapons, shareholders. A year later, Trujillo is out of the picture and the Thodey-led company is taking a much more conciliatory, realistic posture than ever. The Telstra Thodey presented to investors at the meeting seemed stalwart yet humbled, somehow, as it fights to preserve its dignity and interests while seemingly losing ground in its knock-down, drag-out battle with the government.

It has no other choice: debate over the Telecommunications Legislation Amendment (Competition and Consumer Safeguards) Bill 2009 now seems certain to happen before the year's end, and stonewalling is only going to dilute Telstra's ability to walk away with something it wants. Instead, it seems Telstra now considers the sale of the CAN inevitable; its main concern, in Churchillian style, is how much the network goes for — and how the consideration is structured.

That the dialogue has moved past questions of whether Telstra will part with the CAN, reflects a major shift in posture that Conroy must be credited with extracting, especially given Telstra's previously-staunch determination to fight the current legislation.

Just how things are going to change, however, is still up in the air. There has been rampant discussion about NBN Co buying the CAN — which would give the government access to the infrastructure it needs to make the NBN work — but an investor's question to Thodey made clear that the government and Telstra may still be poles apart on the acceptable terms of such an exchange.

Does the government understand that equity in the NBN is completely unacceptable for [Telstra] shareholders?

"It's very clear that if you do vend assets into NBN Co to enable the build, that you cannot accept equity in NBN Co as consideration," the question went. "Does the government understand that equity in the NBN is completely unacceptable for your shareholders?"

Thodey's answer was measured but firm: "Does the government understand that? Yes, I think they do. But have they accepted that? I'm not sure they've accepted that. I could not come to the board or to the shareholders with anything unless it's very clearly defined in terms of what returns we would get. We've made that point to the government and will just have to see how that plays out."

This puts Conroy in an uncomfortable position: Telstra is willing to negotiate, but is drawing Conroy into a contentious argument about fair compensation for the CAN — in cash, not empty promises about the NBN's theoretical potential revenues. If Conroy refuses to give ground, Telstra will look like the gentle giant and Conroy like the tyrant; if NBN Co pays vast sums to acquire the CAN, Conroy will face the politically unpalatable situation of having paid handsomely to buy a major Telstra asset from its shareholders. Such a move would only compound the NBN's tenuous financial situation, especially if the government can't dangle NBN Co equity to offset the cash outlay.

And that, as anybody can guess, is a far from ideal outcome — especially since by Thodey's own admission the CAN is not being actively updated at any great pace. Such a deal would add a major cost to the NBN's price tag, although just how much that cost would be is up in the air after Conroy's claimed-to-be-accidental-but-nobody-believes-it leaking of Telstra-confidential information finally put the disputed figures into the public forum.

There's a big gap between $8 billion and $40 billion, although Telstra has naturally distanced itself from both numbers. Figures aside, it seems the wheels are now well and truly in motion: despite its initial defiant stance, Telstra is coming to grips with reality and steeling itself — and its investors — for major changes ahead.

Does Telstra's new pragmatism suggest Conroy has won the battle? Or has Telstra just secured the upper hand and cut straight to the chase?