commentary The story of how Telstra lost its network is one of hubris and bungling, of misreading the play in Australia by men from the US who thought they knew everything already. Shareholders should never forget this.
(Credit: Suzanne Tindal/ZDNet.com.au)
Telstra should by now be the owner of a monopoly fibre-to-the-node (FTTN) network — that is, its customer access network should have been modernised and the company should still be a private monopoly.
The FTTN network modernisation project was announced, along with a new 3G mobile network, soon after Sol Trujillo and his colleagues arrived in the country in mid 2005.
In early August, about a month after he took over, Trujillo presented Telstra's 2004-05 results to investors and the media and accused Telstra of under-investing in its core networks. He would fix this, he declared.
Trujillo announced that "Telstra and the government will commit to build a world-class, high-speed broadband infrastructure within 3-5 years."
That makes it 2008-2010 — split the difference and we're talking right now.
It would, said Telstra's new boss in 2005, cover 98 per cent of Australia's homes and businesses. "The government and Telstra will assume obligations to each other and to the public to build the network. Telstra commits to provide 6MB broadband to 87 per cent of homes and businesses ($3.1 billion), the government covers the remaining 13 per cent ($2.6 billion)." It had even been costed.
Within a couple of months the project was on hold and Trujillo's regulatory bruiser, Phil Burgess, was at loggerheads with ACCC chairman Graeme Samuel.
In December, the company announced to the ASX that the fibre-to-the-node component of the "Next Generation Network" program was "on hold" because it needed regulations that would "protect investment risk".
During 2005/2006, you may remember, Telstra's new management was rampant. Presentations were conducted in massive halls and there appeared to be a deliberate attempt to restore the company's confidence by making it arrogant.
Then Burgess and Samuel started a slightly amusing game of cat and mouse. They were never going to be close friends but they were enjoying each other's company. I remember talking to each of them through this time and they spoke respectfully about each other and said progress was encouraging.
In fact, at one point Burgess publicly said that the FTTN talks were 98 per cent there.
And then on 7 August 2006, Burgess overplayed his hand. An announcement went out headed: "Fibre-to-the-node talks discontinued".
"Telstra accepts that its negotiations with the ACCC over a fibre-to-the-node broadband network have reached an impasse."
Both Samuel and the Communications Minister Helen Coonan were shocked. They really had been 98 per cent there — the 2 per cent concerned nothing more than pricing in the bush, surely a minor problem.
But in his press briefing that day, Phil Burgess put that into a broad context: "I think there is clearly a conflict between the policy-making branch of the government and the regulatory branch of the government. The policy-making branch of the government wants a national uniform price, the regulatory branch of the government is pushing for de-average prices." He was talking about the pricing between cities and the bush.
But actually the breakdown, according to Burgess, was even broader than that: "We had a conflict in world view, we had a different view of how the world worked, we had a different view of cost and yet those differences of views were always carried out in the most professional manner and I have to say even sometimes with a lot of levity." This is despite being "98 per cent there".
That was the day — 7 August 2006 — that Telstra's future went off the rails. We'll never know whether Trujillo instructed a reluctant Burgess to end the talks, or whether Burgess said he was getting nowhere and recommended that the thing be called off.
I actually think both of them believed they were in such a strong position that the 7 August announcement would either cause both the ACCC and the minister to buckle and come to heel.
The Next G mobile network was two months from being switched on, and they would have already been planning the triumphant launch, complete with guest appearances from some of the world's great telecoms executives.
But they misjudged Graeme Samuel and his powerful influence with the government. Helen Coonan probably would have caved in — in fact she and John Howard were absolutely desperate to announce a broadband network, but Samuel held firm.
A year later they were all in election campaign mode and the ALP had announced its own $4.7 billion campaign promise for a fibre-to-the-node network.
That was always assumed to be a way for Telstra to get back into the game. Commentary after commentary patiently explained that only Telstra could build the FTTN, even if the new Labor Government sponsored it.
For a while we took seriously a plan from the coalition of Telstra's competitors — called G9, and later Terria — but I don't think anyone really thought anyone but Telstra could viably do it.
And then Trujillo made another mistake: he didn't put in a bid for the Labor Government's $4.7 billion broadband investment. More hubris, more bungling.
Stephen Conroy was infuriated, and this time Graeme Samuel didn't have to try to stiffen the minister's spine: he joined the gallery of spectators, including me, sitting back watching the bomb ticking, wondering how, exactly, it would explode.
The answer was that the expert panel appointed to consider bids for the FTTN subsidy also included some tough cookies, and at least one — Professor Rod Tucker — who was a fan of fibre to the premises (FTTP), not just to the node.
No one will tell me how, exactly, a government-controlled FTTP was first raised within the panel as a replacement for a subsidised FTTN, but in the end when none of the bids, including Terria's, was viable, they didn't just tell the minister that melancholy news — they offered an alternative: FTTP as a nation-building fiscal stimulus.
Beautiful. The government had a political strategy, Graeme Samuel had a complete victory over Telstra and the company had to sack Trujillo and the chairman Donald McGauchie and start sucking up to this minister with spine. But it was too late for that.
Telstra had bungled its way into being a different company, and Sol Trujillo and his mates are back home counting their loot.
Yes, Telstra shares went up last week, recovering what was lost after Tuesday's dramatic announcement that it will structurally separate.
But there should be no mistake about this: it is a tragedy for Telstra and the people who bought the company in good faith from the government, and it was entirely self-imposed.
Sol Trujillo and Phil Burgess should be sued for every penny they got out of the company.
This article by Business Spectator's Alan Kohler is reproduced on ZDNet.com.au courtesy of a reciprocal publishing agreement.
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She sounds hot, but looks like Sol going by the picture!