Monday, September 28, 2009

What is truth ... and other Telstra history tales

Kevin Morgan is a former union research officer who is probably better placed than many to tell the full tales of what went on in the last two decades of telco policy, especially in periods under Labour party rule.

However, when he goes out to write an article that starts "In a war the first casualty is truth" as he did in The Age then he better be prepared for close scrutiny.

Firstly he has a go at the suggestion that the current telco Bill corrects past mistakes. I share with him the view that it is an error to blame the industry structure on Kim Beazley for merging OTC with Telecom Australia. I agre that it was long standing ALP policy, but I do not think he is correct in claiming that the legislation to bring about the merger expired with the dismissal in 1975.

The proposal to merge OTC with Telecom was part of the outcome of the Vernon inquiry though the Commissioners could not agree upon it. Following the tabling of the report a sub-committee of cabinet was formed to implement the report and that sub-committee was tasked to include the merger of OTC into Telecom Australia (see the National Archives of Australia " Australian Post Office Commission of Inquiry - establishment of postal and telecommunications authorities - Decision 2237, 2293, 2398(EC) and 2422" Series number A5915 Control symbol 1066 Contents date range 28 Jun 1974 - 5 Aug 1974).

My recollection is that the cabinet decision following on from that sub-committee was to no longer pursue the OTC merger, and I think Kevin errs in believing that legislation was ever introduced. But I need to do more research.

As to the substantive effects, Kevin is right to indicate that OTC was in reality more of a bloated monopoly than Telstra, but also that its revenues were more open to attack from competitors. The basis for the Government decision was the expectation that global trend to competition in telecommunications would see the large firms competing in other countries. The merger was designed to better protect AOTC (as it was originally) from these global competitors, and to position it to globally compete. In reality neither occurred. While initial forays came from Cable and Wireless, BT, and threre RBOCs of Bell South in Optus) and Ameritech and Bell Atlantic (in Pacific Star with Telecom New Zealand) the outcome was that all retired. At the same time Telstra made a number of forays in India and other places, but once again none was successful.

The strategic lesson is that a firm whose core ability is to leverage its access network makes a poor entrant into another market.

Kevin seriously errs in his analysis of the Pay TV decisions. There was as far as I am aware no political pressure whatsoever brought to bear on Telstra to do a deal with News Corporation. Mark Westfield's The Gatekeepers is the best published account. Technically as John de Ridder has pointed out Telsra announced an investment in HFC before Optus did, but the decision that this was a Telstra/News JV came after it.

The pressure to do the deal came internally from Harvey Parker (in charge of consumer) and me (as Account Director for the media portfolio). Options to provide the cable on an open access basis were doomed to failure against plans from both Australis and Optus Vision. There was a group in headquarters determined to do a deal with a US cable company. However, history will show from the success of Foxtel, that if your strategy was to defend Telstra - this was indeed the deal to do.

There is a footnote to that deal that does require explanation - which is why wasn't the Foxtel deal, and Telstra's pursuit of Optus up and down streets like a kid following an ice cream truck "anti-competitive conduct" Optus thought so and sued Telstra for $900M (as noted in both companies annual reports in the late 90s) but the matter was settled for - in the words of Bill Scales to a Senate Committee "a pittance". The prospective member for Bradfield, Paul Fletcher, settled that - at I believe the Sheraton on the Park in Sydney - but the matter is officially confidential.

In an e-mail on 10 July this year, following comments he made at an AFR seminar,Allan Fels stated;

Regarding the merger of Foxtel and all of that, the story is much the same as I mentioned. At the time, in conventional Trade Practices Act terms there was simply not a case to be made against Telstra becoming involved with Foxtel because Optus was already in the field as a powerful looking competitor and it seemed to have a stronger offering and certainly at least an equal offering to what Foxtel and Australis Media had. In addition, as you will recall, Australis Media was an independent party.

The suggestion that Telstra "underwrote" News to the tune of $2B is an accurate representation of the Finances upfront. However, it needs to be considered against the observations made by Frank Blount (in Managing in Australia) that the Pay TV investment was value destroying, but not making it was more value destroying (I think $2B and $6B but I need to look it up).

The reality of why Paul Keating declined the suggestion made to him that there be geographic Pay TV monopolies was (a) the evidence being provided that competition could occur and was occurring and (b) the fact that the person asking was Kerry Packer.

Now Kevin finally suggests that nowhere in the material released by the Government is there a suggestion that Telstra (other than Pay TV) has a stranglehold "compared with other international telecommunications operators". This is like saying that no one has provided evidence that Jack the Ripper was evil "compared to other mass murderers".

Kevin, however, is at least the only person to really nail his colours to the mast. The rest of the defenders of the current arrangements state that there is no need for further reform to deliver competition. Kevin states;

Finally, it's an act of faith that a competitive bounty will be unleashed by destroying Telstra. We've heard it all before that competition will lead to lower prices and better service. Beazley promised it in 1991 and former communications minister Richard Alston said the same with full liberalisation in 1997.

What happened is Australia's performance has gone backward. It's the only fact in the Government's case that stands up to scrutiny. Why would more intrusive and destructive regulation now yield benefits that couldn't be unlocked before? Perhaps it might just be that it is the very construct of competition that is flawed, not its execution.

And that, surprisingly, is a view I have some support for. The question that has ultimately bedevilled telco policy is wheher there truly is a benefit from competition. The standard proof point offered is the continually declining prices. There are three possible responses to that;
1. The price declines also include responses to technology development, and no study has been done to apportion between the technology effect and the competition effect (a position I plan to rectify)
2. The decline in prices has in many areas been mandated by the regulator setting wholesale prices for the monopoly network - couldn't the same outcome be reached by a regulator setting retail prices for a monopolist.
3. The repeated claim that low prices are not reflecting required investment returns and hence resulting in under-investment.

Telco policy is far more vexed than any of the individual propositions advanced by protagonists allows for.

Note: If I find time I will provide more links in this item. I'm sure there was a later cabinet decision that reflected the outcome of the working party established by the decision above - but for the life of me I can't find it now.

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