Let's talk about Telstra and the NBN ... again

Today Stephen Bartholomeusz has followed up the item by his colleague Alan Kohler that I wrote about yesterday.

Stephen repeats the ground on the valuation gap but notes that any direct compensation by the Government to Telstra would need to be on budget and real.

That is very different to the NBN itself. Tony Abbott today was reported as suggesting that he'll save the budget by thre things, the magic public service cuts, cancelling the BER program and cancelling the NBN. We all know that public service cuts never reveal much and that Tanner is being pretty brutal on that anyway. The BER money will all be spent before Tony would have any post election chance to stop it. And the NBN is not a $43B on budget item, it is on budget only for $4.7B of which $2B was the communications fund. The marginal cost of the NBN is less than one year of the cost of Mr Abbott's parental leave scheme which he proposes to fund with a GREAT BIG NEW TAX. (All in caps because that's how Tony alway says it).

The point is that while there is no savng to be made by cancelling the NBN, the Government has no political rationale for paying Telstra compensation.

It looks that this Telstra strategy about the Government funding the difference is driven by the same Telstra strategy that thought that access prices should not just be based on cost but should effectively reimburse Telstra for foregone monopoly profits. They dressed this up in multiple ways over time, but it always amounted to the same thing.

There is some merit in the idea that the shareholders of Telstra bought the asset expecting to retain these rents - in the economics biz it is called capitalising the rent. But the prospectus for each float repeated the Government's policy in relation to telecommunications - which has always been about competition and has always therefore been about extracting rents. To buy the shares expecting the continuation of those rents was irrational (hands up all those shareholders who want to admit to making an irrational investment decision).

Ultimately the question is, as Stephen notes, how much pain does NBN Co need to endure if it has to go head-to-head with Telstra? The first thing to note is that Telstra's "threats" of competing with an alternative access strategy are this time all nonsense. They can't get enough wireless out there, they have major building access issues with HFC and they should be cricified by sharehlders if they try to over-invest in their PSTN. There might be an unhealthy period, but if the Government says "if it takes an extra $XB to make this happen we will do that by subsidising NBN Cos losses not Telstra's shareholders" then it is all over.

Telstra's strategy seems to be to convince analysts and media that the deal hinges on the Government topping up the difference, which then gives them nowhere to go when the Government still doesn't act.

Telstra also hasn't thought hard enough about just how many other ways the Government can make their life uncomfortable. enying access to spectrum is only one element of it.