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Why The Federal Government Is Stuffed Without Telstra

By David Richards | Monday | 15/12/2008

COMMENT: The decision by the Federal Government to cut Telstra from the proposed National Broadband Network bid is bold in the extreme and could well leave Communications Minister Senator Conroy with egg on his face just in time for the next election.

 The decision smacks of politics and arrogance. On one side you have Telstra, a well-established communications Company with a wireless broadband network that is often described as being the best in the world.

They have a service and support network right across Australia, as well as an existing network of fixed line exchanges and a broadband network that reaches most Australians either via a cable network or ADSL.

To exclude Telstra in favour of a rabble of other contenders, some who are foreign-owned, is a high-risk game that I believe will backfire.

The panel has eight weeks from the close of tenders on November 26 to make recommendations on who should be handed the job of building the network, into which taxpayers will invest $4.7 billion.

The other bidders include Singtel Optus, Melbourne-based Acacia, Canadian group Axia, the Tasmanian Government and Canberra utility group TransAct.

I don't own any Telstra shares and while they have declined 6 percent today, my bet is that long term, Telstra will win this battle.

What is being proposed is going to take at least 5-6 years to build. It will cost billions. It will need a massive build infrastructure and then a massive service infrastructure to support the network after it is completed.

At the same time, this network is going to have to compete with Telstra, who by the time the National Broadband Network goes live, will have their own high-speed Broadband offering.

In fact Telstra could well have a 100Mbs Wireless network up and running with 18 months. This will allow users to access fast broadband from almost anywhere in Australia.

Already PC and device vendors are building Telstra Next G wireless chipsets into notebooks and tablet PCs for the existing network and in the future these chipsets could be built into Telstra Gateway boxes as well as set top boxes from the likes of Sony, LG, Panasonic or Samsung. They will go into PC's eliminating the need for an external modem. For those who want multiple connections in a home or small medium business Telstra already has a gateway offering for their Next G service.

Today's decision could well end up costing every Australian billions of dollars - a bit like the Lane Cove and Harbour Tunnels in NSW, which are already costing NSW consumers hundreds of millions.

Telstra are a very savvy marketing Company and you can rest assured that they will come out fighting. They have an established customer base and a new billing system. They are currently building up access to content, which is going to be a key part of the broadband game going forward.

One only has to look at the failed OPEL Network deal to get a taste of the potential pitfalls that are ahead for the Federal Government. 

This was a consortium between Optus and Elders who were given $958 million to start a wireless broadband network for regional Australia in June 2007, only for new Federal Communications Minister Stephen Conroy to dump them 10 months later alleging they hadn't met the criteria of the contract.

At today's analyst briefing Telstra gave this as an example of how other companies do not have the ability to fulfil the contract.  Telstra CEO, Sol Trujillo, took a pot shot at the companies left in the bidding stating, "[The Government] needs to be aware that of the entities left, none have the staff or engineering capabilities, don't have the trucks, don't have the people, don't have the framing, don't have many of the resources needed to get started," he said. "And it's another thing to get started and to build the network…but then you have to have the capability to run it. Then there are a lot of interconnection decisions that have to be made. Telstra is the only company that can do this over alternative groups."

While Telstra have their faults and their service downright lousy at times, they are an extremely solid and well run telecommunications Company, who, unlike a lot of their global competitors, have to deliver a massive communication networks for a mere 21 million people.

In the US and Europe the same networks would be servicing 100s of millions instead of a mere 6,000,000 households or 21,000,000 people.

Conroy can build this network without Telstra and it will cost him billions in tax payer's money. But will he get a return on his investment and will the network be successful? I doubt it as he is going to have to put up with a lot of politics and squabbling, and there is every chance that he is going to hand to a predominantly foreign-owned operation a key piece of Australian infrastructure.

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