NBN Co points finger at Telstra on CVC “margin squeeze”

This is the second in a series of blogs on the ACCC telecommunications Market Study.

The first blog post covered NBN Co’s initial submission to the the ACCC’s market study back in November 2016.

In this post I look at NBN Co’s recent supplementary submission to the market study in which, amongst other things, it attempts to defend its CVC pricing.

One part of this defence (see section 3.3.5) relates to the claim by some RSPs that the CVC pricing is causing a “margin squeeze”.

With some justification, NBN Co asserts that such a “squeeze” would require NBN Co to be active in the retail market. How can NBN Co squeeze the market when it is just a supplier?

Instead it points the figure at the RSPs who have retail market power which allows them to price profitably at lower prices than others.

Telstra is singled out as having reduced its retail price by 20% on NBN Co’s most popular plan over the last 6 months. By implication, it is Telstra, the “dominant access seeker” who is causing the margin squeeze not NBN Co.

This must induce some rye smiles from some of the employees of Telstra who were continually accused of causing margin squeezes on their competitors during the early days of ADSL broadband in Australia when Telstra dominated the wholesale and retail broadband markets.

The smiles might break into laughter when they remember that some of the same executives involved in the claims and counter-claims are current and former directors of NBN Co.

As CEOs of iiNet and Internode respectively, Simon Hackett (a former NBN Co director) and Michael Malone (a current NBN Co director), had numerous run ins with Telstra on the question of fair pricing for ADSL broadband.

In the 2010 “price squeeze” episode Hackett summed up the problem for IT News as follows :

There is no doubt that this ‘price squeeze’ is due to intentional inaction – as this is the third time (at least) that this has happened since the year 2000, its not appropriate for Telstra to claim this to be either surprising nor hard to understand.

The reason why this matters is that Telstra is, and remains, the unique holder of Substantial Market Power as a monopoly provider of voice and ADSL2+ services for at least half of the entire Australian population. Because of its monopoly status, its activities fall under provisions of the Trade Practices Act through which Telstra has seen ACCC enforcement action via Competition Notices in the past.

It is, however, a clear demonstration that when Telstra speaks of competing ‘fairly’, they are using a different definition of ‘fair’ than I would use.

This is the sort of anti-competitive behaviour that underscores how vital it is that there is ultimately either structural separation of Telstra or the completion of the level playing field of the NBN – or preferably both.

The last paragraph is particularly ironic. Hackett sees Telstra’s structural separation and implementation of the NBN as the ultimate solution.

Malone, in the same article, said :

In our opinion, they are misusing their market power in wholesale ADSL to give themselves an unfair advantage in retail.

That’s one more reason why we need structural reform for the industry.

Hackett and Malone’s previous statements highlight that despite industry reform, we are still seeing allegations of Telstra having substantial market power.

What is even more ironic is that some of the architect’s of Telstra’s original broadband strategies are also on the board of NBN Co – namely Ziggy Switkowski and Justin Milne.

In a recent interview ($$$) for the Australian Financial Review, Milne waxed lyrical about the “fun” he had in the good old days at Telstra when he woke the giant up to the benefits of the internet.

The NBN Co boardroom knows these old industry games all too well.

The easy way out for NBN Co is to continue to blame the old foe – Telstra.

There is no acknowledgement that the squeeze may be a result of an increase in costs to RSPs on the NBN compared to previous ADSL networks. In the large migration from one network to another there is a naturally a need to keep retail prices constant to avoid market share loss by RSPs. The only way to do this, if input costs are rising, is for RSPs to reduce margins and also skimp on CVC bandwidth to reduce their costs somewhat. Customers suffer through lower quality services and RSPs through reduced margins. 

NBN Co seems to be in denial over its affect on retail prices and quality of the service just like it is in denial that it is in fact a monopoly with substantial market power (see previous post).

But whether it is Telstra or NBN Co causing the squeeze, what is clear is that the NBN industry reforms seem to have failed to address the long standing complaints of price / margin squeezes.

May be the same complaints are caused by the same fundamental feature of the market both pre and post NBN – an infrastructure monopoly. This monopoly may have shifted from one company to another but the core problem is the monopoly itself rather than who is the owner or manager of it.