It’s not as if the Australian government didn’t warn private broadband providers, notably Telstra.  For the past several years, Australians have endured expensive, slow, heavily usage-limited broadband service that has put the country well behind many other Commonwealth nations.  Australian Communications Minister Stephen Conroy finally warned the nation’s largest telecommunications provider if it didn’t move forward on upgrades and improved service, the government would be forced to step in to protect the national interest.

Instead of improving service, Telstra spent years stonewalling the government and the Australian public, while banking high profits for broadband service.  That’s a familiar story for North Americans, stuck with companies like Bell, Rogers, AT&T, Comcast and Verizon — all of whom seek ultimate control over what kind of service you receive, what you pay for it, and what websites you can and, perhaps down the road, cannot visit without paying a surcharge.

Australia is closing the chapter on this story with a happier outcome for its 22 million citizens.  Perhaps the United States and Canada could learn a thing or two from the folks down under.

Bringing U.S. Oligopoly-Style Management to Australian Broadband: The Sol Trujillo Years — 2005 to 2009

Telstra, a former government monopoly comparable to the American Bell System, was privatized in the late 1990s.  Telstra looked to the United States for a chief executive that had experience navigating that transition.  They found Sol Trujillo working his way up the management ladder at AT&T, finally culminating in chairmanship of former Baby Bell Qwest Communications.  Would Trujillo like to take on the challenge of managing Australia’s largest phone company? Trujillo signed on with as Telstra’s CEO in 2005 promising to modernize the business and to bring American-style innovation to the South Pacific.

Instead, Trujillo established an American-style rapacious oligopoly.

[flv width=”424″ height=”260″]http://www.phillipdampier.com/video/Nine Australia Trujillo War on Unions.flv[/flv]

Channel Nine in Australia reported on Telstra’s sudden interest in union-busting after Sol Trujillo arrived in 2005.  (1 minute)

In his first year at the company, Trujillo started an all-out war to get rid of Telstra’s organized labor, slashing 10,000 jobs to “save the company money” all while boosting his own salary.  What started as $3 million in compensation in 2005 would rise to more than $11 million dollars just four years later, even as the value of Telstra declined by more than $25 billion on his watch.

Trujillo alienated his employees and officials in the Australian government.  Then-Prime Minister John Howard attacked Trujillo’s salary boost as abusive.

“I’m not complaining about the salary I get but I do think the average Australian, who gets paid a lot less than I do … regards that sort of salary as being absolutely unreasonable,” Mr Howard said on Southern Cross radio. “And it doesn’t help the capitalist system, which I believe in very passionately, that some people appear to abuse it.”

Trujillo’s salary was 38 times greater than the highest official in Australia’s government.

The average Australian retiree gets by on $219AUS a week.

Trujillo had to make due with more than $211,000 a week.

[flv width=”424″ height=”260″]http://www.phillipdampier.com/video/Nine Australia Telstra Salary Hike.flv[/flv]

Channel Nine ran this report on the controversy over Sol Trujillo’s compensation package.  That old meme about having to pay high salaries to attract quality talent would have been more convincing had Trujillo’s policies not caused a $25 billion reduction in Telstra’s value.   (2 minutes)

Customers weren’t exactly endeared to spending more of their money on Telstra products and services.  Telstra had already embarked on cost controls for network upgrades, leveraged its monopoly power in many parts of the country with high rates for usage-restricted service, and bungled a critical application to participate in Australia’s National Broadband Network.

Australia’s National Broadband Plan, a roadmap for broadband improvements, set pre-conditions to involve small and medium-sized businesses in network construction.  Trujillo balked, demanding that Telstra — and only Telstra — should have the right to determine what kind of network should be built in the country.  More importantly, unless they exclusively ran it, the company would do everything in its power to block or destroy it.

The Sydney Morning Herald business reporter Ian Verrender was stunned:

Telstra has employed a three-step strategy to muscle out any competition.

It can be neatly condensed into three words: Bluster, Belligerence and Obfuscation.  We [just] saw it again in spades.

Telstra has been excluded from one of the most ambitious infrastructure projects announced by a Federal Government in decades: the construction of a national broadband network.

Could it really be that Telstra’s board and management were so incompetent that they could not get past stage one in a tender process of this magnitude?

After all, there were only four main criteria that had to be met. The first was the proposal had to be lodged in English. The second and third had equally low hurdles. Metric measurements – not the old inches, feet and miles – were required and the bid had to be signed. Nothing too difficult there.

But the fourth criterion appeared to stump Telstra. It didn’t include any plan for the inclusion of small business. And so the Communications Minister, Stephen Conroy, was obliged to exclude Telstra, an announcement that shook 12 per cent from the value of the country’s biggest telecommunications company.

This was no accident on Telstra’s part. It knew it was lodging a non-conforming proposal. Why, you ask?

The answer is simple. Telstra does not want a national broadband network, particularly one that involves anyone else. That includes taxpayers.

And if one has to be built, Telstra will do everything in its power to delay or kill the process. Yesterday marked stage one in a protracted war, ultimately designed to defeat one of Prime Minister Kevin Rudd’s key election promises.

Trujillo claimed yesterday that Telstra had been unfairly excluded from the process on a technicality. That’s just rubbish.

In recent months, the company, its chairman, Don McGauchie, and Trujillo repeatedly threatened to walk away from the tender process, and lodged the proposal only a few hours before the deadline.

Trujillo’s rhetoric yesterday was laced with the usual mixture of bravado and threats. He compared Australia to North Korea or Cuba. He declared only Telstra was capable of building the type of network required by the Government.

But two lines stand out. First this: “Customers make the choice of who they do business with; regulators and governments and others do not.” And then: “We reserve our rights regarding future action.”

The message is clear. Telstra will launch legal action at every opportunity – and even when there aren’t opportunities.

That time-honored American practice of simply suing your way through any legislative or regulatory roadblocks threatened to come to Australia.

The exclusion of Telstra from such a revolutionary broadband project didn’t sit well with the board or shareholders, and directly led to Trujillo’s ouster in 2009.  By then, he had alienated customers, the government, and just about everyone else.  Perhaps the government would allow a second look at a Telstra broadband application if it was submitted by someone other than Sol Trujillo?  It couldn’t hurt to find out.

[flv width=”424″ height=”260″]http://www.phillipdampier.com/video/Nine Australia Telstra Trujillo Quits 2-26-09.flv[/flv]

Channel Nine covers the ousting of Sol Trujillo, wondering what sort of golden parachute he’d receive on the way out the door.  (3 minutes)

Just weeks after leaving, Trujillo decided to settle scores with Australia, telling reporters that he thought the country was backwards and racist.

[flv width=”424″ height=”260″]http://www.phillipdampier.com/video/Nine Australia Trujillo Calls Australia Racist 3-09.flv[/flv]

Payback time.  Trujillo threw a hissyfit in a BBC interview calling Australia’s lack of laissez-faire regulatory policies backwards, and treatment towards him racist.  (Channel Nine – 1 minute)

The Post-Trujillo Era: More Arrogance and Ruthlessness, But a Communications Minister Outmaneuvers the Telecom Giant — 2009 to Present Day

Telstra spent the summer of 2009 attempting to heal the Trujillo-caused wounds with conciliatory statements in the Australian media.  Telstra’s new chief executive, David Thodey, admitted the company’s customer service record needed improvement.  He distanced himself from some of the more caustic comments from the former CEO, and claimed the company was on-track to be a major participant in improving Australia’s broadband experience.

But as the months progressed, Australia’s Communications Minister, Stephen Conroy ultimately concluded he was getting the lip service treatment that Telstra had delivered Australians for years.  Conroy, already suspicious of the company’s control-minded tendencies, quietly began bending the ear of Prime Minister Kevin Rudd.  Conroy had watched Telstra’s steadfast refusal to work constructively towards a National Broadband Network (NBN).  By last summer, the company was making proposals for underwhelming broadband expansion.  Fiber optic broadband was unnecessary and expensive, they said.  Besides, the service Telstra was providing was already good enough.

Australians didn’t agree.  Part of the platform that brought the Rudd government to power was the promise of better broadband service in Australia.  Waiting for Telstra to provide it was a futile exercise.

Conroy told Rudd the government should not be setting its broadband policy agenda based on what worked most conveniently for private providers.  If they won’t move, then let’s get them out of the way, Conroy suggested.  Rudd, working for the interests of the Australian people — not just a handful of telecom companies seeking riches with substandard service at monopoly prices, agreed.

After reviewing the proposals submitted to design and construct 21st century broadband service for Australia, Rudd dismissed them all, calling them inadequate.  The government, he announced, would go it alone and build the network itself — delivering a fiber to the home network for 90 percent of Australians on an open network available to any provider that wanted to rent access at wholesale rates.

More importantly, Conroy was not going to allow Telstra to continually block progress on the NBN.  Conroy was not some supine minister willing to compromise away the goal of super-fast affordable broadband.  His critics called him Machiavellian, slashing and burning anything that stood in his way.  But Conroy was steadfast — corporations would never be allowed to dictate broadband terms to the government.  He warned Telstra to cooperate or face the consequences.

Telstra continued to stall and stonewall, and last September, the Rudd government delivered what it promised — a forced break-up of Telstra.  The company was given a choice — either sell back its copper wire landline network to the government or divest itself of satellite TV service Foxtel and lose access to any additional wireless mobile frequencies for Telstra’s cellular service.

The equivalent in the United States would be to declare fiber to the home to be in the national interest, and if AT&T and Verizon didn’t deliver it to nearly every home in their service areas, the government would move in and do it themselves, taking back ownership of the AT&T and Verizon’s infrastructure along the way.

[flv width=”512″ height=”308″]http://www.phillipdampier.com/video/Network 10 Aus Telstra Break-Up 9-15-09.flv[/flv]

Network Ten covered the announced break up of Telstra by the federal government.  (2 minutes)

[flv width=”512″ height=”308″]http://www.phillipdampier.com/video/Nine Network Telstra Breakup 9-15-09.flv[/flv]

Channel Nine ran several reports on the announced breakup of Telstra, including an interview with the opposition.  (6 minutes)

Australia Declares Broadband a Utility Service that Private Providers Cannot Control

Monday marked a day in history for Telstra, agreeing to sell back its copper wire landline business (for which it will receive $11 billion in compensation).  In return, Telstra is assured wholesale access to the new fiber broadband network, and can market products and services on it.  It cannot, however, serve as a gatekeeper to keep competitors out nor maintain virtual monopoly service, especially for less suburban and rural customers.

Some telecom analysts believe the deal is actually good news for Telstra, if they’d see beyond their control tendencies.  After all, they say, Telstra gets to rid itself of a legacy copper-wire landline network that is expensive to maintain and serves a dwindling number of consumers, many who have switched to wireless.  They also get to develop and market new high bandwidth applications on a network they are no longer responsible for financing.

It’s a win for the government as well who gets a single, national fiber network built in the public interest, which makes it far easier to recoup the billions in costs to build it.  They’ll even likely make a profit suitable to defray the costs of subsidizing wireless broadband service for Australia’s rural residents, to be served with at least 12Mbps connections.  No cost-recovery fees on customer bills, no usage limitations that restrict innovation, and broadband that serves everyone, not just a handful of corporations that seek to monetize every aspect of it.

Conroy wouldn’t think much of America’s National Broadband Plan, which relies near-exclusively on private providers voluntarily doing the right thing. Conroy stopped putting blind faith in Australia’s large telecommunications companies.  The Obama Administration hasn’t.

We’ve seen millions spent lobbying to permit a handful of providers to control broadband service on their terms.  Few will provide fiber to the home service and many are content leaving rural Americans with dial-up service.  With dreams of Internet Overcharging schemes to manipulate usage to maximize profits even higher, things could get much worse.  What’s right for AT&T isn’t right for us.

For Australia, who has lived under such monopolistic broadband regimes for over a decade, a National Broadband Network without arbitrary usage limits and available to all — rural and urban — is the promised land.  It will leapfrog Australia well ahead of the United States and Canada, with far faster speeds and better prices, all because a government stood up to a corporate provider that preferred to overpay its executives instead of getting the job done right.

Australia had a reality check — broadband is a utility service necessary for every citizen who wants it.  Just as electrification and universal phone service became ubiquitous in the last century, broadband will also join those services in the years ahead as commonplace in nearly every home.

If only the strength and conviction that is fueling Australia’s broadband future could also be found in the United States, where too often what is urgently needed today gets frittered away into “maybe we can have it someday” compromises with big telecom and their lobbyists.  That isn’t good enough.

ABC National Radio interviewed telecom analysts about the implications of today’s deal with Telstra to retire Australia’s copper wire phone network (June 21, 2010) (4 minutes, 17 seconds)
You must remain on this page to hear the clip, or you can download the clip and listen later.

<

p style=”text-align: center;”>

AT&T is threatening to pick up its toys and go home if the Federal Communications Commission tries to bring back its oversight powers over broadband.

CEO Randall Stephenson threw a major hissyfit in the pages of the Wall Street Journal, annoyed the company doesn’t have free rein to do whatever it wants.

“I’m a 3-2 vote away from the next guy coming in and [trying to regulate us], [and] I take it away,” Stephenson said, referring to it’s U-verse IPTV service.

AT&T has threatened to cut spending on U-verse deployment if AT&T faces regulations like Net Neutrality in its broadband business.

“If this Title 2 regulation looks imminent, we have to re-evaluate whether we put shovels in the ground,” Stephenson said, claiming the company planned to spend a “couple billion” dollars a year on the service… until now.

But AT&T has already cut spending on U-verse, slashing $2 billion in U-verse investments in 2009 alone — news trumpeted to shareholders.  Additionally, AT&T has laid off thousands of employees.  In short, the threats the company made this week have already come to pass… more than a year ago.

Many analysts claim AT&T is bluffing.  Like most landline providers, AT&T is losing traditional phone customers who are disconnecting their wired phone lines.  Its wireless division has been pummeled for inadequate 3G coverage, poor customer service, and lousy reception in many areas.  AT&T can’t afford -not- to upgrade their services if they wish to retain customers.

The cable television industry certainly hopes AT&T isn’t bluffing.  They are enjoying AT&T’s disconnect business as customers dump inadequate DSL service and overpriced phone lines for cable-provided alternatives.

Goldman Sachs has reviewed the implications of Frontier Communications assuming control of millions of Verizon landline customers, and promptly downgraded their stock to a Neutral rating, telling investors the upcoming consolidation will hasten eroding revenues at Frontier.

“Consolidation of the underperforming acquired assets causes an immediate step-up in revenue erosion for FTR (-6.3% in 2010). In addition, the combined company’s initial EBITDA margins will be significantly below those of legacy FTR (pro forma of 48.0% in 2010, 470 bp below legacy FTR).”

Analysts added, “We expect longer term EBITDA margins of 50%-plus, driven by synergy realization (we forecast $450 mn/year by 2013), and moderating revenue declines, as FTR is able to bring a more localized focus to assets that were not a primary focus inside of a much larger Verizon entity. We forecast 2011/2012 FCF of $950 mn/$921 mn, as synergies and margin expansion only partially offset continued (but moderating) revenue erosion.”

In English, that means Frontier will benefit from its larger customer base in reducing expenses on a per-customer basis, and could become a big enough player to realize some benefits from rolling out services to a larger number of customers nationwide, but those benefits will be tempered by the ongoing loss of revenue as customers dump Frontier landlines for wireless and, where available, switch to a cable modem product to get better speeds and consistent service that Frontier DSL does not provide.  Losing that 5 GB monthly usage allowance won’t hurt either.

Frontier is betting a good deal of the company on expanding broadband service in its largely rural service areas, where many Americans are still stuck relying on dial-up or satellite fraudband, the service that promises a broadband experience but doesn’t come close to actually delivering one.

As long as Frontier doesn’t face competition in its markets, it can deliver 1-3 Mbps DSL service for up to $50 a month and bank those profits as a firewall against ongoing loss of landline revenue.  But if new players arrive, such as LTE wireless, WiMax, cable, or municipal fiber, Frontier’s business plan could go awry in a hurry.

Frontier also continues to pin its hopes on its enormous payout of dividends — sometimes exceeding 12 percent.  The stock is currently the best dividend payer in the S&P 500.  With dependable dividends and the ability to throw back free cash to investors, shareholders can’t ask for anything more.  In the first quarter alone, free cash flow amounted to $152 million and the company paid a dividend to shareholders representing 52 percent of that amount.  That’s $152 million Frontier won’t be spending to upgrade their service or have on hand to pay down debt.

For independent legacy landline providers like Frontier, reducing that dividend could spell disaster for the company’s stock price. Even investors understand this, which is why these kinds of cautionary notes are often attached to coverage about the company:

A cautionary note: telecoms companies with large fixed line exposure generally yield high dividends presently because investors do not believe their revenues and income levels are sustainable as people continue to substitute mobile phones for fixed lines.

The Federal Communications Commission’s approval of Frontier’s takeover of 4.8 million Verizon landline customers in 14 states comes a year after the company announced the deal.  Frontier joins three other independent phone companies — FairPoint Communications, Windstream Communications, and CenturyLink zealously trying to grow their companies with additional mergers and acquisitions to avoid being swallowed up themselves.

What is common among all four companies is they rely heavily on dividend payouts to keep their stock price as high as possible.  That was a formula for disaster for FairPoint, the first of the four to end up in bankruptcy after a similar deal with Verizon in northern New England caused the company to falter.  Service and billing deteriorated, customers fled, and promises for better broadband were broken.  Now Frontier is following in FairPoint’s footsteps with more than 4.8 million new customers Frontier hopes they can swallow.

The FCC’s statement approving the merger reads like a press release for all involved, and delighted FCC Chairman Genachowski, who called these meager requirements “robust”:

Coming one week after the final state approval for the transaction, the FCC’s Order holds the applicants, Verizon and Frontier, to enforceable voluntary commitments, including:

• Extend faster broadband to more Americans: Frontier will significantly increase broadband deployment for the lines involved in this transaction, only 62 percent of which are broadband-capable today. Specifically, Frontier will deploy broadband with actual speeds of at least 3 Mbps downstream to at least 85 percent of transferred lines by the end of 2013, and actual speeds of at least 4 Mbps downstream to at least 85 percent of the transferred lines by the end of 2015, with all new broadband deployment offering actual speeds of at least 1 Mbps upstream.

Frontier’s broadband commitment gives the company a full five years to meet the bare minimum speed considered to constitute broadband in the National Broadband Plan.  One hopes Frontier doesn’t break into a sweat offering a piddly 3 Mbps service to homes using yesterday’s DSL service until then.  While Verizon’s rural castoffs get stuck eventually with 4 Mbps DSL, many of the company’s remaining customers are enjoying 50Mbps service over an all fiber network.  The FCC is accepting an urban-rural divide for broadband which will benefit the phone companies while leaving rural customers in the dirt.

Deploy fiber to libraries, hospitals, and other anchor institutions: Frontier will launch an anchor institution initiative to deploy fiber to libraries, hospitals, and government buildings, particularly in unserved and underserved communities.

Fiber for these locations sure, but no fiber for you or I.  Frontier, like most other telecom companies, loves to promote the benefits of fiber without actually deploying it to homes.

Promote competition: Frontier and Verizon have made a series of commitments to protect wholesale customers, including honoring all obligations under Verizon’s current wholesale arrangements that are in effect at closing.

Since wholesale customers often depend on the same network other customers do, if a company doesn’t deliver robust broadband into a state like West Virginia, there isn’t a robust service to sell to those wholesalers.

Improve data quality and collection: Frontier will make available to the Commission data on its broadband deployment progress at an unprecedented level of detail to enable effective monitoring of Frontier’s compliance with its commitments.

The Commission concluded that the commitments that applicants have offered, coupled with monitoring and enforcement by the Commission, will minimize the risks of harm and ensure that this transaction is in the public interest.

Considering how weakly the FCC is committing itself to protecting rural customers from being dumped into the broadband backwater Frontier has on offer (complete with the 5GB monthly usage allowance), does collecting statistics help when things go sour?  Regulators collected statistics in New England when FairPoint failed, but that didn’t get service levels back until Maine, New Hampshire, and Vermont threatened to toss FairPoint out.  Now the company is in bankruptcy and regulators are negotiating which of the promises FairPoint made can be let go ‘for the sake of the company.’

That’s why it’s so ironic to read editorials that proclaim the FCC is on some sort of power grab when they seek to restore what meager authority they exercised over broadband before a DC Court effectively excluded broadband oversight from their portfolio.

It will be a good day when federal agencies like the FCC start worrying first and foremost about consumers instead of how to make a parade of overpriced mergers and acquisitions succeed for the companies involved.

[flv width=”480″ height=”380″]http://www.phillipdampier.com/video/WANE Ft Wayne Verizon hanging up on local landlines 5-24-10.flv[/flv]

WANE-TV in Fort Wayne warns viewers their landline company is about to change asVerizon vacates the area by July 1st.  (1 minute)

[flv width=”480″ height=”380″]http://www.phillipdampier.com/video/CWA Verizon Dont Take the Money and Run in WV.flv[/flv]

Too late.  The Communications Workers of America ran this ad spot asking the West Virginia governor to intervene and stop the sale.  (1 minute)

Do you or someone you love still have an old looking rotary dial or traditional bell ringer phone mounted to the wall or installed in the bedroom?  Are you sure they still aren’t paying a rental or leasing charge for that phone?  Many customers, particularly the elderly, have no idea they need not continue to pay fees up to $90 a year for a phone manufactured at a time when color television was a novel concept.

A legacy of the old Ma Bell phone monopoly, telephone companies used to own every piece of equipment attached to their lines.  Individual customers would pay a monthly fee to lease telephone equipment that was approved by the phone company to work with their service.  By the early 1980s, nearly every American home had a kitchen wall phone and one or more extensions, usually installed in the living room or bedroom.  Manufactured by companies like ITT, Stromberg-Carlson, AT&T or Comdial, these phones were built to last… and pay for themselves many times over by unaware consumers who don’t realize the days of renting phones are long gone.

After the breakup of AT&T, most phone companies began telemarketing campaigns trying to convince consumers to buy their formerly leased phones.  Those who did now own these classics outright.  Many who didn’t returned them and bought their own new phones.  But more than a million consumers did neither, and continue to pay phone equipment rental fees to this day.  Even as phone companies abandoned the phone rental business, not everyone got the message.

Most phone companies sold off their remaining leased customers to third party companies long ago, including QLT Consumer Lease Services in Miami and Ft. Worth.  QLT has several hundred thousand customers paying quarterly lease fees for telephones often years old.  The company itself admits the majority of its customers are retired, elderly consumers.

QLT markets refurbished bell ringer phones at some surprisingly high prices:

• A traditional desk or wall retro-rotary dial telephone, which many under 30 have never seen before, costs $4.45 per month to rent.
• The glitzy-for-its-day lighted dial Princess phone costs $6.95 a month.
• Big button touchtone phones run $8.85 a month.

QLT informs customers they cannot buy the phones at any price — they must lease them.

QLT claims its customers appreciate the familiar phones from an earlier era, and the bell ringers are louder, too.  Customers can exchange a broken phone within a day after the company is notified, if they can figure out how to install the replacement.

But it’s an extraordinarily high price to pay for classic phones, especially when replacements can be purchased outright for less than $20.  But many QLT customers don’t realize they have that option.  While the company also pitches decidedly non-phone-related services like roadside assistance plans and health care discount cards, it doesn’t spend any time or effort informing customers they can buy their own phones.

So next time you visit your older relatives and see a classic phone, perhaps it would not a bad idea to ask if they’re still paying for it.

[flv width=”640″ height=”500″]http://www.phillipdampier.com/video/WBAL Baltimore MD Many Older Residents Still Renting Phones 5-25-10.flv[/flv]

WBAL-TV in Baltimore found one woman still paying $90 a year for a phone that had been attached to her kitchen wall around the time Ronald Reagan was inaugurated president of the United States.  (4 minutes)