Telstra finds old rules apply to new economy

By GILES PARKINSON

Sydney view

Ziggy Switkowski is about to become a very frustrated man.

He wants two things in his life as the chief executive of Telstra Corp: full private ownership and carte blanche to grow and be globally competitive. He'll be lucky to get either.

Telstra, since its inception as a corporate entity, has always been the big boy in town and it is the way it is used to doing business.

It has known competition only in the past few years, yet in every one of its major business segments it still dominates the market with at least a 50 per cent share.

The challenge for Switkowski and Telstra is to duplicate that market dominance in the so-called new economy, the one that is based around electronic commerce and all the possibilities that it offers.

The possibilities for Telstra are enormous. The former single-purpose telephone utility has the opportunity to use its massive infrastructure and financial clout to move into mainstream media, retail and marketing.

In the past week, however, Telstra got its first taste of how much harder it will be to dominate the new economy than it was to control parts of the old.

Telstra wants to buy the Australian residential internet subscriber business from OzEmail, owned by American giant MCI Worldcom.

It suspected the deal might not pass muster at the Australian Competition and Consumer Commission and asked for a preliminary ruling. Its suspicions were correct.

The $300 million merger of its internet service provider (ISP) with that of OzEmail would give Telstra a 43 per cent share of that market - not huge by Australian standards, but significant in this industry because none of its 750 or so competitors has more than 6 per cent.

Telstra argues that the rules of engagement have changed with the advent of cyberspace, rather like the introduction of the tank issued a particular challenge to horse-mounted cavalry last century.

But the commission chairman, Allan Fels, insists that the business principles of the old economy will still apply in the new, at least for the time being. And on Friday, he made that point very clearly.

"With the removal of OzEmail as a separate business entity in the provision of residential internet subscriber services, the ACCC is concerned that there is a danger to competition because a vigorous and effective competitor to Telstra would be eliminated," Professor Fels said.

Telstra, of course, is getting no support from its junior rivals.

This deal is not simply a pitch for subscriber numbers. By controlling such a large share of the market, Telstra hopes - and companies like C&W Optus, AAPT and One Net fear - that it will be able to control the flow of the advertising dollar in the new medium.

Telstra says it is not fussed by the preliminary ruling and wants to continue talks this week with Fels.

The pitch will go something like this: the ISP market has a huge number of players and is extremely dynamic, and the ACCC should be looking at this on a global basis.

If Telstra wants to compete with the big overseas companies, it needs to be able to grow.

This argument has been used for years by the building and manufacturing industry in Australia to no avail and so far it seems that the ACCC is unmoved by the global economy pitch. The old is holding sway over the new.

Prime Minister John Howard is showing signs of being sympathetic to Telstra's plight, if that is what it can be called.

In a speech on Friday he talked of the company's need to strike new partnerships and joint ventures to allow it to compete in the global communications marketplace.

It is why Howard is happy to try to sell the Government's remaining 51 per cent stake, because the prospect of stakes in newspaper companies and other "unnecessary commercial involvements" could make life complicated for the Government.

But unless he can produce a piece of political genius, the idea of a fully privatised Telstra is doomed by a hostile Senate until at least the next election.

Battling the Senate and the Fels' ACCC cavalry is going to make Switkowski's life a lot more complicated than it is for his overseas rivals and his dream of a Telstra superhighway into every room of the home that much more difficult to realise.

* Giles Parkinson is deputy-editor of the Australian Financial Review