Telstra profits from reduced uncertainty

Tuesday 22 June 2010 | 12:33 CET | Market Commentary
Telstra has reached an agreement with the Australian government about its participation in the National Broadband Network, which will be built in the coming years with government support for a cost of AUD 43 billion. Telstra will make its infrastructure available to the NBN Co on a lease basis and in return, in addition to making changes in the organisation, will receive AUD 11 billion (net cash value paid over several years). In addition Telstra will migrate its customers to the NBN, which will be based mainly on fibre, and phase out its copper network. Telstra's HFC cable network will be used only for the pay-TV service Foxtel. Telstra's shares rose around 3 percent on the news.

While the agreement is far from final, it's good news for Telstra, as the share price reaction shows. This is largely due to reduced uncertainty:
- Telstra will participate in the NBN. Instead of competing with the new network, Telstra will be a supplier.
- Telstra will have guaranteed income, an attractive perspective for its shareholders. Of the AUD 11 billion, AUD 9 billion is lease income.
- Telstra can participate in future LTE spectrum auctions. The government had threatened to exclude the operator if it didn't separate its network and services operations.

There is still some uncertainty remaining. The parties will negotiate the details of the agreement in the coming months, and it's questionable whether the current government will survive the next elections. The opposition has already said it will scrap the entire plan if it wins the elections.

The agreement also has ripple effects. For the government and Telstra it's a big win. And for supporters of open networks (the NBN Co is a wholesale-only vehicle) and widespread availability of excessive bandwidth (to drive innovation) it's a promising development.

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