Understanding the Telstra d-i-v-o-r-c-e

Richard Chirgwin analyses the federal government's decision to break Telstra into separate wholesale and retail operations.

Since the government's policy is to separate Telstra Wholesale from the carrier's retail operations, it's interesting to take a look at just what is going to end up in the separated entity.

This is particularly important, given that there's little evidence in the government policy or the legislation that all of the complexities within Telstra Wholesale are well-understood.

The general understanding of Telstra wholesale is that it owns the wires, ducts and exchanges. Because Telstra exists as a single, monolithic business, this gives Telstra a role as gatekeeper - it owns the infrastructure over which services are delivered, and it delivers the services.

Other competitors, who need access to that infrastructure, are therefore at a disadvantage because they have to negotiate access with Telstra, and the nature of the infrastructure itself constrains what services may be delivered.

For example, an ISP offering ADSL2+ broadband services needs to use Telstra's copper to connect the household customer; it needs to rent space in Telstra exchanges for its DSLAMs; and, if it wants to run its own fibre from the DSLAM to its own facilities, it would have to rent space in the Telstra ducts between the exchange and its data centre.

As far as it goes, all of these services are held by Telstra Wholesale. But in the business of breaking up the telco, the government is quickly going to discover that there's a lot more to Telstra Wholesale than just the ducts, exchange and wires.

Telstra Wholesale is a large and complex operation in its own right. Broadly, the services it offers can be categorised as physical infrastructure services, such as those discussed above; upper-layer services, such as Internet Transit, in which Telstra Wholesale routes Internet packets for retail ISPs; bundled services, in which a complete retail-like service is made available for resale; as well as support services in which operations such as billing are handled on behalf of the retail partner.

There are dozens of different products in the Telstra Wholesale portfolio - if you're interested, they're listed at www.telstrawholesale.com - and most of these fall outside the more stereotyped "wires, ducts and exchanges" portrayal of the organisation.

To understand the complexity of separating Telstra Wholesale from the whole company, let's look at some of these services in more detail.

A good place to start is Internet Transit.

Any ISP needs to connect not just to its customers, but to the rest of the world - the bit of the Internet that's usually represented as a cloud in PowerPoint slides. That means paying someone - in this case, Telstra Wholesale - to carry your customer traffic to other ISPs and to content hosts.

This service, in the Telstra Wholesale product book as Global Internet Access, is not an "infrastructure service" in the same way as duct access might be considered. The customer, by a variety of means, has to get its traffic to a Telstra Point-of-Presence (POP) such as a major Telstra exchange.

While all of this involves physical infrastructure, such as some kind of fibre service, Global Internet Access itself is a Layer 3 service - it's sole concern is the proper routing of IP packets between TW's network of Internet POPs in different countries.

In the case of Global Internet Access, the physical infrastructure comprises data centres and large-scale, high-performance routers, but the service is much more than merely the infrastructure. It's also the ability to ask for large-scale connection to other large Internet backbone companies - the right to send traffic to those providers as a "peer" - and pass on that connection to customers.

Voice Services

 

The boring old PSTN is also offered as a wholesale product - not just the wires that the calls are carried on.

There is quite a number of wholesale voice services on offer (and, it could be argued, voice wholesale is one of the more competitive segments of the wholesale market in general, especially in the international market, where customers can purchase any number of wholesale voice minutes products).

These range from individual point services, such as international toll-free termination aimed at operations such as call centres who want to allow international callers to make toll-free calls terminating to an Australian number, through to complete bundled PSTN voice services, which allow retail customers to brand the service as their own, but leave all the operational details to Telstra.

There are too many PSTN-based wholesale services to list comprehensively, but one in particular deserve a mention: PSTN termination.

Anybody operating a voice network in competition to other carriers needs to be able to send and receive calls from the whole network; otherwise, you would need an Optus phone to call Optus customers, a Telstra phone to call Telstra customers, and so on.

Even if a provider isn't large enough to deal directly with Telstra, if you have a non-Telstra phone that's able to make calls to Telstra customers, you do so because someone between you and the person you're calling is a wholesale customer, buying originating and terminating access to the Telstra PSTN network.

Like IP Transit, this is a service that comprises much more than the "wires, ducts and exchanges" view of the wholesale business. The calls are delivered to a point of interconnect - PoI in industry parlance - and passed between carriers, with inter-carrier charges billed (typically) by the second.

Mobiles

 

It's not hard to see that there are many more mobile brands than there are mobile infrastructure owners. Telstra, Optus, and Vodafone/Hutchison own and operate mobile networks, but there's a host of retailers offering mobile services under their own brands. All of these buy wholesale mobile services from one of the three mobile network operators, including Telstra Wholesale.

Again, Telstra Wholesale has a number of different wholesale mobile services on offer, from a complete bundled service in which the retailer indulges in what is essentially a re-branding exercise, through to individual components of the mobile service on offer as discrete wholesale products.

For example, there's SMS wholesale services.

If you've subscribed to some kind of third-party SMS service - say, a daily horoscope - then it's delivered via a wholesale SMS service. The service provider sets up an SMS server, and sends its messages to Telstra Wholesale, which passes the message to the mobile network for delivery to customers (of course, if the message is going to some other network, it's passed across the other network's wholesale point of interconnect).

The service may be routed from the provider to Telstra over the Internet, or the provider may buy a Telstra data service and send its messages directly.

And, of course, Telstra Wholesale is the division that interconnects mobile calls with other carriers, via its mobile originating / terminating service.

As with the internet and PSTN voice services, the mobile services are far removed from any understanding of the network that stops with the physical infrastructure. Most of the point products in the wholesale mobile space, with the exception of the bundled resale product, are associated with the routing of calls and messages between Telstra's network and other networks.

Data Products

 

Finally, there's the important data services.

Australia has quite a number of companies offering managed data services on behalf of their customers, even though they operate only limited networks themselves (a good example is Macquarie Telecom, which has data centres, limited city fibre networks, various points-of-presence, and a DSLAM deployment).

If someone like Macquarie wins a bid to build a national data network for a customer, it will need to connect customer sites far beyond the reach of its own network, and to do so, it will probably at some point rely on a Telstra Wholesale data service.

Some of these services are familiar to the consumers, such as DSL-based Internet access, but others are less so. Quite probably, only business customers and industry insiders are aware that Telstra Wholesale offers an Ethernet service, which provides high-speed metropolitan Ethernet access for wholesale customers, and other services are even more obscure.

Most of the data services, however, do fall under the heading of infrastructure-based services - the difference is that they're mostly designed to serve business applications rather than consumer services.

Separation in Practice

 

John Stanhope, Telstra's CFO, is on the record as saying that a full separation between wholesale and retail could take five years and cost $1.5 billion.

In many quarters, that's been dismissed as a self-serving exaggeration - but I'm not so sure.

Some things look easy to separate: put the ducts, wires and exchanges under a separate company, and hive that company off into a completely separate entity (even this would be challenging from an administrative and financial point of view).

But some of the separation would need considerable duplication of various platforms - because at the moment, some platforms within Telstra clearly serve both internal and external requirements.

Separation remains a good policy stance. It encourages competition, and it encourages Telstra to "play nice" with the rollout of the NBN.

It is, however, a technical task that's far more complex than most people understand.

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