A 'thermo-nuclear weapon' sits on the launching pad, primed for Telstra after the national carrier began its audacious strategy to boost broadband subscriber numbers by reducing its retail price below the wholesale rate it charges rivals.
Telstra's cut-price broadband deals are good news for consumers but have incensed competitors who cannot compete with its new retail rates without running at a loss.
The Australian Consumer and Competition Commission (ACCC) has moved quickly, fearing Telstra's new monthly DSL access fee of $29.90 will kill competition either by causing companies to go out of business by losing customers or going broke in an attempt to match pricing.
Telstra now has an ACCC Part A "competition notice" hanging over its head - the last step before fines of up to $10 million a day are levied on the carrier until it succumbs to demands to drop wholesale pricing in line with its retail move.
"This is not the ideal way to resolve a dispute," says Internet Industry Association chief executive Peter Coroneos. "It is the thermo-nuclear weapon option. A fine of $10 million a day is too rich even for a company the size of Telstra."
Coroneos sits in a difficult position as Telstra is a key member of his association. "Ultimately, we invest our trust in the ACCC to get these things right," he says. "But there should be no mistaking the fact pricing for broadband services in Australia is a serious issue."
On the surface, Telstra appears to have flaunted the Telecommunications Act, which was revised in 2002 to ensure that its wholesale prices were never sufficiently high to stymie rivals at a retail level. The ACCC contends this is exactly what Telstra has done.
There is no single wholesale rate as different suppliers have contracts with Telstra that are based on volume, data speeds and service levels.
Optus marketing director Scott Lorson said, "The issue relates to margins and our demand that the wholesale structure returns to the status quo."
IIA chief Coroneos adds: "I like the idea of lower broadband prices, but there are concerns about what has happened.
"In the long term, this Telstra strategy can actually retard competitions by forcing other players out of business. Historically, this kind of action has actually worked against consumers."
The first salvos in this battle would indicate the opposite. Small independents TPG and Internode have quickly rolled out competitive packages with download caps at $30 and $50. iPrimus now has a similar deal with a 6 Mbps product.
Independent analyst Paul Budde said these companies will "find it very difficult to survive" in this market. Only Optus and AAPT have the buying power and sufficient fiscal resources to go toe-to-toe with Telstra for a prolonged period, he claims.
A number of competition-related issues have driven Telstra to this position as it tries desperately to hang on to the market share it once enjoyed as a monopoly.
Disappointing subscriber enrolment numbers have long plagued Telstra's broadband services through its ISP, BigPond.
Budde claims Telstra has "panicked" after promising share market analysts to grow subscriber numbers that have remained steadfast at 25 per cent, despite a $10 million advertising campaign for its BigPond brand.
Even improving the technology to offer ADSL-type broadband over copper wires normally used for telephony did little to advance the cause. Last year, it began offering the service within 4 km of an ADSL exchange, rather than 3.5 km. Even though this opened the market to an estimated 400,000, the impact has been minimal.
Then Telstra increased to 240 the number of exchanges that would handle business-grade ADSL services - a move that proved equally uninspiring.
Telstra executives also knew the game would get tougher, having negotiated for 18 months with Optus over how the No 2 carrier should resell Telstra's ADSL services - a service that was launched in February.
Those in the crow's nest of the Telstra ship could also see on the horizon new wireless operators, such as Unwired and Personal broadband Australia, which now offer broadband services to homes and businesses that cannot get ADSL or cable at the door.
Their growth, exploiting a technical weakness in the Telstra network, will serve only to further erode the carrier's market share.
The biggest threat was the new DSL services from Optus, which continues to make significant inroads into Telstra's revenue base, especially in the mobile phone market where its network has captured 5 million customers, or 35 per cent of the market.
There is no reason to believe Optus cannot achieve similar success in the broadband market despite the Telstra spoiling tactics.
The new deal triples the Optus reach into the broadband market, taking its services into 900 exchanges. Where its cables run alongside Telstra's, Optus has a broadband penetration rate of 18 per cent, twice the national average.
So Telstra hit everyone where it hurts most - pricing. Its $29.95 always-on service is a third lower than Optus's best offer and undercuts cable equivalents by around 50 per cent, depending on the deal.
On the night before Optus's February 16 DSL launch, Telstra announced it was hacking into its own price structure for DSL.
Telstra's regulatory affairs chief, Bill Scales, has stated his company has renegotiated wholesale deals with 60 per cent of operators and he did not believe "we have done anything wrong".
However, he conceded that a "minority" of competitors had refused to negotiate, claiming they had adopted a "highly politicised approach calculated to spark regulatory intervention".
He claimed Telstra would be "prepared to strongly defend its position should it be challenged" by the ACCC.
Optus chief Chris Anderson said in a recent speech: "We have seen Telstra playing a fairly classic card by seeking to impose a wholesale-retail price squeeze. Optus can see no justification.either Telstra must drop its wholesale prices, or the ACCC must issue a Competition Notice - declaring the conduct illegal."
A number of analysts believe heads could roll at Telstra as the ACCC begins to take action. Those who watch not just the domestic market but also broadband innovation overseas are scathing about Australia.
"There is no clearly defined strategy at Telstra," complains Bjarne Munch, of the META Group. "Everything it does appears to be defensive. We are seeing Telstra dumping price because of Optus's entry into the consumer space."
Munch says the Telstra reaction to more competition is not surprising, and the dust-up with the ACCC is "merely a glitch" on the journey to lower broadband prices.
"It's impossible to know exactly what goes on inside Telstra, but this latest episode to take retail prices below the wholesale rate is either a blunder or a deliberate ploy for a brutal first-to-market strategy," continues Munch.
He voices qualified sympathy for the national carrier. "Telstra is fighting to retain revenue in an increasingly competitive environment. The trouble is, when you once had 100 per cent of the market, there is only one way you can go."
He says the impact for business DSL is limited. "Prices will keep tumbling from this point. I would not suggest that any business owner or telecommunications manager sign up for a long contract on the strength of what has just happened."
Munch also points out the $29.90 service is "the most basic possible" with caps on downloads that would force many customers to pay more. "It's a strategy to move dial-up customers to broadband services," he says.
So-called 'bill shock' for consumers is inevitable, according to Optus's Lorson, who is marketing director for its consumer and multimedia division.
"We regret this industry practice and will continue to offer a flat-price structure," he says.
Converting consumers from dial-up to BigPond, after months of outages at the end of last year, will not be a simple task.
The service suffered appalling publicity that is not easily forgotten, and Telstra CEO Ziggy Switkowski admitted at the time a greater corporate commitment needed to be made.
"We realise the Internet is now mission critical for our customers," said Switkowski. "Whether they're residential customers using the Internet socially for e-mail correspondence, or whether they are corporate customers using the Internet to undertake commerce, it needs to be operated at kind of industrial strength."
He pledged to invest a further $100 million in BigPond to ensure the fiasco of constant downtime was never repeated.
Gartner analyst Geoff Johnson, one of the foremost observers of the local industry, says the price cut is long overdue. He is contemptuous of the Australian broadband sector, comparing it poorly with the innovation of South Korea and Japan.
"These two countries are showing the world that broadband is all about entertainment, and in Australia we are still selling on different speeds and downloads.
That may be how telecommunications executives think they should pitch their product, but it is not how the consumers want to buy it."
He also complains that "we are still sorting out the plumbing problems of the network that Singapore sorted out five years ago". Telstra's move to slash ADSL pricing has come "way too late for us to be internationally competitive".
"The leaders in broadband are experimenting with video-on-demand and entertainment packages," continues Johnson. "There are several of these projects under way in Japan and South Korea. But you look at Australia, and we are still selling access, not entertainment. We talk about downloads and capping.
"I am accused of being all 'doom and gloom' about Australia, but I just do not see anything to change my mind. Australia just isn't keeping pace with our economic rivals."
Paul Budde says "something drastic" needs to be done in Australia to stimulate broadband take-up, "so I am very happy Telstra has started to drop its price".
"However," he adds, "I am not happy about the way it has done it, and the impact that retention of wholesale rate may yet have on its competition."
