Telstra's Adam Internet buyout in jeopardy

Telstra has hit a snag in its proposed buyout of Adam Internet over concerns the arrangement could promote favouritism, skirt equivalence obligations and reduce price competition in South Australia.

The Australian Competition and Consumer Commission released a "statement of issues"— effectively its "preliminary views"— on the proposed acquisition today. (pdf)

In a statement provided to iTnews, Telstra said it was committed to working with the ACCC to ensure the acquisition went ahead.

"Telstra will continue to constructively engage with the ACCC regarding the proposed purchase of Adam Internet," it said.  

The ACCC's chief concern is that Telstra could provide Adam with favourable wholesale terms that are not equivalent to those on the table for other wholesale customers.

Favourable terms could extend to "lower prices for key upstream inputs", access to better information on "Telstra's network issues or operations (including product development", quality-of-service discrimination and priority processing of port connection orders made through Adam.

"The ACCC's preliminary view is that post acquisition, Telstra would have the ability and incentive to utilise its market power to favour Adam over its wholesale customers in the provision of access to its network infrastructure," it noted.

"The ACCC is concerned that this is likely to reduce the ability of alternative retail fixed voice and broadband service providers to constrain Telstra's market power at the retail level, significantly foreclosing competition in the markets for the supply of retail fixed voice services and retail fixed broadband services."

Telstra is likely to argue the opposite is true, citing the quarterly equivalence reports it provides the ACCC to meet structural separation undertaking (SSU) obligations.

For the three consecutive quarters that Telstra has provided the reports (pdf pdf), it has claimed that "overall, Telstra is treating Wholesale Customers more favourably than Telstra's own Retail Business Units".

However, the reports show Telstra's retail business typically gets better pricing than wholesale customers on key "resale" products, such as wholesale ADSL ports.

The competition watchdog is concerned the value of such equivalence reports may also be watered down if the Telstra-Adam acquisition proceeds.

Specifically, the ACCC fears Telstra could "divert customers, and/or assets from its existing retail business to Adam" or "transfer particular wholesale or network functions" to reduce transparency of agreed equivalence arrangements.

South Australian pricing

An additional issue the ACCC said "may raise concern" is the exit of an "independent competitive constraint on Telstra" in the South Australian market.

According to the ACCC, the consolidation "may enable Telstra to increase prices and/or reduce the quality or offering of its retail fixed broadband services in South Australia".

The ACCC acknowledged Telstra's plans to make Adam a low-cost brand, but argued that the ISP's existing customer base are much like Telstra's — "typically not highly price sensitive" — raising fears that South Australians could be left worse off.

The ACCC's views have been informed in part by "market inquiries", and industry players can provide further comment on the concerns ahead of a final decision being taken on February 7, 2013.

Macquarie Telecom's national executive for industry and policy, Matt Healy, told iTnews that it will be "hard to get to the bottom" of the acquisition without further details.

“Does the establishment of a lower cost operator mean they are paying the staff less, or are they receiving wholesale pricing not available to the rest of the industry? We just don’t know and experience to date doesn't engender confidence."