The Australian government is pressuring Telstra into splitting into two separate businesses, leap-frogging New Zealand's May 2006 reforms of Telecom with its own more draconian approach to regulation.
If Telstra refuses to split into two separate companies, a bill will force its wholesale and network business to operate at arm's length to the rest of the company and offer services to competitors on equal terms.
Telstra would be prevented from getting the radio spectrum it required to build a 4G mobile network unless it agreed to a clean split or sold off its cable networks in Australia's state capitals and its 50 per cent stake in pay-TV operator Foxtel.
"It is the Government's clear desire for Telstra to structurally separate, on a voluntary and cooperative basis," Communications Minister Stephen Conroy said. Telstra will have till early December to decide how to respond.
The legislation will also beef up the powers of the Australian Competition and Consumer Commission, Australia's equivalent of the Commerce Commission.
ABN Amro Craigs analyst Geoff Zame said the regulatory crackdown was the start of a long process, designed to persuade Telstra to pool its network assets into the Australian government's A$43 billion (NZ$52b) initiative to roll out fibre to 90 per cent of the population.
"The government probably doesn't have all the powers it needs to structurally separate Telstra and they are trying to get it to volunteer to separate."
Zame said New Zealand was going down a separate path.
In an ideal world, Telecom's network arm Chorus would sell some of its assets to the Crown Fibre Investment Company that would be set up as part of the New Zealand government's $1.5 billion Broadband Investment Initiative, but Telecom remained wedded to vertical integration and was unwilling to consider that, Zame said.
The Australian reforms could benefit Telecom's Australian arm, AAPT, he said.
"It is going to improve access at the wholesale level for other players and that is of benefit to Telecom, but it is at the margin as AAPT does not represent a significant part of Telecom's enterprise value."
Telecom welcomed Mr Conroy's announcement. "For some time we have been seeking a level playing field where AAPT enjoys the same equal access to customers in Australia as Telstra already receives in New Zealand," said chief executive Paul Reynolds.
Telstra's shares closed down 17 cents on the NZX, at a record low of $3.83. Telecom closed down 4c at $2.68.
TelstraClear spokesman Chris Mirams would not comment on the choice faced by its parent, saying it was "business as usual" for TelstraClear.
Relations between the Australian government and Telstra had grown increasingly tense under the tenure of former chief executive Sol Trujillo, who earned more than A$30m during his four-year stint.