In November that year Telstra made a new offer, a 12 Mbps network serving 4 million addresses in the five big cities, again on condition that it was released from the access rules. The rules were introduced in the early 1990s, as the government deregulated telecommunications and exposed Telstra to competition. They allow Telstra's competitors to rent parts of Telstra's network to combine with their own. Trujillo seemed to think that by dangling the prospect of a shiny new network, the government would abandon 15 years of bipartisan policy. The then communications minister, Helen Coonan, told Telstra she would not change the law. Telstra would not listen. For two years it tried and failed to do a back-door deal - first with the Australian Competition and Consumer Commission, and subsequently with Coonan. Telstra's relations with the Howard government were poisonous.

So when the Rudd Government came to power with a policy of holding a competitive process to determine who would get the right to build the national broadband network, Telstra should have changed its approach. Instead, Telstra made four fundamental mistakes. First, it failed to acknowledge the Rudd Government's clearly stated policy objective that the new network be "open access" to increase competition. Telstra still thought it could lock up a new broadband monopoly. Second, Telstra followed a muddled and unclear strategy. In February this year it issued a media release saying the company would participate in the Government's competitive selection process. Days before the deadline, it said it would only participate if the Communications Minister, Stephen Conroy, explicitly ruled out "structural separation" of Telstra's business - which he rightly refused to do.

On the day proposals were due late last month, Telstra said it was "not … in a position to lodge a highly detailed proposal in response" to the request for proposals. On Monday, after the Government ejected it from the process, Telstra said it considered it had "fully complied with the [request for proposals] requirements". If even Telstra was unsure whether it was participating in the process or not, it can hardly be surprised if the Government makes the decision for it. Third, Telstra made a basic error in not meeting the formal legal requirements. The Government would have been in an impossible position if it had broken its own rules - so clearly spelled out in the document - to give Telstra special treatment.

Fourth - a point that has received little focus so far - the substantive deal Telstra was offering was one that Conroy could hardly have accepted. When Trujillo first put his deal to Howard in 2005 he offered two options. If Telstra was given sweeping regulatory concessions, it would build a network serving 98 per cent of Australians. Howard could have a 6 Mbps network for $2.6 billion, or a 12 Mbps network for $4.7 billion. The options were set out in a document that Telstra made available to the stock exchange a few days later - and the second option subsequently underpinned the Rudd Government's policy to spend $4.7 billion on a national broadband network. Yet last month Telstra in effect reneged on the deal. Now it says that for $4.7 billion it will only build to between 80 and 90 per cent of the population.

The first rule of negotiation is to recognise your counterparty's position. How could the Rudd Government ever accept a deal so much worse than the one Telstra offered to Howard? This week's developments may not spell the end of Telstra's broadband ambitions. But they certainly show how it has misplayed its response to the Rudd Government's process - much as it has consistently misread the Australian Government for more than three years.

Paul Fletcher is a telecommunications consultant, former Optus executive and author of the forthcoming book Wired Brown Land? Telstra's Battle For Broadband.