Broadband, Telstra and the future of Australia's telecoms

I haven't really commented to this point on the Australian Government's roll-out of the proposed National Broadband Network (NBN) intended to provide enhanced broadband access to the majority of Australian homes. However, I had an interesting query from a friend in the US.

There was dinner at which Telstra was to be one of four companies receiving an award for their diversity program. Apparently the MC announced that much as the Telstra CEO wished to be there, extraordinary circumstances prevented his attendance, the government was not allowing him or the Chairman to leave the country. This caused some astonishment, and my friend asked me what sort of totalitarian regime governed Australia

I am sure that this is a case of lost in translation. As I explained in my reply, Telstra and the Government are locked in tight negotiations just at present over details, among other things, of the relationship between the NBN and Telstra. Minister Conroy has been under a lot of pressure over delivery, the legislation providing for structural separation of Telstra's wholesale and retail arms is still locked up in the Senate, while there  are continuing doubts about the commercial viability of the NBN. It's all a bit of a pressure cooker, so I can imagine the Minister not reacting well to any suggestion that either of the key Telstra negotiators should leave the country to attend an award dinner.

The major reason I haven't commented to this point on the NBN lies in the sheer size and complexity of the project. I am simply not close enough to the details to offer really informed comment. However, at the risk of making errors, I thought that I should provide a few comments.

The original concept of a national high speed fibre to the node network was a Rudd Government election commitment.

On 7 December 2007, the Minister for Broadband, Communications and the Digital Economy, Senator the Hon Stephen Conroy, announced that the Commonwealth Government was committed to building a national high-speed broadband fibre-to-the-node network, and that it would run an open and transparent process to determine who would build the network. A Request for Proposals was issued. However, none of the proposals met the Government's needs. You can find an excerpt from the evaluation report here.

The Australian Government then announced on 7 April 2009 it would establish a new company to invest up to $43 billion over eight years delivering superfast broadband to Australian homes and workplaces. The Ministerial press release stated:

This new super fast National Broadband Network, built in partnership with private sector, will be the single largest nation building infrastructure project in Australian history.

This new National Broadband Network will:

• Connect 90 percent of all Australian homes, schools and workplaces with broadband services with speeds up to 100 megabits per second100 times faster than those currently used by many households and businesses
• Connect all other premises in Australia with next generation wireless and satellite technologies that will deliver broadband speeds of 12 megabits per second
• Directly support up to 25,000 local jobs every year, on average, over the 8 year life of the project.

Under the Rudd Government's new national broadband network every house, school and business in Australia will get access to affordable fast broadband.

The Minister's release also stated that the proposal was also the biggest reform in telecommunications in two decades because it delivered separation between the infrastructure provider and retail service providers.

This page on the Department's web site provides further details, along with links to related material. The NBN company web site can be found here.

The complexity of the task the Government is undertaking is quite mind-boggling. We can summarise some of the key challenges in this way.

To begin with, it involves the establishment of a company that will ultimately have gross assets around $A43 billion. To put this in perspective, in 2009 Telstra (Australia's largest telco and a Fortune 500 company) had total book value assets of just under $A40 billion. So NBN will end up as a very large infrastructure company indeed.

The company will be majority Government owned initially, although this share will then be sold down. So there is a big task in defining funding and shareholder arrangements, including exit provisions.

Initial roll-out has begun:

• NBN Tasmania Limited was formed to build and operate the NBN in Tasmania—construction of the rollout has commenced, while the first 10 Tasmanian communities to receive superfast broadband were announced. Most recently, iiNet, Internode and Primus were unveiled as the TNBN Co’s first wholesale customers at an event in Mornington, Tasmania where Communications Minister Stephen Conroy opened a proof-of-concept test centre. The test centre will provide retail service providers with a live environment to test their services as part of the roll out of the NBN in Tasmania.
• Nextgen Networks was engaged to rollout almost 6000 km of new fibre optic backbone links as part of the Government’s $250m investment in the Regional Backbone Blackspots Program to connect over 100 regional locations along the routes to the six priority areas of Geraldton, Darwin, Emerald and Longreach, Broken Hill, Victor Harbor and South West Gippsland.
• NBN has just announced five first release test sites intended to test and document design and construction in a range of situations. One of those sites includes part of West Armidale, with 2,900 premises, including the University of New England.

The selection of West Armidale as a test site is obviously pleasing from my viewpoint given my continuing linkages with town and university, as well as my involvement in previous attempts to gain improved telecoms for the city.

The technical and commercial risks associated with company formation and associated network roll-out can be summarised this way:

• what services will NBN offer, and will they be sufficient to ensure financial viability? The primary intent is to offer wholesale carriage services, although in the context of the stand-off between Telstra and the Government, Minister Conroy indicated at one point that NBN might be allowed to provide certain retail services.
• what will be the relationship between NBN and existing carriers as funders (including possible transfer of assets) and NBN customers? This includes especially the complex relationship with Telstra; I will discuss this separately.
• how will NBN in its planning and operations balance the need to maximise its own service revenues to ensure financial viability and the Government's requirements for it to meet national delivery objectives, including especially services to rural areas? What does this mean for existing community service obligations?
• can the new company acquire the financial, technical and engineering expertise required to manage such a big project in the time scales involved?
• how will the network be constructed to ensure interoperability with existing and future networks and services taking technological and market change into account?

The relationships with Telstra are especially complicated because Telstra controls the existing customer access network. While this is heavily copper and is also facing problems as fixed line usage declines, it remains important. Simply, Telstra controls the pipes.

Key issues in the Telstra relationship can be summarised in this way:

• The previous Government started selling its shares in Telstra on an as-is basis. With more than a million Telstra shareholders who have already suffered loss in value, actions that reduce the value of Telstra raise political and equity issues.
• The Government's desire to enforce structural separation of Telstra's retail and wholesale arms is both a competition issue and one central to the proposed operations of the NBN. How do you stop Telstra obtaining monopoly returns, thus reducing NBN's viability? Alternatively, what happens if Telstra decides that the returns are insufficient and starts reducing its support for activities on which the NBN depends?
• If NBN is to absorb Telstra assets, what price should be attached to those assets?

A special problem, I think, lies in transition and flow on effects that may not be clear at the time.

Recently Minister Conroy announced that as from 1 July all new housing developments must incorporate fibre. As a consequence, Telstra announced termination of its current arrangements with developers regarding installation of copper. This caused considerable distress to developers.

The problem is that network economics means that Telstra has had an incentive to provide network services to new dwellings. That incentive no longer exists. In the absence of alternative arrangements, customers will now need to pay the full costs of service connection, and fibre is more expensive. This will affect house prices and housing supply. 

I have no idea how all this will work out, but you can see the complexity.

My best guess, and it is a guess, is that so long as the price is right, Telstra may actually exit the traditional infrastructure business, leaving NBN not just with fibre but also copper cable.

In all this, you can see why I find the whole thing so fascinating. We are dealing with what is, I think, the biggest commercial game play in Australia's history!