A $7 billion NBN warning

The real economic benefits of high-speed broadband will only come when it's ubiquitous, so any move by the Coalition to stop the NBN in its tracks could mean a repeat of the HFC debacle that saw billions in wasted private-sector investment.

Those who remember the 1990s in the telco industry know of the massive investment destruction in telecoms infrastructure that was carried out by Telstra and Optus.

At that time Optus saw the strategy to build a high-speed broadband infrastructure based on the HFC technology as a way to break Telstra’s telecoms monopoly. This infrastructure was to deliver far superior broadband and cable TV services than Telstra could supply over its copper cable network.

However, under a self-regulatory regime, Telstra saved no money or effort and chased Optus through every street it was working in to overbuild the new network with its own HFC infrastructure. In the end this led to a $7 billion investment destruction and resulted in a very small alternative network (roughly covering 25 per cent of premises).

Obviously Optus’ aim was to become that alternative telecoms provider based on a nationwide (or at least metro-wide) network. Apart from the enormous financial losses, Australia also ended up with a half-baked solution that has been a millstone around the neck of Optus – since that time it has never been able to position itself as a real facilities-based competitor to Telstra.

Telstra, as the victor, retained its monopoly, which led to the greatly diminished competition during the 00s. As a result the cost of all of this to Australia was that it became one of the last countries to get broadband; and its prices were higher and its speeds lower than anywhere else in the world.

While there are many lessons that we can learn from this disaster – the key one being that building competitive national telecoms infrastructure is economically unviable – we will concentrate here on another element, that of ubiquity.

As we all know, devices and services such as telephones, faxes, emails, internet etc will only create economic and social benefits if they are ubiquitously available. It is something of a chicken-and-the-egg situation – once ‘everyone’ has them these new services unleash enormous personal and societal benefits.

Of course, the same will apply to the next generation of broadband infrastructure. This will facilitate the transformation of complete sectors of the economy such as business, finance, media, healthcare, education, etc. But here also the social and economic benefits can only be achieved if those services are ubiquitous.

In many situations these services will not be economically viable if they can only be delivered to, let’s say, 25 per cent of the population. Pay TV in Australia never really took off due, to a large extent, to the lack of scale and as a result the country ended up with the most expensive pay TV services in the world and high-speed broadband over HFC is only available to a small proportion of the population.

If we had got it right at the beginning and HFC had become that alternative infrastructure we certainly would not have needed the government’s NBN intervention – we would have been able to avoid the market failure that followed that HFC disaster.

Are we now going to make that same mistake again?

The Coalition’s official line continues to be stopping the FttH rollout in the event of it winning government.

Presumably they will not go that far in capital destruction and the work that is underway at the time will be allowed to be completed. However, without the level of network ubiquity needed for such infrastructure, the investment ‘in the ground’ at that time will be fairly useless, as very few companies will start delivering services over such a limited infrastructure. The capital destruction, as well as the massive disruption to the telecoms industry, will cost far more than the $7 billion destroyed during the HFC rollout.

If we have a repeat of the HFC network debacle and end up with a half-baked fibre-based infrastructure, this destruction of capital, plus the damage to the economy and the Australian society, will be many times greater than the $27 billion of taxpayers’ money that will be spent over a ten-year period to establish a ubiquitous high-speed broadband infrastructure.

Paul Budde is the managing director of BuddeComm, an independent telecommunications research and consultancy company, which includes 45 national and international researchers in 15 countries.

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