A dubious NBN payday for Optus

The ACCC made a delicately balanced decision to authorise the decommissioning of Optus' HFC cable network in return for $800 million from taxpayers, as it would have remained competitive to the NBN for some time.

The Australian Competition and Consumer Commission’s draft decision to authorise the decommissioning of Optus’ HFC cable network in return for $800 million from NBN Co must have been a delicately balanced decision.

Despite concluding that the agreement would remove a potentially significant fixed-line competitor to the national broadband network in Sydney, Melbourne and Brisbane – one that might have pressured NBN Co to improving its performance and provided a competitive constraint on NBN Co – the commission proposes to authorise the agreement between Optus and NBN Co.

It says the main benefits of the agreement are avoiding the duplication of costs that would occur if there were two fixed-line networks and delivering a lower-cost HFC subscriber migration to the NBN.

The Optus HFC network – and the larger HFC network operated by Telstra that is also going to disappear after its $11 billion deal with NBN Co – are focused on the capital cities and were developed during the infamous pay TV wars during the 1990s.

The Optus network passes about 1.4 million ‘’serviceable premises’’ and has 496,000 subscribers, of which 429,000 take its broadband service. In 2010 Optus announced it had completed an upgrade of the network that enables it to offer download speeds of up to 100 Mbps.

The network offers upload speeds of only two Mbps, although technically those could be increased. Optus doesn’t offer wholesale access to the network, although it could. The reason it doesn’t offer higher upload speeds or wholesale access is the cost of doing so.

There is no dispute in the key submissions and ACCC discussion that if the agreement weren’t authorised Optus would compete with NBN Co, ‘’cherry-picking’’ key prospective customers in the three capitals where its HFC network operates. It would, given the sunk cost nature of its investment, be able to under-cut NBN Co on entry level-style services.

With Optus saying it is not willing to make further investments in the network in the face of the NBN roll-out, however, the network would progressively degrade and be decommissioned.

NBN Co approaches the issue from a different perspective. If the HFC network competes with the NBN it would, it says, be likely to delay its planned roll-out of the NBN in areas serviced by the HFC network, with a detrimental impact on its economics.

Moreover, given it has been mandated by the federal government to price its wholesale-only services on a uniform national basis, competition from Optus as it sought to retain its higher-value customers would undermine the proposed cross-subsidy from metropolitan customers to regional customers that under-pins that uniform pricing model.

Fundamentally, the continued existence of either of the HFC networks would add to the pressure on the economics of the NBN. Those were marginal when NBN Co developed its business case and have been stressed by the delay in executing the agreement with Telstra, the slower-than-planned roll-out and the lower-than-anticipated initial take-up of NBN services.

One could argue the competing merits of a competitive model for broadband rather than the creation of an even stronger monopoly, albeit a wholesale one, than Telstra has enjoyed since the industry was opened to competition. Malcolm Turnbull does that quite effectively.

Indeed the leverage Optus would have over NBN Co’s national pricing would suggest that a competitive model would produce considerable consumer benefit in during the initial years of the NBN’s existence – albeit at considerable cost to its own economics and therefore the taxpayer.

Interestingly, the ACCC didn’t accept the claimed economic benefits from the improved take-up of NBN services and of its financial returns if the agreement with Optus was authorised as public benefits and also came to the logical conclusion that because NBN Co is obliged to offer national uniform pricing it will do so regardless of the fate of the agreement.

The critical question of why taxpayers should fund an $800 million payment to Optus wasn’t directly addressed.

Like Telstra, Optus is using the leverage provided by NBN Co’s desire to prevent cherry picking and pressure on its pricing and hoped-for modest financial returns to extract something material from the Federal Government for an asset it lost real interest in some years ago.

Optus could operate the HFC network for some time, offering services that are far faster in terms of the download speeds of most concern to most households than the entry-level NBN speeds – HFC networks can be upgraded to 3000 Mbps. It could also upgrade the network to offer faster upload speeds. It could even expand the network’s geographical coverage.

All those things would come at a cost of increased investment and eventually, as the NBN becomes ubiquitous and generates economies of scale and encourages innovation at the product level, Optus would probably be over-run and would have an incentive to migrate its customers onto the NBN anyway.

That is, however, both a long way off and Optus’ choice. It remains unclear why taxpayers are going to fork out $800 million to encourage Optus to do something it says itself is inevitable – and, as consumers, lose the benefits of competitive tension in the meantime.