A win-win deal for Telstra and NBN Co

The new deal will see Telstra get the same $11bn as per the original 2011 agreement, while the telco will progressively transfer ownership of its copper and HFC networks to NBN Co.

NBN Co and Telstra both had a vested interest in achieving a renegotiation of the agreement that underpins the building of the national broadband network. That’s why, while the nature of the NBN might have changed radically, the important fundamentals of the new deal Telstra has agreed to are effectively the same as in the original agreement.

In fact, while it will still receive roughly the same $11 billion in net present deals as it was supposed to receive from the original deal with NBN Co to build the Rudd/Conroy fibre-to-the-premises network it would still probably regard the new agreement as preferable.

That’s because the building of Malcolm Turnbull’s multi-technology network will be completed years (if not decades) earlier than the extravagantly gold-plated network Conroy wanted. Telstra’s cash will come more quickly and be more certain, and it will be out of the capital and people-intensive fixed network business far earlier, than it would have been under the original NBN rollout.

While there are some tweaks to the arrangements that give Telstra more protection from a truncated rollout and which reduce its remediation liabilities, Telstra’s single-minded objective was to protect the $11 billion of value it had originally negotiated.

A potential bonus, given the better working relationship between Telstra and NBN Co and Morrow’s over-riding goal of getting the network built as quickly and efficiently as possible, is that Telstra could play a much bigger role than previously in the actual building of the network, generating additional revenue.

While Telstra always had a form of natural hedge in that it would continue to generate revenue and profit from its network until they were decommissioned there’s little doubt it would prefer to exit the fixed-line space as quickly as possible rather than continue to operate diminishing networks for the next decade, or two, if the original very troubled fibre-to-the-premises rollout had continued. It still has that hedge but the scale and need for it will reduce far more rapidly.

The fact that Telstra wasn’t seeking more from the negotiations and that Turnbull and the new guard at NBN Co, led by Ziggy Switkowski and Bill Morrow, pragmatically prioritised getting a deal done and the way cleared for the multi-technology rollout meant that, while the 2003-page agreement still took a long time to finalise, it was always going to be agreed.

From NBN Co’s perspective the big change is that instead of Telstra decommissioning or being prohibited from using quite useable infrastructure -- its copper and HFC networks -- those networks will be progressively handed over to NBN Co, which will own them and where appropriate operate them.

Turnbull’s NBN is much cheaper (peak funding of $41bn versus $73bn) and faster (at least four or five years faster) to build than Conroy’s because, where it delivers fast enough speeds, it does exploit existing infrastructure. That ought to mean that it will be cheaper for end-users, too.

It’s certainly a better approach for taxpayers, who were being asked to sign a blank (but inevitably massive) cheque for a super-fast network whose speeds would be of real value to only a very small (albeit very vocal) proportion of the population.

The bulk of the cost in a FTTP network is in connecting it to households with no obvious need or use for the speeds it would have delivered, so the great majority of taxpayers would have been subsidising a relative handful of NBN users.

Something critics of the multi-technology strategy generally ignore is that the combination of speed and cost means that in net present value terms it is actually much cheaper and also involves less technology risk to build Turnbull’s network and subsequently upgrade it to FTTP than it would be to roll out a full-fibre network (supplemented by satellite and fixed wireless in remote regions) from the outset.

Thus there is an economically compelling case for building a multi-technology network today, even if it is subsequently upgraded to a different technology like FTTP.

To execute the multi-technology rollout NBN Co didn’t actually need to own Telstra’s copper and HFC -- and Optus HFC network -- but given that it wasn’t going to cost it any more to acquire them than the value attributed to them by the original deal it was probably simpler for everyone to effect a progressive acquisition of the networks as the NBN roll-out continues than to do some form of leasing arrangement.

Once the NBN has been rolled out in a region Telstra will transfer ownership of the networks, as well as the operational, remediation and maintenance responsibilities, to NBN Co.

Both NBN Co and Telstra say that the migration arrangements have been streamlined and simplified and will not only be cheaper for both parties, who will share the gains, but provide a better and less intrusive experience for end-customers.

NBN Co, Telstra and Optus require Australian Competition and Consumer Commission approval of the migration arrangements to ensure that Telstra’s retail business doesn’t gain some competitive advantage from them, but the ACCC approval process ought to be quicker and more straightforward than was the case for the original agreements given that the structural separation of Telstra will still occur as originally envisaged.

Telstra could have put the new deal in front of its shareholders for their approval, as it did with the original deal in 2011. Given that the shareholders will receive the same value, however, it doesn’t feel it is necessary.

That requirement for shareholder approval was a key piece of leverage Telstra used, very successfully, in the negotiations with Conroy and the previous management of NBN Co to counter the crude threat Conroy had made to destroy its wireless business if it didn’t co-operate.

With Turnbull, Switkowski and Morrow there were no threats and therefore no need for the deal to be put to Telstra’s shareholders.