Avoiding 'Telstra Mark II' with the NBN

NBN Co's role in backhaul markets is a critical element in getting the NBN right and turning NBN Co into another Telstra would be the worst possible outcome.

There are some things you need to get right from the start because the cost of mistakes are so high, and they are so hard to undo, that failure is unacceptable. Getting the National Broadband Network right is one of these, and its role in backhaul markets is a critical element.

Mark Gregory’s recent article on the Competitive Carriers’ Coalition’s objection to NBN Co entering competitive backhaul markets fails to understand either the appalling history of failed competition in communications markets or the level of risk involved in allowing NBN Co to expand its remit without thorough scrutiny (Holding the NBN hostageMay 15).

If experience has taught the industry, policymakers and regulators anything, it should have taught them that everything must be done to avoid repeating the past -- and that means, above all, making sure Telstra is appropriately structurally separated, without NBN Co becoming Telstra Mark II. This week's revelation from the Australian Competition and Consumer Commission that Telstra systematically discriminated against consumers trying to buy broadband from competitors underscores just how difficult that has been to date.

Over 30 years, Telstra’s inherited monopoly over the backhaul market has gradually, partially broken down as competitors entered first the market between capital cities and, subsequently, from capital cities to some -- but not all -- regional cities. And as those competitors entered the market, a curious phenomenon occurred in the prices for backhaul.

When the first competitor to Telstra entered the market, not much happened. But when the third entered, prices crashed to about one tenth of what they once were. Where those input costs crashed, downstream retail competition flourished. Where backhaul hasn’t become competitive, retail competition has struggled to gain a foothold.

The advent of the NBN has forced everyone in the industry to look again at the definitions of backhaul. The design of the NBN fibre access network, as originally planned, is different to the copper. The 'last mile' runs of fibre are longer than in the copper network, and the 'natural' aggregation point at thousands of local exchanges is no longer relevant.

The structurally-separated, wholesale-only NBN will enhance competition throughout Australia, but there needs to be careful oversight to ensure that competitive backbone backhaul markets are not negatively impacted.

The ensuing debate about where to draw the boundary on the NBN’s business was resolved by the ACCC, which analysed backhaul across the country, applying a competition test that looked at how many places enjoyed a choice of three or more backhaul providers. In those locations -- 121 of them -- NBN Co is building points where it interconnects with these other, competitive networks. That, then, is the new last-mile access network boundary at which NBN Co should stop.

All this, of course, has little to do with the regulation of backhaul prices to the thousands of still-operating Telstra exchanges around the country that are yet to be replaced by the new NBN. Competitors to Telstra have been very vocal about their disappointment at the level of those prices and are determined to work hard with the ACCC to get a better result for consumers as it resets prices this year.

The ACCC’s competition test can and should be subject to review over time. It might well be that there are some points of interconnect that are found not to be competitive. In those situations, the ACCC might decide it is better to have NBN Co continue to carry all the traffic.

But what would happen if NBN Co were allowed to carry traffic beyond the PoI, in competition with those who have built competing networks? Exactly what has happened for the past 20 years -- where Telstra has leveraged its market power in monopoly access networks to stifle competition in competitive markets wherever it can.

There are places were NBN Co can enhance competition in regional areas by leveraging some of its assets, such as by offering competitive connections to mobile communications towers to connect them up to its access network infrastructure and link up to the nearest competitive points. But this is consistent with its core task of building independent infrastructure in monopoly access networks.

Entering markets where the ACCC has determined there is already competition is a very different proposition. Once again, the first step for NBN Co should be for it make the case that these markets are not competitive. And the ACCC is the appropriate judge of that.

Matt Healy is the chairman of the Competitive Carriers Coalition

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