Broadband brainstorm
The broadband debate is focused on who's going to own the new monopoly and what needs to be done to protect that monopoly. Now, a group of leading thinkers is asking why competition seems to have been forgotten.
The debate around the federal government's proposed national broadband network (NBN) has been couched largely in terms of who's going to own the new monopoly and what needs to be done to protect that monopoly from competition that would undermine its economics. A collection of papers commissioned by the Committee for Economic Development of Australia (CEDA), however, questions whether that's the right approach.
A consistent theme within the six papers written by seven authors on the subject of Australia's broadband future, however, emphasises the role that competition and investment in competing infrastructure can play in promoting the development of broadband.
The authors (Michael Porter, Martin Cave, Joshua Gans, Henry Ergas, Eric Ralph, Jeffrey Eisenach and Jim Holmes) are for competition and investment and against structural separation of Telstra, the picking of winners and protection of a fibre-to-the-node operator.
Porter, controversially, advocates the divestment by the winning bidder for the NBN of their cable network (which assumes either Telstra or Optus is the winner) while most of the authors advocate a lighter and more targeted regulatory regime that provides some incentive for infrastructure-based competition.
The CEDA papers are timely, given that the deadline for bids (or, in Telstra's case, proposals) to build the NBN was last week. It was notable that all the bidders (except Telstra) wanted mandatory cut-overs of Telstra's copper network and restrictions on its capacity to build competing infrastructure. The Terria consortium backing the Optus bid also wanted to restrict any expansion of Telstra's HFC (hybrid fibre coaxial) cable network.
As Porter says, cable is the forgotten piece of the Australian broadband puzzle. Both Telstra and Optus have extensive networks in urban areas, although Optus' cable is under-utilised – Telstra says because access to its copper network is under-priced and therefore offers better margins and returns on investment for Optus than if it used its own infrastructure.
As the papers say, in other markets cable has been a major driver of investment and infrastructure-based competition for broadband services. In most other markets, of course, the cable isn't owned by the two major telcos.
Telstra's competitors are concerned about what it might do with its cable should Optus win the tender. They believe it might already have quietly expanded its cable footprint without yet turning it on as a 'Plan B' if it doesn't win the NBN.
If Telstra keeps its high-margin urban customers on a proprietary network it would destroy the economics of a competitor-owned NBN. Hence the pleas from the bidders for legislation that would effectively force Telstra's customers to be herded onto the NBN.
It is already apparent from the nature of the bids that none of the bidders has any intention of meeting the government's request for a fibre-to-the-node network that reaches 98 per cent of the population. They all plan to use copper, satellite and wireless technologies to reach the last 10 per cent or so of the population, if not more.
The CEDA papers see intermodal competition as a plus and a mandated FTTN monopoly as a risk. The Gans paper notes that even if fibre is technically superior to other technologies, they might still be economically superior.
Ergas and Ralph are against the government picking winners, preferring that the government "fix" the regulatory regime and allow investment decision and consumer preferences to determine what infrastructure was deployed. Despite slower speeds and speeds that slow as usage rises, consumers might prefer wireless broadband for many applications.
The papers tend to focus on the largely missing ingredient in the Australian industry, investment. The current regulatory settings favour access over investment. To the extent there has been any meaningful fixed-line investment it has been to take advantage and leverage favourable access pricing decisions, the pricing of access to Telstra's unconditioned loop in particular.
The US experience is referred to in the Eisenach paper. Until 2003 the US had a very intrusive regulatory regime and minimal investment. In 2003 it exempted broadband infrastructure from unbundling requirements and ignited a big surge in investment in competing infrastructure.
Perversely, the best way to encourage competition and competing investment in the Australian fixed line segment might be to allow Telstra to charge more for its services – including, if it won the NBN bid, broadband services.
The US experience indicates that if sufficient headroom is created, competitors will invest and compete away the excess profitability. The current settings simply divert some of Telstra's monopoly fixed line profits to its competitors.
A consistent theme within the six papers written by seven authors on the subject of Australia's broadband future, however, emphasises the role that competition and investment in competing infrastructure can play in promoting the development of broadband.
The authors (Michael Porter, Martin Cave, Joshua Gans, Henry Ergas, Eric Ralph, Jeffrey Eisenach and Jim Holmes) are for competition and investment and against structural separation of Telstra, the picking of winners and protection of a fibre-to-the-node operator.
Porter, controversially, advocates the divestment by the winning bidder for the NBN of their cable network (which assumes either Telstra or Optus is the winner) while most of the authors advocate a lighter and more targeted regulatory regime that provides some incentive for infrastructure-based competition.
The CEDA papers are timely, given that the deadline for bids (or, in Telstra's case, proposals) to build the NBN was last week. It was notable that all the bidders (except Telstra) wanted mandatory cut-overs of Telstra's copper network and restrictions on its capacity to build competing infrastructure. The Terria consortium backing the Optus bid also wanted to restrict any expansion of Telstra's HFC (hybrid fibre coaxial) cable network.
As Porter says, cable is the forgotten piece of the Australian broadband puzzle. Both Telstra and Optus have extensive networks in urban areas, although Optus' cable is under-utilised – Telstra says because access to its copper network is under-priced and therefore offers better margins and returns on investment for Optus than if it used its own infrastructure.
As the papers say, in other markets cable has been a major driver of investment and infrastructure-based competition for broadband services. In most other markets, of course, the cable isn't owned by the two major telcos.
Telstra's competitors are concerned about what it might do with its cable should Optus win the tender. They believe it might already have quietly expanded its cable footprint without yet turning it on as a 'Plan B' if it doesn't win the NBN.
If Telstra keeps its high-margin urban customers on a proprietary network it would destroy the economics of a competitor-owned NBN. Hence the pleas from the bidders for legislation that would effectively force Telstra's customers to be herded onto the NBN.
It is already apparent from the nature of the bids that none of the bidders has any intention of meeting the government's request for a fibre-to-the-node network that reaches 98 per cent of the population. They all plan to use copper, satellite and wireless technologies to reach the last 10 per cent or so of the population, if not more.
The CEDA papers see intermodal competition as a plus and a mandated FTTN monopoly as a risk. The Gans paper notes that even if fibre is technically superior to other technologies, they might still be economically superior.
Ergas and Ralph are against the government picking winners, preferring that the government "fix" the regulatory regime and allow investment decision and consumer preferences to determine what infrastructure was deployed. Despite slower speeds and speeds that slow as usage rises, consumers might prefer wireless broadband for many applications.
The papers tend to focus on the largely missing ingredient in the Australian industry, investment. The current regulatory settings favour access over investment. To the extent there has been any meaningful fixed-line investment it has been to take advantage and leverage favourable access pricing decisions, the pricing of access to Telstra's unconditioned loop in particular.
The US experience is referred to in the Eisenach paper. Until 2003 the US had a very intrusive regulatory regime and minimal investment. In 2003 it exempted broadband infrastructure from unbundling requirements and ignited a big surge in investment in competing infrastructure.
Perversely, the best way to encourage competition and competing investment in the Australian fixed line segment might be to allow Telstra to charge more for its services – including, if it won the NBN bid, broadband services.
The US experience indicates that if sufficient headroom is created, competitors will invest and compete away the excess profitability. The current settings simply divert some of Telstra's monopoly fixed line profits to its competitors.
Share this article and show your support
Call 1300 880 160
Start a chat
Schedule a call
