HFC's flawed competition promise

The ACCC was right to approve Optus' $800 million HFC deal because infrastructure-based competition in Australia just doesn't work .

The discussion around the ACCC acceptance of the deal between NBN Co and Optus that will lead to the decommissioning of the HFC network has again opened up the debate surrounding the infrastructure-based competition issues in relation to the NBN.

First of all, as I have mentioned many times before, it is important to note that because of the new government policies competition will move from competition between pipes to competition between services and applications which will be delivered to the customers over the NBN pipe. As this is a wholesale-based utilities-based infrastructure there is no need for competing pipes. We don’t have this with electricity, water and gas – and the current telecoms infrastructure, owned by Telstra, is in fact also a monopoly. Optus HFC is the only significant last-mile fixed infrastructure competitor; they have under 500,000 customers against close to nine million last-mile customers connected to the Telstra network, you can hardly call this serious competition, and that situation hasn’t changed in nearly two decades.

Optus had learned the hard way that infrastructure based competition was not feasible and came to the conclusion, long before the NBN was envisaged, and that it was not going to pursue its HFC network. Subscriber numbers on this network have been stable at around 500,000 for close to a decade. As a matter of fact, the same applies to Telstra’s HFC network; it also has retained a very stable subscriber level – one that has not significantly increased over a decade.

But back to Optus, there were two reasons for its decision. The company’s original plan, which dates back to the mid-1990s, was successfully killed off by Telstra, which chased the company street by street and in the end overbuilt the Optus network to the extent of 80 per cent. So proponents of infrastructure-based competition should take note of this. Here we have – for close to 20 years – competing infrastructure that did not lead to an increase in any useful competition; instead it stifled competition, as it made Telstra the winner. The incumbent became even stronger and in all some $7 billion worth of investments was wasted in the process. This clearly shows that there is absolutely no business case for such a national overbuild, and that fixed infrastructure-based competition is not working. The Coalition was in power during all of that period and it was unable to get that level of competition going when it held the reins; so it is somewhat puzzling why it would want to try it again now.

Another reason for Optus’s decision not to pursue its HFC network is that it is very much aware of the fact that it will eventually need to be replaced by Fibre to the Home (FttH). The fact that Google is overbuilding the HFC network in Kansas City with FttH is a clear indication that they believe their superior infrastructure will out-compete the HFC network.

Also interesting to note is the retreat of Verizon and AT&T from infrastructure-based competition in the fixed broadband market in the USA – opting instead to concentrate on the mobile broadband market. Obviously this transition will take some time, but they have abandoned attempts to compete with the cable companies. Here we see that the cable companies will soon have the monopoly on broadband. If there is no room for infrastructure-based competition in the USA, what hope is there for a country like Australia?

At the same time China’s government has started its national broadband project, and this means that the fibre optic network construction that was launched in 2010 has risen to national importance. Indications are that investment focusing on broadband construction will reach 370 billion yuan this year alone (A$60billion).

The Indian government has launched its NBN plan and this will see 200,000 villages connected to a fibre network.

So, while we could say that Australia was on the bleeding edge when our NBN was launched in 2007-2009 this is no longer the case. The Opposition continues to focus on the lack of fibre rollout in the ‘heavily wounded’ European economies and the USA, but we argue that we should aim to position ourselves among the leading economies in the world – economies that are all, without exception, investing heavily in FttH.

So it does not come as a surprise that Optus has clearly indicated to the ACCC that it will not be investing in HFC. It would be a waste of money. The reality is that Telstra also has not put any effort into increasing its HFC subscriber base. So, given that Telstra arguably also does not believe in HFC and/or cannot make it work, it will be interesting to see what policies the Coalition brings to the table to convince the incumbent to invest in HFC to such levels that it becomes a viable alternative for users. Currently less than five per cent of Australian broadband users are connected to the Telstra HFC network. It would require a massive investment in old technology to extend that footprint to any significant degree. If the Coalition believes this is a viable alternative it would be good to see a cost benefit analysis on it.

Having said all of this, and given that there is at least another three to five years life in both HFC and ADSL2 , I think that a smarter plan – as it takes at least 10 years to roll out the FttH infrastructure – for the NBN could have been to leave the areas where there is HFC (and for that matter ADSL2 ) as they are for the moment, and to initially concentrate the FttH rollout in areas where such services are not available.

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.