NBN Co ups the ante in the broadband battle

Bill Morrow and his chairman Ziggy Switkowski are bringing a strong streak of commerciality to NBN Co, foreshadowing a decisive response to TPG Telecom’s planned cherry-picking roll-out of fibre-to-the-basement in metropolitan areas.

NBN Co announced today that it would bring forward its own roll-out of broadband to apartments and offices in inner cities in response to “emerging competition for high-value customers from vertically integrated telecommunications carriers”.

The vertically integrated carrier it was referring to is TPG, which has begun rolling out its FTTB network and signing up apartments and other multi-unit buildings to exclusive deals with its retail arm.

TPG has estimated that its network could capture up to 500,000 customers. Its network exploits a loophole in the legislation that gave NBN Co a wholesale broadband monopoly and which was designed to prevent cherry-picking of its most valuable prospective customer base in urban Australia.

Switkowski has estimated that if the TPG roll-out were to continue uncontested it could take five to 10 per cent off the value of the NBN. If Telstra and Optus were to respond to TPG with their own roll-outs – as they have threatened –  that figure would be even greater.

At the moment, the Abbott government has left the issue with the Vertigan committee that is undertaking a cost-benefit analysis of the NBN. However, Malcolm Turnbull has asked the committee to give the issue priority and it may provide advice to the government before its broader report is handed over mid-year.

With TPG already signing up and connecting buildings, however, there is some urgency to NBN Co’s response. Morrow, formally in his role as NBN Co chief executive for a couple of weeks, isn’t waiting around for the government to do something.

Today he said that NBN Co will announce its priority areas within weeks. These are expected to include Haymarket in Sydney, New Farm and Fortitude Valley in Brisbane and South Melbourne in Victoria, with service to be available by mid-year.

One can reasonably assume that NBN Co’s priority areas will include any and all of those targeted by TPG in a reprise of Telstra’s response to Optus’ HFC roll-out in the 1990s.

NBN Co has two advantages over TPG: its brand and the fact that it is a wholesale-only broadband provider. As Morrow said, the wholesale-only nature of the NBN means building owners and apartment owners will get access to the full range of retail service providers and benefit from retail competition rather than having only one retail service provider.

TPG’s strategy and the potential for it to force Telstra and Optus to replicate it is a direct threat to the economics of the NBN, which relies on the ability to cross-subsidise loss-making and sub-economic services in rural and regional Australia from the profits it hopes to make in urban areas. It’s a threat to the entire NBN model.

There was an interesting omission in NBN Co’s statement. It didn’t specify what kind of broadband service it would deploy to connect apartments and offices.

Earlier this month, Switkowski told a Senate Committee that NBN Co already had pilots underway to roll fibre out to the basement of buildings, using existing copper wiring within them to deliver broadband to the individual units within the buildings.

He also agreed with Labor’s Stephen Conroy, however, that it was possible that NBN Co could run fibre not just to basements, but all the way through to the individual units within the buildings. That would offer a significant (albeit more costly) advantage over the TPG offering.

The obvious initial response to TPG is to choose the lower-cost FTTB option to blunt TPG’s impact while waiting to see what the Vertigan committee recommends and what the government’s response might be.

The announcement today demonstrates that Morrow and Switkowski aren’t sitting around waiting for government to step in. They are prepared to do what normal commercial enterprises would do in analogous circumstances and respond directly and competitively to a threat to their own interests.