NBN Co's pragmatism puts Telstra in the box seat

The deal struck between NBN Co and Telstra in NSW and Queensland will allow the formerly excluded telco to play a key role in the NBN, with the potential to generate extra value for users and taxpayers.

The $150 million-plus deal NBN Co and Telstra announced today for a large-scale pilot project for fibre-to-the-node infrastructure in NSW and Queensland is inconsequential in the context of both the national broadband network and Telstra itself. It is, however, quite symbolic.

Apart from the transit network -- the backhaul network that runs fibre between the 121 points of interconnect and which is possibly the only piece of NBN infrastructure that is being built on time and on budget -- Telstra had been excluded from any meaningful role in the construction of the NBN.

Given its testy relationship with Stephen Conroy and the former Labor government -- it was the break down in the relationship which ultimately led to Kevin Rudd and Conroy dreaming up their plan to build the NBN and smash Telstra in the process -- it perhaps wasn’t surprising that Telstra wasn’t more involved.

Even under the previous fibre-to-the-premises rollout strategy, however, the extent of the co-operation required from Telstra to displace its copper network and to access its infrastructure (capitalised eventually into the deal worth $11 billion in net present value terms Telstra negotiated with Conroy and NBN Co) and its own experience of building networks should have made it a key participant in building the NBN.

As it transpired, Labor’s FTTP NBN has been a disaster, with its cost blowing out and its ability to meet the roll-out targets and to actually connect customers abysmal.

The change of government last year led to a complete change of strategy and of NBN Co’s management, with the network shifting to FTTN technology with the flexibility to use other technologies to deliver fast-enough broadband at a lower cost and within a shorter timetable.

With Malcolm Turnbull now Communications Minister, Ziggy Switkowski, a former Telstra chief executive in the NBN Co chair and former Vodafone Australia chief executive Bill Morrow replacing Mike Quigley as CEO, the old hostilities have disappeared. Pragmatism has replaced the misplaced and politicised zeal of the former regime.

The deal under which Telstra will ultimately help build 1000 nodes for NBN Co is the biggest engagement Telstra will have had with NBN Co apart from the transit network and means that it has finally been brought into the heart of the construction of the network.

That’s a sensible and desirable development.

The FTTN network will use Telstra’s copper (instead of fibre) to provide the connection between the nodes and individual premises. As with the FTTP roll-out, Telstra knows its copper network better than any third party and it does have a lot of experience in building and expanding networks.

Telstra ought to play a larger role in the 'new' NBN -- and it wants to. In February, at the group’s half-yearly results presentation, David Thodey said he would be very happy to do more work in helping to design and construct the network should opportunities arise that were commercially attractive.

Today’s deal also signals that both NBN Co and Telstra are moving the FTTN project ahead of any definitive renegotiation of the existing $11bn deal that compensated it for providing access to its infrastructure, the disconnection of copper lines and for providing essential services.

That deal was supposed to have been struck mid-year but appears to be drifting towards the latter part of the year even though both NBN Co and Telstra are reporting good and amicable progress in the negotiations.

The hitch appears to be the Vertigan Committee, which was appointed by Turnbull to produce a cost-benefit analysis of the NBN as well as to look at the regulations around the network.

Among those will be the extent to which competition should or should not be allowed – an issue given prominence by TPG’s decision to roll-out its own fibre-to-the-basement technology. Telstra and Optus have threatened to emulate TPG if it isn’t stopped, while NBN Co has said TPG alone has the potential to knock up to 10 per cent of the value of the NBN if it continues to deploy its fibre and sign up customers.

The committee was supposed to finalise its report by the end of this month but it now appears it is running about a month behind schedule.

Until the report has been completed and the government has endorsed or rejected its recommendations, NBN Co and Telstra would be unable to sign off on a revised agreement, given that the recommendations have the potential to shift a lot of value around and alter the regulatory settings in ways that could also impact any deal they agreed.

Telstra’s bottom line, of course, is that any new deal has to deliver at least as much value as the $11bn of net present deal it stands to receive from the existing arrangements.

If it can generate some extra value beyond that by helping Turnbull and the NBN Co leadership get the derailed project they inherited back on track, that would be a bonus and a positive outcome for all the parties involved, including broadband users and the taxpayers exposed to the massive and open-ended cost of Conroy and Rudd’s folly.