TECHNOLOGY SPECTATOR: NBN Co's necessary monopoly

Technology Spectator

The shadow communications minister Malcolm Turnbull's retort last week to the points raised by NBN Co chairman Harrison Young made for interesting reading. While Turnbull engaged in the usual political rhetoric, specious comments and gratuitous insults, he did raise two important points: monopolies and the provision of new services during the transition from Telstra to NBN Co.

Here's what Turnbull has to say on NBN Co's monopoly status.

"We support all Australians having access to very fast broadband, but would prefer it be delivered by the private sector in a competitive environment as far as practicable, instead of by a government owned monopoly provider."

To characterise NBN Co as a monopoly provider may be technically correct but Turnbull's speech is more histrionics than insight.

Fibre to the home is now a regulated service, overseen by the ACCC. Enterprises like TransACT who are already building their own FTTH have sought and been granted exemptions. A prospective entrant with a good story might be able to convince the ACCC to allow them to compete with NBN Co, but I'd expect with the proviso of "equal access".

The only "monopoly" NBN Co is in the provision of wholesale, not retail, services. The intention is to guarantee a level playing-field for retail ISPs and allow competition and choice for end-users. The ACCC also regulates what NBN Co can charge, this is not a free-for-all.

Monopolies vs monopoly behaviour

The reason we have an NBN is because Telstra didn't invest in a new distribution network over the last 20 years when it would've cost less than 1 per cent per annum and wouldn't co-operate with the Rudd government in building a fibre-to-the-node network in 2008.

We now have the Coalition embracing NBN Co and a national broadband network because the communications minister managed to get Telstra to agree to structural separation in April.

Both sides of politics have created the mess in the telecoms sector but the Howard/Costello government created the monster of a fully privatised Telstra. The "T3" public offering in 2006 was the time to structurally separate the business. Without being answerable to the government as a majority shareholder, Telstra was always destined to move from being combative, recalcitrant and uncooperative to completely uncontrollable.

The 1995-1997 HFC rollout by Telstra and Optus, which only passed 2.5 million homes, twice, for $7 billion happened under both Keating and Howard governments.

Both Telstra and Optus wrote-off multi-billion dollar investments to the detriment of their owners/shareholders and instead of getting a viable cable TV business in Australia, we got a crippled, woefully inadequate network that didn't support viable content providers.

There are a couple of things to remember here. Firstly, Telstra wasn't technically a monopoly, but it behaved as one, attacking and extinguishing competing businesses.

Then there was a massive governance and oversight failure by both sides of politics in allowing Telstra to sabotage the Optus cable rollout.

This action by Telstra as the dominant market player – and which still has an almost entire monopoly in the copper distribution network, (TransAct, Internode/Agile, Cable-TV in rural VIC) – was deliberate and planned.

They have always been large enough to behave as an effective monopoly, without technically being one.

Telstra management have since 1992 actively sought to prevent competition in every area they could. We know from the HFC debacle, what they would've done if anyone else attempted to build a full fibre network: they would've overbuilt them and undercut their pricing. Exactly what they will do with HFC against NBN Co if they are not restrained.

TransACT invested between $280 million in FttN and HFC networks in Canberra and regional Victoria, and sold it last year for $60 million. Partly, I suspect, because of their own "irrational exuberance" and marketing/managerial approach, like AusSat in the 80s, but mostly because Telstra destroyed their business model: their ADSL pricing was cheaper and had a broader reach.

The elephant in the room is that left to their own devices, telcos in competitive markets haven't installed full fibre distribution networks, though they fully converted their long-distance and internal networks a decade or more ago.

If the free market and maximum competition is so good and so efficient, why didn't Telstra start deploying fibre to homes by 1995? If they didn't deploy the fibre, why not an incremental upgrade program of installing empty conduit into which fibre could be inexpensively installed later? Or an incremental upgrade program, like Y2K, would've had an almost zero marginal cost spread over the last 20 years.

The question for Mr Turnbull needs to ask is why, in the most competitive and hence "efficient" marketplaces, have telcos not converted to full fibre distribution networks?
Why have sections of Korea, Japan and I'm guessing Singapore done so when they usually have state owned telcos?

I suspect the answer is simple economics. When all your competitors are using the same technology as you, you all have around the same cost structures, similar margins, similar cost of finance.

Because of the high cost-of-entry and guaranteed low-initial consumer take-up rate due to contracts and conversion delays, no single telco will ever see an attractive rate of return on such expensive investments.

Even for dominant or sole-supplier telcos, they have no economic incentive to change technologies. Each year they can change-out just a little of their degraded copper, raise prices just a little to cover increased maintenance and continue "business as usual".

Greenfields: Who's the bad guy

With regards to the greenfields, Turnbull validly observes that Telstra isn't installing services to new homes and NBN Co and Fujitsu aren't installing fibre – leaving home buyers in many greenfield developments without any fixed-line service.

Turnbull's observations have come under fire from Conroy who said that his opposition counterpart was deceiving the Australian public.

According to Conroy, Turnbull has wrongly assumed that all new homes completed in the past 18 months in estates of over 100 lots were NBN Co's responsibility.

"This is incorrect. The agreement reached with Telstra states that if Stage 5 planning approval had been received prior to 1 January 2011 these homes remained the responsibility of Telstra. As outlined in the 2012-2015 Corporate Plan, since 1 January 2011 NBN Co has received development applications for approximately 132,000 new housing lots. These applications span across the next eight years to 2020.

"NBN Co has fibre construction commenced or completed for 29,000 lots in new housing estates already, and has passed more than 15,000 of these. This includes lots where homes have yet to be built. The Universal Service Obligation requires that people in homes without fixed line telecommunications services have access to a mobile phone charged at landline rates.

"This is the exact same system as was used when Telstra was the telecommunications provider of last resort."

So it all comes down to a question of responsibility and on wonders who's really the bad guy here?

My contention is that if Telstra actually cared for customers, it would seek exemptions from the ACCC to install copper services until the NBN Co process is up and running smoothly. While doing so, it could install empty conduit for fibre, and then could even ask NBN Co to pay a premium for those installs.

But they don't. They are deliberately and consciously leaving customers out in the cold.

How can that utter disregard for customers for one of the modern world's most basic utility services be considered acceptable, let alone tolerated by customers and regulatory authorities?