TECHNOLOGY SPECTATOR: Slaying the NBN monopoly

The NBN is a welcome project but sadly does not look like being a competitive one. Have we learnt nothing about the effect of state-run telecommunications monopolies in this country?

Technology Spectator

There has been a lot of ink spilt on the NBN, its roll-out, and what it means for competition in the telco sector. However, it’s worth noting that a lot of the commentary on NBN pricing has centred on the retail aspects of pricing and it might be pertinent to have a look beyond the retail aspects of NBN and delve into the wholesale layer of the NBN.|

What’s needed is a better understanding of whether the proposed construct is actually good for competition. Also, as the NBN will eventually be privatised, we need to consider if we have a case of history repeating itself and if we are going to ultimately end up with the same lack of competition that characterised the days of the Telecom Australia/Telstra monopoly.

It is tough to argue against the main thrust of a government-led roll-out of national broadband infrastructure. Sure, there are many ways to skin the proverbial cat, and there will be myriad constructs propounded by all and sundry with their own agenda and revenue bases to protect and grow, but most people were always going to be in favour of some form of broadband network. The question marks and areas of greatest contention have, unsurprisingly, been around costs, framework and execution.

The wholesale framework is an interesting beast. The NBN will be a government-run asset for the "benefit” of Australia and Australians and there are some projects that are, clearly, suited to be mandated by the state. However, as basic economics will tell you, state-based infrastructure projects create monopolies. A monopoly will price like a monopoly (i.e. at an inflated level of pricing which is generally greater than pricing set by competitive market forces) and that is not necessarily good for competition.

With the NBN there are two key areas of the regime where there are inadequacies which will affect the wholesale price and in turn affect the retail sale price and the buy price for every Australian:

1. Retailers are only able to buy services from one network, meaning they cannot gain a wholesale pricing advantage.
2. A monopoly that is funded by monopoly pricing, and possible centrally funded or subsidised, will have no incentive to try and lower the buy price and will, by its very nature, be inefficient in its operations.

On top of these competitive weaknesses, the NBN will eventually be privatised. The parliamentary notes reveal discussions on this topic, and it is assumed that at some stage the government of the day will seek to raise money by privatising another state-based telecommunications monopoly.

So, how will that monopoly be any different from the Telstra monopoly that for years has held back innovation and competitive forces that, almost paradoxically, led to this NBN being created in the first place? We build an NBN to break a monopoly only to create a monopoly that will need to be broken.

The wholesale conundrum

When you are in business, you seek to gain a competitive advantage anyway you can. One of the key ingredients of any telco solution is the access that you have to purchase before you can offer retail services to your clients.

When you, and all your competitors, are forced to purchase your main inputs from the same supplier at the same price, it ultimately feeds into your product mix and takes the edge of what you can promote to your customers.

Fortunately, the world has moved on at an incredible rate from when there was only a copper PSTN network. A product mix can now include mobile layers, PABX systems, IP layers; cloud products and an ever evolving mix of services. In many respects, the NBN will be a further enabler of these value-added products and services. Let’s be honest, this is and will be a great, necessary, improvement.

However, the fact that no one can get an advantage from a supplier contract or supplier pricing remains a weakness to the competitive make-up of the future of our telecoms sector. Perhaps that is levelling the playing field away from even greater anti-competitive and monopolistic practices that we have seen in the past. But perhaps that is socialism and not capitalism.

Inefficient network

The other side of the equation is the network itself. When the supply side pricing is set, and is the same for each and every customer, what incentives will there be for new innovation or creation? What incentive is there to better improve yourself for your customers? Wholesale customers are locked into pricing anyway, why on earth would you try and reduce monopoly pricing to a lower level of margin. Even if you had the gumption to try, is it even achievable or possible?

In any event, history and economics will tell you that all monopolies are inherently inefficient (a view that I sincerely subscribe to having worked at several privatised telecommunications monopolies) and no matter which way you view it, these inefficiencies translate into inflated retail pricing. NBN retail pricing will be higher than it could be under a different model – e.g. a PPP NBN.

Prepare for privatisation

What is most concerning about the NBN is the long-term future of telecommunications in this country. Sure we are going to be stuck with an inefficient state-run asset that makes us all pay inflated prices for our data access. Sure, it’s going to be an improvement on the current set up, but do we really need to create another privatised monopoly? The diverse network technology is there, the software is there, and the money certainly is there to create a brilliant framework of diverse stakeholders, ownership and technologies and avoid the proverbial train wreck.

Should we not avoid future problems by creating the break-up or privatisation provisions of the NBN now? These could easily be enshrined in the relevant legislation. Perhaps a forward thinking government would consider adequate structural separation or ownership provisions.

What we must avoid is a cycle of telecommunications monopolies. Why? Because that is why the NBN was created to enshrine innovation, deliver a better network, create competition and lower data prices. Surely, when you look at the structural weaknesses as set out above, the mark has been missed on all but one front.

Tony Simmons is the managing director and founder of The Full Circle Group, an independent telecommunications consultancy and software firm focused on Telco expense costs and management.