Teflon Telstra emerges without an NBN bruise

Under a Coalition NBN, Telstra is set to win accelerated cash and infrastructure payments, healthier margins and new build deals – all with comparatively little downside.

The sharemarket response to yesterday's launch of the Coalition’s national broadband network was revealing. There was no response.

Given that the policy unveiled by Malcolm Turnbull and Tony Abbott would fundamentally change both the nature of the network and Telstra’s current contracts with the government and NBN Co, it is curious that new uncertainty in Telstra’s medium-term outlook wasn’t reflected in its share price, which was essentially unchanged.

Maybe that’s because Abbott declared that (unlike Stephen Conroy) he wouldn’t go to war with Telstra and would renegotiate a deal with Telstra that would ensure its shareholders were ‘’kept whole’’, or because the market takes the pragmatic and rational view that Telstra isn’t going to agree to anything that surrenders the $11 billion of net present value it negotiated with Conroy and NBN Co.

It may get some of that value in a different form – it would get to keep its HFC cable network under the Coalition’s NBN, for instance – but that would be its base negotiating position and Turnbull and Abbott clearly understand that.

From Telstra’s perspective it would probably appreciate the opportunity to sell its copper sub-loop – the copper between its nodes and individual premises – to NBN Co.

The faster rollout of the Coalition’s version of the NBN would also accelerate the cash payments for disconnecting customers which would inflate the real value of those payments to Telstra.

It would presumably still get its infrastructure access payments, again at an accelerated rate, although the planned changes to the nature of the NBN build, which would prioritise rural and regional areas over urban centres might adversely affect those flows of payments.

It might also play a bigger role in the actual building of the network – for some reason, apart from the building of the transit network, Telstra hasn’t been involved despite the shambolic nature of the rollout of the NBN so far – and collect some payments for leveraging off its understanding of its own network.

Against that, the early focus of the network build in those less-populated regions where Telstra faces the least competition today would presumably impact its earnings and margins and market shares earlier and harder than the current NBN rollout.

It would also lose its compensation for shutting down the HFC cable to all services other than Foxtel; would have to create third party access, or a wholesale offer, to the HFC platform and, of course, it would have to once again face the distraction and cost of a lengthy renegotiation of its deal with the government and a new assessment from the Australian Competition and Consumer Commission.

While shuffling the various streams of value around to deliver equivalent value to Telstra shareholders might be complex it ought to be doable and Telstra would be particularly interested in the prospect that it could retain its HFC network and therefore still own some fixed line infrastructure.

In Melbourne and Sydney that network, which passes more than 2.5 million homes in the capital cities, was upgraded to deliver maximum speeds of 100 Mbps not that long ago. The technology to upgrade the network further to speeds of around 300 Mbps is available and functioning in other markets.

While HFC networks slow as the numbers of users on them increase, the reason Conroy wanted the Telstra and Optus networks effectively shut down was their prospective ability to compete with the NBN in the most profitable catchment areas. Telstra would have that ability under the Coalition’s NBN – which would also, incidentally (and intentionally) help to discipline NBN Co’s pricing.

The Coalition’s NBN would not only be quicker, and much cheaper, to build than the Conroy NBN but as a result would be accessible earlier and more cheaply for consumers, which might explain why Telstra’s competitors were generally (albeit not unanimously) quite approving of Turnbull’s plan.

Turnbull said the estimated monthly wholesale price his version of the NBN would charge in 2021 was $38, compared with NBN Co’s $62 a month and that the estimated retail price would be around $66 a month for a 12 Mbps service against NBN Co’s $90.

Whatever the actual numbers, the Coalition version, because it would cost much less (the Coalition says at least $17 billion) should have significantly lower wholesale charges, delivering both faster take-up by consumers and better margins for retailers. That would be good for consumers, the industry and, as inevitably the biggest retailer, good for Telstra.

There has, of course, been strong criticism of the Coalition plan from those who want the fully-fibre version regardless of its cost, even though Turnbull argued that in real terms it would be cheaper to build a fibre-to-the-premises network in two phases a decade apart than to go straight to a national FTTP network.

He also plans what is effectively a cost-benefit analysis of both plans, so at least there will be some capacity to more intelligently compare their relative merits and costs within the context of their foreseeable usage.

Given the criticisms, it is worth referring again to a speech Telstra’s Kate McKenzie gave yesterday which was discussed in Business Spectator (Telstra’s plans to ease its traffic jams, April 9).

In it, referring primarily to wireless networks (although she said there was a similar experience on Telstra’s fixed network), she revealed that the top 1 per cent of users accounted for 25-30 per cent of traffic and that Telstra’s experience was that these users could download more than 130GB a day. The bottom 80 per cent of users accounted for less than 15 per cent of aggregate data.

If that experience were translated into a Conroy NBN environment – as it almost certainly would, given that most households wouldn’t know what to do with 100 Mbps – most taxpayers, and taxpayers as fixed line customers, would be substantially subsidising the heavy use of the network of a few.

The economics of the NBN, albeit perhaps in its initial phase, could be extremely regressive whereas the Coalition’s plan would at least force the heavy users to pay for a fibre connection to their premises if they wanted much faster speeds rather than socialising the costs within the overall network build.

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