Telstra gets the money and the box

David Thodey played his NBN hand very well, with Telstra getting all the money originally agreed but also being given a reserved part of the NBN to keep servicing its customers.

Telstra’s David Thodey has played his hand very nicely indeed, and has even managed to make it seem like a draw, which is by far the best way to win a contest with a politician.

We revealed in July that the NBN negotiations were now about the acquisition of Telstra’s copper network -- the re-nationalisation of a previously public asset -- but it took a few more months for Telstra to wring every last drop from its very strong negotiating position and then for the deal to be positioned as a win-win.

Not that the Government is a big loser, it’s just that once fibre-to-the-premises was changed to fibre-to-the-node with the election of the Coalition last year, Telstra had the Government over a barrel.

Labor’s NBN was, at heart, an anti-Telstra invention, born out of the fires of anti-Telstra sentiment in the ALP during the turbulent reign of Sol Trujillo.

Telstra would have got $11 billion cash, it’s true, but it would have been disenfranchised -- Gulliver captured by a thousand Lilliputian competitors using the new Government-owned infrastructure.

But because the Government needs Telstra’s copper network to fulfil one of the election promises that is to be kept -- that is, to not build a national fibre network -- and because NBN needs the hybrid cable network so as to not dig up millions of city gardens, Telstra has been able to negotiate two “continuity deeds”.

The full details of these deeds were not revealed yesterday, but the summaries in yesterday’s statement are revealing enough:

1. Telstra licences part of the HFC network’s spectrum to supply its own broadband customers during the migration period, and also to carry existing Foxtel customers;

2. Telstra licences parts of the copper network to support Telstra continuing to provide PSTN, DSL, ULLS and LSS, retail and wholesale special services, services to “non-premises” and “long copper tails” outside the rollout region.

PTSN is the public switched telephone network, DSL is digital subscriber line, or copper broadband, ULLS is unconditioned local loop (with no dial tone) and LSS is line-sharing services. That is, everything.

What’s the term of this deal? According to the statement: “Copper continuity licences run for as long as Telstra supplies the copper services described above.”

In other words, it looks like Telstra has been given a reserved part of the NBN to keep servicing its customers -- forever on copper and during the migration to NBN on HFC.

The deed says that the charge for these licences is to be “value neutral” to Telstra, but the value of customer retention is not about the money -- it’s about the market share, and is therefore priceless.

Telstra was originally going to be paid $4bn to disconnect its customers. Now it looks like Telstra still gets that money, and doesn’t have to disconnect its customers. Beautiful.

By the way, on the subject of the $11bn, it’s very neat that they have kept the discount rate at 10 per cent in calculating the NPV.

In the original agreement of June 2010, the net present value of $11bn was derived from various long-term cash flows to Telstra from renting its ducts ($5bn) and for disconnecting its customers ($4bn) (which it doesn’t have to do now) and for “other Government payments” ($2bn).

The discount rate used to calculate the NPV was 10 per cent -- that is, future cash flows were reduced by 10 per cent per year to account for the time value of money and risk of getting money from the Government. At the time, the Government bond yield was 5.4 per cent.

The bond yield is now 2.9 per cent. That means the time value of money and the risk of receiving money from the Government has almost halved. Yet the discount rate in the Telstra calculations has been left at 10 per cent.

The original deal implied total cash flows to Telstra of roughly $1.5bn a year, totalling $27bn in real cash (which is how you get an NPV of $11bn using a 10 per cent discount rate).

If the discount rate were halved, as arguably it should be now, then the NPV would be about $17bn.

But that would be rubbing the Government’s nose in it -- Telstra keeps its customers, builds the network and gets $6bn more cash.

Best leave the discount rate at 10 per cent: you never want to rub politicians noses in anything if you can avoid it.

And finally, on a personal note: I am now getting 100 megabits per second from my Telstra cable internet connection -- 115 mbs, in fact. The NBN has not been rolled out in my neighbourhood, but 100mbs was what the NBN was being built to deliver, at vast expense. So I’m getting it already from Telstra’s 15-year-old cable.

That means the cable that NBN Co is acquiring from Telstra and Optus will do perfectly well for the more than three million homes passed.

Of the rest, there will be a lot of optic fibre -- what’s been rolled out already, and new estates.

Will there actually be much FTTN? Not a lot.