Telstra in the box seat over NBN

Telstra is a crucial player in the construction of a national broadband network in this country, and that is the case regardless of the type of network that is built: the group's ownership of the existing copper wire communications backbone means that it can exact a toll if the copper wire is replaced by Labor's fibre-to-the-home project or piggybacked, as the Coalition's fibre-to-the-node network plan envisages.

That explains why the Coalition says it intends Telstra no harm if it wins power and switches from Labor's high-speed, high-price and labour-intensive fibre-to-the-home project to one that is slower but not fatally so, capable of being upgraded on a "user pays" basis, cheaper at the front-end, and easier to build because 71 per cent of the network will run to neighbourhood nodes. It also explains why Telstra isn't whingeing.

After years of brawling and arm-wrestling Telstra last year finalised an $11 billion NBN deal that would see it structurally separated from its copper wire network. That was a huge step and it will not be reversed, regardless of who is in power.

The pros and cons of the two NBN plans will be debated every which way in the lead-up to the election, but Telstra is basically committed. What it most needs to know is how its existing deal would be modified for a Coalition rollout - and the early signs are that it would not need to be modified very much: the Coalition's plan does not seem likely to deconstruct or seriously undermine the main financial elements of Telstra's compact with Labor and NBN Co, and might actually be more valuable to the telco.

Telstra's existing NBN deal leaves Telstra with ownership of a copper network, but it is an asset that is progressively shut down as the fibre-to-the-home broadband network rolls out. Telstra is paid progressively as that occurs, and is also paid over the life of the broadband network for allowing its copper wire ducts and conduits to be used by NBN fibre. Last year it put a net present value (NPV) of $9 billion on those arrangements, and side deals with the Labor government added another $2 billion of NPV.

The Coalition's NBN would stop seven times out of 10 at neighbourhood nodes: about 22 per cent of it would extend all the way to premises, but more than half of that would be in new housing developments where connections are new. The Coalition would also focus on areas where broadband service upgrades are most needed and leave intact the existing urban hybrid fibre broadband cable networks that are owned by Telstra and Optus. In practice, that would mean that the Coalition's network would be developed "inside-out", from regions and outer suburbs built when dial-up connections were state-of-the-art in towards cities and urban areas where cable networks already offer relatively high broadband speeds.

Telstra would, however, still exact payments for either selling the "last mile" of its existing network to the NBN or allowing it to be used. And while delays in Labor's rollout are pushing the timing of payments out and reducing the net present value of Telstra's deal, a quicker Coalition NBN rollout would accelerate payments to the telco, boost the NPV of the deal and perhaps also accelerate "NBN bonus" cash returns to shareholders.

Citigroup estimates that Telstra would still generate value of $6.2 billion from making its infrastructure including the "last mile" of its copper network available to a Coalition NBN, and generate $4.5 billion of NPV from disconnection payments as its copper wire customers switch onto the NBN, most often via neighbourhood nodes.

There's lots of detail to be sorted. Telstra and Optus could offer wholesale broadband on their cable, or just be retailers. They could keep their cable running when the network arrives in cabled neighbourhoods, or decommission it as a broadband pipe, and be paid to do so.

Telstra would keep its cable open to pipe Foxtel pay TV programming to consumers, but Optus might consider selling the cable outright to a company that wants to wholesale broadband in competition with the NBN.

Telstra might make extra money as an NBN constructor in the Coalition's rollout. On the other side of the ledger, it might also need to spend money to upgrade the last mile of its copper network to make it ready for connection to neighbourhood nodes.

Whatever happened, the Coalition plan would require new legislation, the NBN's role and its regulation would need to be redefined, and Telstra's structural separation undertaking might need revision.

The Coalition's hybrid plan does not appear to seriously undermine the economic rationale of Telstra's co-operation with an NBN rollout, however. It wouldn't be a love-in when the details were thrashed out, but it wouldn't be a cage

fight either.

The Maiden family owns Telstra shares.

mmaiden@fairfaxmedia.com.au