Time to untangle the NBN

News today that Telstra is romping back to market dominance in broadband, signing up 67 per cent of new customers in the last quarter, according to The Australian, should not come as a surprise to Business Spectator readers.

In September, Internode boss Simon Hackett laid out the case for a price squeeze being created in the ADSL2 market, with Telstra gaining competitive advantage simply by 'doing nothing' (Telstra's price squeeze must end, September 30

It is well worth revisiting what he wrote at the time: "Telstra Wholesale has failed to appropriately adjust the relevant wholesale access costs for access to 'ADSL2 ports and aggregation', that it charges telecommunications companies (such as Internode) for wholesale ADSL2 service access in monopoly geographic areas ... (which we believe constitute as much as half of the entire Australian population)."

The same newspaper reports today that the ACCC looks set to side with broadband industry players to demand that NBN Co build 200 points of interconnect into the national fibre network, rather than the 14 currently planned, which would leave hundreds of millions of dollars worth of existing infrastructure stranded.

So there, in a nutshell, is a snapshot of the ideological battle at the heart of the NBN conflict. The private sector monopolisation of telecommunications can't (and won't) be allowed to continue, and the public sector monopoly planned by the government would be wasteful and not as competitive as it should be.

Yesterday I looked at the powerful political weapon that the NBN will be at the next federal election, but there were two questions left hanging:

1) Aren't many of the services the NBN will provide possible using existing technology?

2) Can't the market mostly provide the infrastructure to deliver these services?

It has been frustratingly difficult to answer these questions. In past articles I have argued that all other options should be put on the table, so that the Productivity Commission (or at least somebody) could pick the optimal spend – and allow spare budget to flow elsewhere (A better place for NBN dollars, November 17.)

Business Spectator was also the first to examine a 'good enough' system being rolled out in the UK for a quarter of the per-capita cost of the NBN (BT's lesson for Conroy's NBN, October 6.)

Yet despite these objections, I am beginning to see a deeper logic to the NBN – and significantly the two people who have done most to explain it are Doan Hoang, Professor of Computer Networks at UTS and director of the Advanced Research in Networking Group (Conroy's fading NBN vision, October 27) and more recently, some of the joined-up-thinking of Paul Budde in his pieces on Business Spectator

Together they have filled in the gaps in Stephen Conroy's sales pitch to the nation, which is quite possibly being left incomplete for reasons of political strategy (Conroy's NBN health hustle, December 2.)

Professor Hoang's argument is that the speed of data transfer is not the most important feature of an optical fibre network. Rather, it is the reliability and lack of congestion that would be of most benefit to business, educators and health providers wishing to engage with customers, student and patients.

Taking just the business element, a high-bandwidth connection between business and customer/client that does not cut out, seize up and come and go with peak traffic demands creates a user experience in which any dissatisfaction is down to the company, not the technology. It would be as reliable as a physical shop window.

Likewise, in health applications, the efficiencies are greatest when your 20 minute consultation is not disturbed by a connection 'buffering' and freezing because of bandwidth bottlenecks.

On Wednesday Conroy described in a speech how a young burns victim in rural Queensland has been able to have repeat consultations with a 600km-distant specialist via high definition video conferencing. But the minister has never made it clear enough to his critics that speed, in this scenario, is only part of the package.

Malcolm Turnbull recently pointed out that 2Mbps synchronous broadband is enough to conduct standard definition video conferencing. But this argument only holds if everything's working properly. Saying "this really should be working" is not going to help patients who miss their 20 minutes with a $300-an-hour specialist waiting at the other end of the line.

Paul Budde added to this by pointing out that the cost-benefit analysis calls from the Coalition overlook the startlingly obvious fact that the NBN is not viable, or sensible, unless the government takes a major role in incentivising businesses, educators and health providers to build the services that make it viable.

This goes directly to an excellent point made by Business Spectator reader Andrew Eldridge yesterday in our Conversation section: "The socialist goal for 'every person to have a zillion bites per second by 2020' must be properly tested."

What Budde has explained in a number of recent articles it that testing something that is not yet born, is not possible. While a detailed cost-benefit analysis could build in assumptions about how the private sector would use the $35.7 billion network, it is harder to model cost-benefit effects of a government determined to seed-fund national e-health, e-education and e-businesses projects which aim, essentially, at 100 per cent market penetration, and which generate billions in public expenditure savings each year.

So Eldridge is right – there are no two ways about this. It is a socialist project.

What's missing from this argument is the extent to which the government, under Kevin Rudd, first tried to make it a private-sector, 'capitalist' project.

Senior Labor sources in Canberra have made it very clear to me that in the months leading up to Telstra lodging a 'non conforming' bid to build the NBN, then CEO Sol Trujillo's negotiating team made demands on the government so outlandish, that the total cost to taxpayers would have been only a few billion dollars shy of the current public capital spend.

The pressure from Telstra was for the government's contribution of $4.7 billion to be doubled or tripled, and for the compensation to Telstra for the shutting down of its copper assets to be close to double what shareholders will now receive ($11 billion in net present value).

So 'fiscal conservative' Rudd set loose Stephen Conroy to sell a public monopoly instead. To my mind he has not done this well, but he has not done so badly as to let the project fail.

Voters already like the NBN and a new Access Economic study commissioned by Macquarie Telecom found that "more than 50 per cent of [business] respondents say a high speed fibre network will enable them to compete better, expand their target markets and geographic reach".

The report also stated that: "Given its increased reach, speed and capacity, the NBN can be expected to drive productivity gains of an order of magnitude even greater than those experienced as a result of earlier ICT/broadband innovation."

The NBN is a very large and complex picture, but finally the argument is gaining force – without or without Conroy's salesmanship – that the network is going to offer its owners (taxpayers) very substantial returns in economic and social terms.

It is these that in the long run will justify the government's apparently pig-headed determination to split Telstra, replace copper with fibre and fund the creation of new public services and private sector opportunities.

The financial return, now somewhat undermined by the ACCC's position on points of interconnect, is likely to look, in retrospect, like nothing more than an afterthought.