TPG lays down the gauntlet on the NBN

How will Malcolm Turnbull and Ziggy Switkowski respond to confirmation that TPG has already started to build its fibre-to-the-basement network infrastructure?

The imminent launch by TPG Telecom of its national broadband network plans and its confirmation that it has started building its fibre-to-the-basement broadband network adds urgency to the question of how Malcolm Turnbull and NBN Co should respond.

TPG intends to release the plans within a couple of weeks. It also said today that the construction phase for its network was underway, with construction starting in Pyrmont and Ultimo in Sydney, Southbank and the Docklands in Melbourne and Fortitude Valley in Brisbane.

With TPG estimating that its network could capture up to 500,000 customers and Telstra, Optus and others saying that if the TPG roll-out continues they would consider jumping through the "loophole" that TPG is exploiting with infrastructure of their own, the commencement of TPG’s network construction represents, as discussed previously (Dialling up the pressure on Turnbull’s NBN, March 18) a very direct threat to NBN Co’s fragile economics.

NBN Co’s chairman, Ziggy Switkowski, has estimated that TPG could, if it were allowed to continue building its network, lop five to 10 per cent off the value of the NBN. If Telstra and Optus emulated it, the value destruction would be considerably greater.

At the moment the issue of whether the government should act to close the loophole – an exemption in the legislation granting NBN Co a wholesale broadband monopoly that permits extensions of less than a kilometre to networks built before 2010 – has been left to the Vertigan committee that is conducting a cost-benefit analysis of the NBN.

The committee isn’t due to hand in its report until July, although there have been suggestions that Turnbull might ask it to provide a recommendation on how to respond to the threat of "cherry picking" of NBN Co’s high-value customers via the exemption earlier than that.

Earlier this month, appearing before a Senate committee, Switkowski made it clear that NBN Co was concerned about the threat posed by TPG if its roll-out continues. He also made it apparent that NBN Co has some potential responses of its own.

In response to a question from Stephen Conroy, he said that his understanding of the policy developed by Conroy when Labor was in government was that NBN Co would be the exclusive wholesale provider of the national broadband network and that was the policy it was implementing.

"If there are infrastructure-based enterprises who want to test the limits of the policy they take a risk that NBN (Co) will respond in some way, as was the original construct," he said.

Pressed by Conroy, Switkowski agreed that one of the probable scenarios was that NBN Co could run fibre, not just to the basement, but all the way through to apartments. He also said, however, that NBN Co could quite quickly roll fibre to the basement and use the existing wiring within buildings to deliver broadband and already had pilots for that approach underway.

Switkowski wouldn’t have to dig too deeply into his memory banks to find an analogous situation.

He was the chief executive of Optus in the 1990s who had to clean up that group and its partly-owned Optus Vision after its plans to roll-out a HFC network capable of delivering voice, data and pay television services ran head first into a Telstra response.

Telstra, having failed in a bid (with News Corp) to acquire a satellite licence for pay TV, was galvanised by a decision by Optus, in the Optus Vision partnership with Continental Cablevision of the US and the Seven and Nine networks, to roll out its HFC cable network at a cost of about $3 billion.

Telstra’s then chief executive, Frank Blount, had already been considering a cable network of his own. The Optus strategy threatened the dominance of Telstra’s fixed line network, so Blount launched his own HFC roll-out with Telstra’s crews famously following the Optus roll-out down every street.

Despite the fact that Optus, having tied up the key networks, the key sporting rights and most of the better movie studios in the US, had a massive advantage in content, the Foxtel partnership (which eventually included Nine) eventually overwhelmed Optus.

Switkowski joined Telstra after his stint as CEO of Optus and, 18 months after being recruited, became Blount’s successor.

So, he is fully aware that if he deploys a similar strategy and cables up exactly the same apartment buildings as TPG and exploits the NBN brand – and the reality that retailers would have a much wider and deeper relationship with NBN Co than TPG – that he ought to be able to undermine the economics of the TPG plan and probably bring it to an abrupt halt.

At the very least, even if NBN Co deployed the same fibre-to-the-basement approach as TPG rather than the more complex and expensive option of running fibre through the buildings, NBN Co would significantly reduce the "first mover" advantage TPG currently has.

One suspects that one of the earliest decisions for new NBN Co chief executive, the former Vodafone Australia CEO Bill Morrow, will be whether or not to re-prioritise the network roll-out to fire some warning shots across the bows of TPG and any other player that might want to emulate it.

If he requires a quick history of the success of similar tactics in the Australia telecommunications sector, Switkowski is just the man to provide it.

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