Turnbull's NBN headache rages on

Twelve months after Communications Minister Malcolm Turnbull opened a can of worms by setting in motion a radically different agenda for the National Broadband Network he is finding out that achieving the desired outcome isn’t going to be a walk in the park.

In fact, the past couple of weeks have provided an insight into how hard it will be for Turnbull to stuff the worms back into the can. The smart money is on the worms getting away.

In an effort to provide broader justification for the government’s view of telecommunications competition and regulation, and how the unwanted NBN can be sidelined, the government’s hand-picked review and audit teams have provided a constant stream of reports that call for deregulation, increased competition and a raft of other outcomes that align with Coalition policy.

But what Turnbull does not appear to understand is that after agreeing to the NBN, albeit reluctantly, the telecommunications industry is yet to agree that the new playing field is level. TPG is a prime example of a telco that’s doing its best to take advantage of the turmoil, and so it should.

Stalled reviews 

The Competition Policy Review panel led by Professor Ian Harper released a draft report (PDF) this week and when it comes to telecommunications, the draft report stands by the government’s calls for reduced industry regulation and associated red-tape.

The draft recommendations correlate closely with the first report released by the Cost-Benefit Analysis and Review of Regulation panel led by Dr Michael Vertigan on telecommunication access arrangements and regulation of the NBN.

Unsurprisingly the Harper review has recommended that the Australian Competition and Consumer Commission should no longer be responsible for access and pricing regulation and that a new access and pricing regulator be created.

The government’s Smaller Government Reform Agenda announced in the 2014-15 budget included reducing the number of small government agencies in order to streamline the delivery of public services and as a consequence the Telecommunications Universal Service Management Agency (TUSMA), set up by the former government to oversee the universal service levy, was scrapped.

So how can the government justify setting up a new small government agency to do what the ACCC is doing quite capably now? As a smoke screen to justify legislative changes that support Coalition policy of course.

As part of this shift in responsibility is the recommendation that price signalling legislation, which is currently applied only to the banking sector, be scrapped. The legislation aims to stop companies from illegally colluding on prices or terms for products and services.

Recently the larger telcos have become extremely worried about comments by the ACCC chairman Rod Sims that the ACCC would consider extending the monitoring and prohibition of price signalling to the telecommunications industry and unsurprisingly the larger telcos have supported the scrapping of this legislation or the application of the legislation to all industries. That's something the government will not want to do, so scrapping the legislation looks like the preferred option.

The draft report also states that the Vertigan panel’s third report would provide recommendations on aspects of competition in the telecommunication industry not covered in the draft report – possibly to ensure that the government’s policies are not released prematurely.The third Vertigan report, which is presumably being withheld by the government until the renegotiated Telstra and Optus agreements are finalised, will provide recommendations on changes needed to the regulatory and legislative environment to facilitate increased competition in the telecommunication sector.

Joining the FTTB race

While the hand-picked review and audit panels have built a carefully justified picture of the Coalition’s vision for the telecommunication industry, cracks have started to appear in the façade and it's only a matter of time before more of the worms decide to go their own way.

TPG Telecom is slowly but surely growing market share by focusing on opportunities that have been overlooked by competitors. TPG’s 2013 decision to rollout fibre-to-the-basement (FTTB) using the legislative loophole in the Competition and Consumer Act 2010 Section 152AGA (6) puts a spanner in the works that will cause greater damage over time, especially when other companies realise what TPG can do after the initial FTTB rollout is complete.

The ACCC ruled on September 11 that TPG’s actions were consistent with the legislation and therefore TPG could continue rolling out FTTB to the 500,000 premises identified in TPG’s FTTB plan. Sims stated that “having carefully examined TPG’s plans, the ACCC does not propose to take further action in relation to TPG’s planned fibre to the basement network rollout to supply residential customers in high-rise buildings in Brisbane, Sydney, Melbourne, Adelaide and Perth.”

Sims also made it clear that if the TPG FTTB network extensions were prescribed, after a planned review, that pricing would be set to ensure that TPG made a profit and that any access restrictions and pricing would not be set to benefit NBN Co.

Sims was reported by AFR on September 17 as saying that “this is a hugely important point. What we’re saying is, ‘if you’re providing a wholesale service you should make a reasonable return and we’re not regulating to put you out of business’.”

“We take into account risks, we determine the weighted average cost of capital and what the return on equity should be – it’s what we do all the time.”

Equally TPG would be prevented from setting prices that prevented competitors from accessing the FTTB network.

Turnbull was quick to attempt to allay industry fears by stating that he would look to force TPG and any other company that followed TPG’s lead to functionally separate but the horse has already bolted and the government does not have the legislative power to force telecommunication companies to structurally separate and any that willingly undertook to separate would be looking for considerable compensation.

What will Telstra and Optus do?

So what are the broader implications of TPG’s actions?

After rolling out FTTB to 500,000 high value premises, TPG will turn its attention to other premises that fall within the permitted 1km network extension range. This could be another 500,000 premises, especially in dense inner urban areas. And as NBN Co is not exactly setting any speed records rolling out its network, if TPG moves fast enough it could end up connecting a million or more premises.

While TPG is building out its network, it's taking steps to grow its product offering and aims to have a premium TV service available in early 2015. TPG’s strategy is working and its market share continues to grow as does its net profit – in the year to July 31 it was up 15 per cent on the previous year.

SingTel-Optus must be crunching the numbers too because by using the same loophole it could extend the Optus HFC and fibre networks and pick up a corresponding number of premises, something that Telstra cannot do if it is unable to find a way out of the 2011 NBN Co agreement.

The question though that must be answered by new Optus CEO Allen Lew is will Optus continue to float along or will it become a serious competitor?

In a Fairfax article on September 12 Lew was reported to say that “his job will be to ‘reinvigorate’ the Australian company and help it grow in the face of tough competition from rivals such as Telstra and analysts' forecasts that its revenues will shrink.”

If Lew is serious then the first thing that he will do is to walk away from the 2011 SingTel-Optus NBN Co agreement and look to upgrade and grow the Optus HFC and fibre networks, for any failure to do so will see TPG eat into Optus’s customer base and profit margin.

Optus chairman Paul O’Sullivan told Fairfax “it was investigating the possibility of using its assets to offer fibre to the basement services.”

Even more interesting would be the possibility that Optus could add high speed Wi-Fi to its existing network and grow its customer base without the need for cables into premises. The spread of high speed Wi-Fi in New Zealand has proved to be a winner for the structurally separated Spark and Chorus (formerly Telecom New Zealand) but is there a company in Australia that will take a serious look at using high speed Wi-Fi to capture new customers in residential areas?

And Telstra must be wondering by now if it needs to reassess its position. Telstra potentially has the most to lose if its rivals choose to compete with TPG and in doing so cherry pick up to five million high value inner urban premises.

Telstra CEO David Thodey did not appear concerned about TPG’s FTTB rollout when he said on this week that “I don't think it is making a significant difference” and “I can resell the TPG offering.”

But will this position change when someone points out to Thodey that over the next few years the number of premises connected to networks other than NBN Co’s could grow significantly, perhaps to the point where even Telstra will need to directly compete?

Thodey has taken every opportunity recently to point out that Telstra will not get "a dollar more, and not a dollar less" than the 2011 NBN Co agreement but of course he was forgetting to mention the $120 million FTTN rollout contract signed with NBN Co for 1000 nodes and 120,000 premises to be connected to the NBN, future FTTN rollout contracts and the as yet to be announced substantial ongoing maintenance and upgrade contracts for the copper, HFC and leasing arrangements for Telstra’s infrastructure.

Thodey told retail shareholders yesterday that there was “a long way to go” before the NBN Co agreement renegotiation will be completed and his statement is a real blow to the government at a time when the Coalition’s NBN plan is under sustained attack from many quarters.

With the 2016 election rapidly approaching, the Communications Minister should be aware that if events continue as they are now he may yet become the first minister to be replaced by the Abbott government in the lead-up to the 2016 election.

Turnbull needs the NBN Co-Telstra agreement renegotiation to be completed quickly before yet another worm decides to wander off.

Mark Gregory is a Senior Lecturer in the School of Electrical and Computer Engineering at RMIT University