The fall of Australia’s Labor government in the election means significant change for its wholesale National Broadband Network (NBN) plan and for the NBN Co, the company established to build and operate it. Labor’s plan to extend fibre to the home (FTTH) to 93 per cent of the market at a capital cost of $37 billion has foundered as significant delays have plagued the project. Some of these delays were outside the NBN Co’s control, but many were not.
Under the new government, a change in the technology mix is guaranteed, with fibre to the node (FTTN) taking a central role. More importantly, there will be major changes to the operation of the NBN Co and its role in the project, with the incumbent Telstra also making an important contribution.
New emphasis on FTTN and competition
The NBN will remain a wholesale-only layer 2 network which will operate on a structurally separated basis. In contrast to the previous government, the new coalition government is committed to a mixed technology network. The remotest 7 per cent of the market will be serviced with fixed TD-LTE and satellite, just as the previous government had proposed. But for the 93 per cent of the market where fixed broadband is rolled out, the coalition government proposes 22 per cent FTTH (comprising committed rollout contracts and greenfields sites) and 71 per cent FTTN. It currently aims to deliver the FTTN network in 2015, except where hybrid fiber coaxial (HFC) is already available, and over the entire 71 per cent footprint in 2019.
The policy differences were principally driven by the high capital costs of FTTH. The coalition estimates it can deliver its policy for just over $20 billion in capex. In addition, it will not enforce the part of the Telstra/NBN Co agreement that requires Telstra to shut down its HFC network, which covers around 25 per cent of the market. Indeed, the new government will allow competing networks to be constructed, in contrast to the previous government.
These changes will have major implications for the NBN Co, Telstra, and the coalition government itself.
For NBN Co, we will see a distinction emerging between the construction of the network and the operation of the network. The new government remains committed to structural separation of the fixed access network, and NBN Co will certainly remain the NBN’s wholesale operator. Its role in the construction of the network, however, is less secure. The series of lengthy delays in contract allocation and execution have put the NBN two years behind its original schedule and have attracted sharp criticism.
In response, the new government has promised a financial, management, and technical audit of NBN Co, with a view to making significant changes in the management of the company. The coalition spokesman for communications, Malcolm Turnbull, has already stated he wants to see significant changes at the board level. The resignation of the NBN Co CEO Mike Quigley in July 2013 leaves the position open, and his replacement will be appointed by this new board.
Whatever changes are made at the top, a key question for the audit is whether the NBN Co really has the capacity to manage such a large civil works program.
Threats and opportunities for Telstra
For Telstra, the new policy presents both threats and opportunities. Under its agreement with NBN Co, Telstra was to be compensated for the decommissioning of its copper and HFC networks as the NBN rolled out. This forced migration was a unique feature of the Australian project, and a lucrative one for Telstra. Its decommissioning payments had a net present value of $4.5 billion in 2011. In addition, it was due to receive a similar amount in rental payments for NBN access to Telstra’s passive infrastructure. All of this is now under threat in the 71 per cent of the market where FTTN will roll out.
Nevertheless, there are also opportunities for Telstra. The FTTN network will require access to Telstra copper, which will generate rental payments. In addition, we consider it likely that the new government will call on Telstra’s extensive expertise in network construction to accelerate the rollout, and this will generate further revenues for Telstra.
Finally, the new government will need to make the re-orientation of the NBN project its top communications policy priority if it is to meet the ambitious rollout timetable it has set. The two key challenges are the renegotiation of the existing deal between Telstra and NBN Co to incorporate FTTN, and the restructuring of the NBN Co management and strategy.
Significant delays in either of these areas would make it impossible to meet its 2015/2019 targets for the fixed network rollout.
It’s all comes down to execution
New government must execute quickly and there are some good reasons to think it can do what is required.
First, Telstra is not the beast it once was. Under previous CEO Sol Trujillo, Telstra was strongly focused on maintaining its fixed infrastructure advantage. The Labor government’s decision to bypass it with a FTTH network was a direct consequence of this intransigence. The new CEO, David Thodey, sees Telstra’s future in mobile services, content, and cloud services, and has carried Telstra with him in this direction.
Negotiating with Telstra will be an easier task than it once was (though still not an easy one).
Second, FTTN is much less demanding of civil works in suburban streets, which is where precisely where NBN Co has stumbled. The previous government bit off more than it could chew; the new government may just avoid doing that.