analysis In several radio interviews this week, Shadow Communications Minister Malcolm Turnbull stated that the National Broadband Network project would cause consumer broadband prices to rise higher than those currently on the market. However, unfortunately this statement was factually incorrect.

To illustrate why, firstly, let’s go through what Turnbull said. According to transcripts available on Turnbull’s website, Turnbull said the following on 2GB in an interview with Ben Fordham on Wednesday:

” … Australians are waking up to how much this is going to cost them – not just as taxpayers but also it’s going to be more expensive as a consumer. You see this is the penny that hasn’t quite dropped. I think most people recognise that this is a very, very expensive project. But what they haven’t quite – the penny hasn’t quite fully dropped that this is going to be expensive in terms of the usage charges.”

“Now what’s going to happen here is because there is no competition, because this is a government monopoly and because they are spending so much money so they’re overcapitalising it, inevitably prices are going to be high.”

In a separate interview on the same day with 2UE’s Paul Murray, Turnbull said the following: “What we do know is that it’s going to cost a bomb, and it’s not going to make broadband access any cheaper. It’s going to make it more expensive.”

The Coalition has publicly stated its opinion that broadband prices will be higher under the NBN than the current ADSL-dominated broadband market repeatedly over the past six months. In September, Liberal MP Paul Fletcher stated that new NBN pricing released by iiNet at the time was higher than existing ADSL prices. And several months earlier, Turnbull stated that early pricing released by Internode for services on the NBN demonstrated the project would drive consumer broadband prices higher.

However, unfortunately the Coalition’s statements on this matter have been factually incorrect.

Almost all of Australia’s major ISPs released their first tranche of NBN pricing over the closing months of 2011, and in almost all cases, the prices are directly comparable to current pricing available over Telstra’s copper network (ADSL) or the HFC cable networks operated by Telstra and Optus.

To illustrate this fact, let’s examine the NBN prices of Optus, and compare them with the telco’s existing ADSL broadband prices. In naked DSL, Optus currently offers three plans, at $59.99, $69.99 and $79.99 monthly price points, and with 120GB, 150GB and 500GB of data quota included. And in naked NBN, Optus offers exactly the same price points and download quotas.

In bundled DSL, Optus currently offers five plans, at $79, $99, $109, $129 and $149 price points, and with 120GB, 500GB and terabyte download quotas, with varying amounts of call charges included — usually unlimited ‘standard’ local and national telephone calls within Australia, to both landlines and mobile phones. And in bundled NBN, Optus offers many of the same price points and quotas — except sometimes they’re cheaper. The company’s $79 plan with 120 GB of data has morphed into a $64.94 plan (with, admittedly slightly lesser calling value). The $109 bundled plan with 500GB of data and unlimited calls has been copied straight across, and so has the $129 plan with a terabyte of data and unlimited calls.

It should be clear that virtually every single aspect of Optus’ NBN pricing plans represents better value than the telco’s current ADSL plans — and for exactly the same price. Optus doesn’t currently actively promote its HFC cable offering, so it’s tough to get an idea of what its prices are there. But if you compare its ADSL broadband plans to its NBN broadband plans, it seems clear that the plans are virtually identical.

It’s a similar case with Australia’s second-largest provider of ADSL broadband services, iiNet.

If you sign up for a naked DSL broadband plan through iiNet on its own network, (which comes with a bundled Internet telephony phone line), you’ll get a total of 100GB of quota (50GB on- and 50GB off-peak) for $69.95 per month. A similar plan with a bundled traditional telephone line and 100GB of on- and off-peak quota will cost you a total of $79.90 per month. If you’re not using iiNet’s DSLAM infrastructure in exchanges, you’ll pay a bit more — or the same, but with less download quota.

iiNet has two NBN plans which are comparable to this. The first comes with speeds of 12Mbps and 100GB of on- and off-peak quota, for $69.90 a month with an included Internet telephony line. Then iiNet has a 25Mbps plan with the same quota and telephone line for $74.90 a month. In short, like Optus, iiNet’s NBN plans are almost exactly the same as its ADSL plans. However, the NBN fibre technology is more reliable, has better guaranteed speeds and lower latency (responsiveness) than the current copper network.

Still not convinced? Let’s look at a another major provider, Internode, which was recently bought by iiNet, but whose prices so far remain independent. Internode currently offers a 300GB ADSL plan with a bundled telephone line for $99.90 a month. The top speeds possible on this plan are limited to 24Mbps, due to the limitations of the copper network, and most people will be getting less than 16Mbps. But for $94.95 a month, on Internode’s NBN plans, you can get a 100Mbps connection with the same 300GB monthly download quota, plus a bundled internet telephony line. Yup. A broadband plan four times faster, using more reliable technology, for $5 a month cheaper. That’s the NBN.

Now there are some anomalies in NBN pricing so far which may give the Coalition some basis for its pricing claims. For example, cut-rate ISP Exetel has priced its NBN plans significantly higher than its ADSL plans. In another example, when you get to really high-end plans — 100Mbps plans with a terabyte of download quota — pricing can shoot up in some cases.

However, these cases are not the rule.

Further analysis reveals that Exetel is still offering low-end NBN plans starting at $34.50, and its prices don’t start to get expensive compared with its ADSL pricing until you start to get to the point where you’re downloading more than 100GB of data per month. Exetel has acknowledged it’s not targeting big-downloading customers, so we’re not really surprised by its lack of competitiveness at the top end.

There is also the fact that Exetel has a miniscule share of Australia’s broadband market compared with Optus and iiNet, which are the second and third-largest providers of broadband in Australia. The prices offered by Optus, iiNet (and its subsidiary Internode) are, by definition, mainstream price points which the majority of Australians will be buying services at. And those prices are even more mundane and normal when you look at the mid-range plans (between $50 and $70 a month) bought by most Australians.

Two other major Australian broadband providers, Telstra and TPG, are yet to release NBN pricing. If both exhibit radically different pricing structures from Optus and iiNet, I will be more than happy to revisit this topic at that future date. However, I would not expect Telstra’s NBN pricing to be radically different from its current broadband pricing, which is already at the pricey end of the market. TPG’s pricing has historically been at the discount end of the market, and I would expect this trend to continue.

Lastly there is one other important fact which needs to be taken into account.

NBN Co has lodged a document with the Australian Competition and Consumer Commission called a ‘Special Access Undertaking’. This document, among many other commitments, states that NBN Co will maintain prices for its key wholesale prices at the current levels for five years. In addition, the company will limit future increases to be less than the rate of inflation for 30 years. In short, in real terms, NBN Co’s wholesale prices will remain fairly stable for the next 30 years.

Taking this binding commitment into account alongside the fact that current mainstream NBN prices are directly comparable, often for a better service or even slightly cheaper, than current ADSL pricing, it is factually incorrect for the Coalition to state that consumer NBN prices will be higher than current broadband prices. And if prices were to increase, given the fact that NBN Co’s prices will remain the same, that price increase is not the NBN’s fault. That blame could be laid at the door of the retail ISPs.

With all this in mind, I would hope that the Coalition would refrain from making this claim in public in future. Or, if it does make this claim, I would hope that it would provide some evidence to make its case. This debate is not a matter of opinion. This debate is about objective fact.

Image credit: Enrico Corno, royalty free

news National broadband provider iiNet this afternoon announced it had completed its $105 million buyout of rival Internode, a month ahead of schedule.

The pair announced their nuptials in late December just days before Christmas, in a deal which will add some 190,000 broadband subscribers and some 260,000 active services to iiNet’s already extensive customer base, vaulting the company into clear second place in Australia’s ADSL broadband market, ahead of Optus. The deal also extends iiNet’s current ADSL infrastructure and will see Internode managing director Simon Hackett (pictured) become a major iiNet shareholders.

This afternoon iiNet said completion of the deal was subject to “a number of administrative conditions”, which had now been satisfied. “Thanks to the leadership of Internode managing director Simon Hackett and his team, the transaction has been well received by Internode staff and customers,” said iiNet chief executive Michael Malone.

“Internode is an attractive acquisition, consistent with our strategy of building scale in anticipation of the National Broadband Network. Internode’s experienced management team and excellent customer satisfaction record will allow iiNet to efficiently grow its presence in the South Australian and Eastern State markets.” Separately, iiNet noted that it had issued in excess of 12 million shares to Hackett, meaning the Internode chief will own some 7.5 percent of iiNet.

In a post on broadband forum Whirlpool this afternoon, Hackett noted that the transaction had been completed, stating that the two companies had “overachieved” in a good way in the process.
Hackett emphasised that the company remained a separate business unit from iiNet’s retail operation — any customers looking to churn between the pair would do so at “arm’s length”. He wasn’t sure whether that would change in the future, with a “loooong list” of action items currently being discussed between the two companies as the integration progresses.

“This is the end of the beginning, and we are looking forward to doing lots of great stuff together from now on,” the executive added. “So now – onward and upward :)”

Image credit: Internode

news National broadband provider TPG has broken what has appeared to be a long-term policy of not criticising the nation’s largest telco Telstra over its supply terms to rivals, slamming the big T’s wholesale approach in a new submission filed early this year with the competition regulator.

Over the past half-decade and before, it has become common for Telstra rivals such as Optus, iiNet, Internode and others to regularly criticise Telstra, due to what they saw as ongoing uncompetitive behaviour by Telstra in giving customers of its wholesale division less favourable terms and pricing for access to its infrastructure than its own retail division. All of these major ISPs — and others such as Macquarie Telecom — have employed regulatory staff to engage directly with the Government and the Australian Competition and Consumer Commission over the issue.

However, in that period, TPG has notably been absent from the debate, despite being one of Australia’s top four ISPs and a major buyer of Telstra wholesale services. Some in the telecommunications industry have speculated that the ISP’s silence on Telstra’s terms has led to it receiving more favourable commercial deals from Telstra, compared with more vocal ISPs such as Internode.

However, in a major submission filed with the ACCC early this year (PDF), TPG appears to have dramatically changed its public stance on Telstra. The submission comes in response to an ACCC discussion paper seeking comment from the telecommunications industry on whether a wholesale ADSL service should be ‘declared’ (regulated more strictly than it currently is).

In TPG’s discussion paper, the ISP maintained that a wholesale ADSL service should be declared, due to Telstra’s uncompetitive actions in the marketplace.

“Telstra has repeatedly obtained advantage for itself over competitors like TPG, both by pricing its wholesale services at a rate that make it extremely difficult for competitors to compete and by creating unnecessary business constraints around the supply of the service,” TPG stated in its submission. “TPG does consider that Telstra’s terms and conditions of supply inhibit competition.”
TPG criticised Telstra in a range of areas in its submission, raising the following issues:

• Telstra does not permit TPG to use its own network for connecting rural broadband services back to the city (known as ‘backhaul’)
• TPG argues that “the price Telstra charges for backhaul does not appear to bear any correlation to actual cost”
• A “price squeeze” by Telstra with regards to regional wholesale prices between July 2010 and January 2011 saw many customers churn from TPG to Telstra
• Telstra does not allow wholesale customers to access a so-called ‘multi-cast’ facility which would allow TPG to supply Internet video (IPTV) services
• Price discrimination between companies seeking to use Telstra’s infrastructure
• TPG considers it “highly likely” that it will use the $11 billion payment it will receive from its contract with NBN Co to market its services to customers heavily with the aim of locking them into long-term contracts

TPG also reveals in the document that it had been arguing with Telstra “for years” on some issues.

Many of the same issues were raised in other submissions to the ACCC by ISPs like iiNet, Internode, Primus, Adam Internet and TransACT (which filed a joint submission (PDF)), Optus and Macquarie Telecom. “Our clients firmly believe that Telstra’s [wholesale DSL] terms and conditions inhibit competition, the joint submission stated.

In its own submission (PDF), Telstra argued that there was no need to more heavily regulate wholesale ADSL services. “Such declaration would neither promote competition nor encourage efficient investment in infrastructure, and would not be in the long-term interests of end users,” the company wrote.

The telco said Australia’s broadband market was “already highly competitive”, pointing out that substantial facilities-based competition, particularly in CBD and metropolitan areas, already existed, and other ISPs already “actively and aggressively” compete with Telstra nationally using other types of broadband services — such as the Unconditional Local Loop Services (ULLS) and Line Sharing Service (LSS) — both of which have already been declared by the ACCC.

“Declaration of the wholesale ADSL service would only serve to limit the incentives for access seekers to invest in [ADSL infrastructure] and other alternative infrastructure,” Telstra stated.
The difference between declaring the ULLS and LSS services and declaring Telstra’s wholesale ADSL services is a subtle issue, but important to ISPs. Declaring a wholesale ADSL service would mean that Telstra would have much more controls placed on how it sold a higher-level package of its network infrastructure to other ISPs — while the ULLS and LSS services are component parts of supplying a broadband service.

opinion/analysis
It’s fascinating to see TPG come out of the closet with its true feelings about Telstra in this manner. The ISP has largely abstained from the ongoing criticism of the big T over the years. One wonders whether this is the start of a more open and transparent TPG in general.

news The Competitive Carriers’ Coalition (CCC) this week objected strongly to the Government’s decision to exempt Telstra, the nation’s largest telco, from its own regulations in more than 100 locations around the country, saying that it will leave thousands of Australians without the full benefits of increasing competition in broadband markets.

The CCC represents a number of telcos such as Primus, iiNet, AAPT and more — but not Telstra. The organisation’s response was in reaction to the new accord, signed by Telstra this week with Communications Minister Stephen Conroy, which grants it exemptions from meeting the Government’s and National Broadcast Network (NBN) Co’s regulations for the setup of new fibre infrastructure.

Laws passed in 2011, meant to safeguard NBN Co against unfair price competition, require that any company that builds a fibre to the home network has to operate the network in the same way as the wholesale-only NBN does. In return for the exemption, announced Minister Conroy, Telstra would provide what he described as “an open access wholesale service” on fibre networks it is currently deploying in South Brisbane and also in some new housing estate projects.

“The decision gives Telstra a green light to discriminate against consumers who choose to buy services from competitors,” a CCC spokesperson said. “The exemption is to laws that the Government introduced after years of complaints from competitors about Telstra’s conduct. This legislation was supported by competitors who had watched Telstra selectively replace its copper access network with fibre to the home or fibre to the node, and in the process cut off competitors who had paid Telstra to put their equipment into Telstra exchanges.”

The CCC also criticised the “open access” arrangement approved by Minister Conroy, terming it as “vastly inferior and more limited than that offered by NBN Co” and “less competitive to the service Telstra is required to offer over its copper network.”

Some of the flaws in the exemptions, according to the CCC, are:

• The arrangement will not provide competitors with access to the same services that NBN Co will be offering, making it difficult for them to transition to the NBN;
• Of the three speeds offered by Telstra, the 8Mbps option does not meet the national commitment for 12Mbps;
• There is no commitment from Telstra that the wholesale services will be equivalent in any way to Telstra Retail services, opening the door to a return to the worst competitive abuses of the past;
• There is no requirement for Telstra to provide a wholesale equivalent of any other retail service it offers over the networks;
• The wholesale services are inferior to the services that could be offered through the ULLS, because Telstra has to provide only three wholesale service options that limit competitors’ ability to provide different and innovative retail products;
• The wholesale services Telstra has offered do not include a symmetrical service, despite the Government having repeatedly said that this was a key reason for preferring fibre to the home as a technology, and;
• The affected communities will not be covered by the new obligations Telstra will face if its own Structural Separation Undertaking is accepted by the ACCC.

Telstra has confirmed that it will not address several of the complaints by other ISPs about the way it is handling its new fibre rollout in the South Brisbane exchange area. Issues range from the company’s wholesale prices—which are claimed to be markedly higher than equivalent broadband prices on the previous copper network—to the lack of equivalent services such as the ability to stream IPTV services via multi-cast or offer so-called ‘naked’ services without an attached telephone line.

news The nation’s largest telco Telstra has confirmed it will not address several of the largest complaints by other ISPs about the way it is handling its new fibre rollout in the South Brisbane exchange area, despite signing a new accord regarding the region with Communications Minister Stephen Conroy.

Telstra has chosen to replace the copper connections to about 20,000 premises in the region as the exchange — where the copper cables terminate — is being closed in order to make way for the new Queensland Children’s Hospital in the area. The region is one of the first in Australia to receive fibre services to the home — but is not part of the Federal Government’s flagship National Broadband Network project, although the long-term plan is for the infrastructure to become part of the NBN.

However, over the past year other major ISPs such as Optus, iiNet and Internode have expressed strenuous complaints about Telstra’s handling of the situation, with issues ranging from the company’s wholesale prices — which are claimed to be markedly higher than equivalent broadband prices on the previous copper network — to the lack of equivalent services such as the ability to stream IPTV services via multi-cast or offer so-called ‘naked’ services without an attached telephone line.

On Monday Communications Minister Stephen Conroy announced that Telstra would provide what he described as “an open access wholesale service” on fibre networks it is currently deploying in South Brisbane and also in some new housing estate projects.

For customers in those new housing estates, the deal is good news. As iTNews has documented in an extensive article on the subject, the deal will see Telstra’s fibre in those area opened up to retail competition for the first time, with rival ISPs like iiNet, Optus and TPG able to provide services over Telstra’s network, if they sign supply arrangements with the telco.

However, in both the new housing estates and in its South Brisbane network, Telstra has stated that it will not provide ‘naked’ services or allow multi-cast IP video services that would allow the ISPs’ own video platforms (typically FetchTV) to operate. “There is no change from the [South Brisbane Exchange fibre arrangement] that we have detailed with our customers in previous months,” a Telstra spokesperson said. “An underlying voice service is required for Telstra wholesale and retail customers because this is the way the network is configured and multi-cast is not supported by the network.”

In practice, what the deal signed between Conroy and Telstra means is that Telstra will be exempt from having to meet the Government and NBN Co’s regulations for the setup of new fibre infrastructure. Broadly, the regulations are meant to ensure that any new fibre infrastructure built around Australia has to match the standards of the NBN, so that NBN Co will not overbuild fibre infrastructure in areas where it already exists.

“We welcome this decision to exempt the South Brisbane Fibre network and other smaller specified ‘Velocity’ fibre networks these networks are set out in the Velocity networks exemption) from the Government’s ‘level playing field’ obligations,” the Telstra spokesperson said. “It provides Telstra and its wholesale customers with certainty concerning the availability of a broadband fibre product in these areas. Telstra has agreed to offer a Fibre Access Broadband (FAB) service to wholesale customers as a condition of this exemption.”

Telstra said it had been in discussion with NBN Co in relation to the South Brisbane exchange area — as this area is eventually expected to become part of the NBN. “These discussions continue,” the telco said. And it added that it had signed commercial deals in the area with 20 customers (usually retail ISPs) of its wholesale division.

Conroy said the deal would facilitate competition in the fibre areas covered by the arrangement, and it would be subject to scrutiny by the Australian Competition and Consumer Commission. The ACCC has already stated that it is satisfied with Telstra’s arrangements with customers in the region. However, it is likely that Telstra’s reluctance to offer naked broadband services and IPTV services over its fibre networks will continue to rankle other ISPs and their customers.

In addition, there are other issues which Telstra is facing in the South Brisbane area that have the potential to spill over into the new housing estate areas where it will also begin to open its networks to competition.

Internode has complained publicly about poor Telstra pricing in the South Brisbane exchange area, stating that its own higher pricing in the region was based on the “crazy” underlying wholesale costs which it said Telstra was charging for other ISPs to access its new infrastructure. TPG is also charging higher prices in the region than on other copper infrastructure, and it remains unclear what Telstra’s wholesale pricing on the fibre infrastructure in the new housing estates will look like.

opinion/analysis
It remains unclear why both the ACCC and Communications Minister Stephen Conroy are unwilling to take more drastic action with respect to Telstra’s obviously uncompetitive actions with regard to its fibre networks located around Australia.

It seems like common sense that Telstra should not be simply allowed to replace its existing copper network with a fibre network in certain areas and then be able to completely change its wholesale service offering to retail ISPs, charging them radically different prices for access to the infrastructure and not offering fairly basic services such as broadband without a compulsory associated telephone line. Especially when it seems like much of this infrastructure will eventually become part of the National Broadband Network.

I believe Telstra is not speaking correctly when it says it cannot support naked broadband or multi-cast IPTV streaming services over these fibre networks. I am very sure that this is technically possible. The phrase ‘don’t rock the boat’ comes to mind when I think of the actions of the ACCC and Conroy with regard to this contentious and ongoing issue.

Image credit: Telstra

news National broadband company iiNet revealed late last week that it had installed a Wi-Fi service throughout the Perth central business district that would let any customer of its growing family of brands access free Internet in the area.

“Over the past few months we’ve been busy working behind the scenes to install a number of wireless hotspots around the Perth CBD to make life a little easier when you’re out and about,” the company’s operations manager of its business division, Balmik Soin, wrote on its blog last week.

“There are 15 hotspot locations across the city. Whenever you’re near one of the hotpots with a wireless compatible device in hand, simply select the ‘iiNet’ WiFi network and log in with your account details. You don’t even need to know your primary account username and password – any email address and password associated with your account will let you onto the WiFi network.”

The service is branded ‘iiNet’, but customers of most brands within the iiNet group (including Westnet and Netspace) will be able to access the service, with the company to add access for customers of its new acquisitions TransACT, Internode and AAPT soon.

Soin appeared to hint that the iiNet Wi-Fi service could be coming to other cities shortly. “This is just the start of our Wi-Fi rollout plans. Keep an eye out for further announcements on where you can access ‘iiWiFi’ (say it out loud, it has a nice ring to it!) as we’ve got a couple of new locations in the pipeline already,” he said.

Further information about iiNet’s Wi-Fi coverage is available here.

iiNet has not historically invested much in Wi-Fi networks around Australia, preferring to focus on its direct broadband offering. However, rival Internode, which iiNet recently announced it would acquire, operates a large number of Wi-Fi hotspots around Australia, which are free to access. Internode has also partnered with companies such as CityLAN, cafe chain Cibo Express, airports in Darwin and Adelaide and others, in order to broaden its service nationally to some 400 locations.

At various stages over the past few years, a number of Australian Governments and other organisations have offered or planned to offer free Wi-Fi services in CBD locations. In November 2006, for example, then-NSW Premier Morris Iemma announced that the CBDs of key cities in NSW would get free Wi-Fi broadband within the succeeding three years. The project was eventually scrapped.

Many in the telecommunications industry believe that in large part, the popularity of 3G mobile broadband, either through dedicated USB dongles for laptops or through tethered smartphones or tablets, had made the need to offer Wi-Fi services fairly redundant. However, new Wi-Fi services such as iiNet’s are still launched at regular intervals in Australia.

Image credit: iiNet

news The nation’s number two telco Optus this afternoon confirmed it had signed the wholesale services agreement which Optus and other telcos have been negotiating with NBN Co for the past 15 months.

The interim contract will guide how Australia’s retail and wholesale onseller telcos will buy services from NBN Co over the next year, until a more final long-term contract is negotiated. Each telco signs the same standardised agreement with NBN Co.

The contract has been being developed for the past 15 months in consultation with the telecommunications industry, but the negotiations around it have come to a head over the past several weeks, with a number of telcos declining to sign a version of the contract until provisions were modified about the Australian Competition and Consumer Commission’s ability to oversee telcos’ relationships with NBN Co, and NBN Co accepted more legal liability in some areas.

The timing of the breakdown in negotiations came as the previous trial agreement through which telcos had been selling commercial services on the NBN concluded in early January, leading to a situation in which NBN Co might stop signing up new end users to the infrastructure.

Following key modifications made to the contract last week, however, most of the several dozen telcos who have signed up to buy services from NBN Co had signed the contract, with the major holdouts being Optus, and Telstra, which has a more complex relationship with NBN Co courtesy of its $11 billion deal to transfer its customers onto the NBN infrastructure.

Today, however, an Optus spokesperson confirmed the company had signed the document, ending several weeks’ of standoff between the companies. “Optus today confirmed it has signed the executable NBN Co Wholesale Broadband Agreement,” the telco said. “Optus will continue to engage in constructive dialogue with NBN Co to ensure that outstanding concerns such as regulatory oversight and service assurance levels are adequately addressed in any future long-term version of the WBA.”

“Optus confirms it has signed the NBN Co Wholesale Broadband Agreement,” NBN Co added from its Twitter account.

Other companies believed to have signed the agreement include major telcos like iiNet, Internode, Primus and more, with several dozen telcos in total now signed up to provide services over the NBN. So far, however, only a handful of retail ISPs are selling commercial services over the NBN, with one of the nation’s major players, TPG, remaining a notable holdout.

update: Since this article was published, Telstra has clarified that the comments published below were originally published by the Financial Review and distributed to staff as a daily email summary of media commentary. It appears that a Telstra staff member removed the AFR attribution and published the statement on Telstra’s internal intranet; it appeared to staff that it was a statement from Telstra itself.

news Telstra has issued a newsletter to its retail staff informing them that iiNet’s buyout of Internode could see TPG vaulted into clear third place in Australia’s broadband market, following a possible buyout of iiNet by TPG.

Over the closing months of last year, TPG bought about 7.24 percent of iiNet, in a move which many in Australia’s telecommunications sector could be the first step to an eventual acquisition bid. At the time, TPG said it had “no specific intention regarding iiNet” other than to own the shares as “a strategic investment”.

Speculation about the future of the industry as a competitive sector intensified when iiNet unexpectedly announced just before Christmas last year that it would buy long-term rival Internode, with Internode founder Simon Hackett to end up owning a similar percentage of iiNet as TPG when the transaction completes early this year.

However, in an update to staff issued yesterday under the ‘industry news’ banner and seen by Delimiter, Telstra appeared to state that it believed a TPG acquisition of iiNet was likely. “iiNet’s $105 million acquisition of Internode, announced just prior to Christmas, will see it gain 190,000 subscribers, and spearhead TPG Telecom into third place among broadband providers behind Telstra and Optus,” the company’s update read. “In recent months, TPG Telecom has been building a stake in iiNet, which, according to market speculation, could be a precursor to a full takeover.”

It’s possible that the mention in Telstra’s newsletter of TPG Telecom leaping into third place could be a typo — with the iiNet acquisition of Internode actually more likely to leap iiNet into third place in the broadband sector. A TPG acquisition of iiNet would likely lead TPG to being the second-largest player in Australia’s broadband sector, ahead of SingTel Optus.

If an acquisition of iiNet by TPG did occur, it would see Australia’s telecommunications sector drastically consolidated in the arena of fixed-line broadband into just three major players — current incumbents Telstra and Optus as well as TPG. Other rivals such as Primus and Dodo currently have a reduced market share compared with the existing top four players.

Any move by TPG on iiNet would likely be viewed by iiNet’s board as a hostile takeover attempt. The two ISPs have radically different corporate cultures and market approaches, with iiNet being viewed as a very open and friendly company which tends to target mid-level broadband consumers with premium customer service and a quality broadband network, and TPG having a more cut-throat internal corporate culture and a market focus which sees it positioned as one of Australia’s discount kings of broadband.

The chief executive of iiNet, Michael Malone, has said a public inquiry would need to be held if TPG decided to extend its stake in his company to the point where an acquisition was on the cards — and the issue could become a policy question to be decided by the Federal Government.

If TPG were to make an offer for iiNet, Malone said, such a deal would be on the threshold where the Australian Competition and Consumer Commission would be interested in examining impacts on competition arising from the deal.

opinion Over the past week a rather pathetic little game of bluster, bluff and ultimately light blackmail has played itself out in Australia’s telco sector as a handful of Australia’s major ISPs have done everything in their power to demonstrate just how self-interested they can be when it comes to exploiting the National Broadband Network.

This game — let’s call it Quigley’s Hold’em, or perhaps Dalby’s Five DSLAM Draw — probably kicked off, as most such shady efforts do, late in the week, perhaps as the shadows of last Friday night were drawing near and the weekend, with all its inherent vices, began to beckon the players away from the clear sunlight of honest dealing.

At the time, the head negotiators from most of Australia’s major ISPs — at least including iiNet and Internode, but likely Telstra and Optus as well — informed the National Broadband Network Company that they were not planning to sign the comprehensive wholesale agreement which it had labored with them for some 15 months to develop.

Despite the fact that the document had already been through five draft iterations and hundreds of hours of consultations, the ISPs told NBN Co, it had still not addressed some of their key concerns; namely, the ability of the Australian Competition and Consumer Commission to oversee the relationship, the liability in the case of problems, and equivalence issues with all ISPs signing the same document.

Now, normally this kind of issue would be part of the normal cut and thrust of negotiation between the ISPs and NBN Co — fair points to raise. But, to add a little punch to their demands, at the last moment, the ISPs played two hidden trumps: Timing, and the media.

Unlike the ISPs, NBN Co has been on a clock in the negotiations. The existing trial agreement between the two sides, which has allowed some 4,000 customers to be signed up to NBN Co’s infrastructure nationally, expired today. This isn’t a problem for the ISPs. After all, they need be in no rush to move their existing customers onto the NBN’s infrastructure. Either way — if the customers stay or go — the ISPs get paid.

But it is a vast problem for NBN Co.

The ridiculous furore that erupted when NBN Co released its current customer sign-up numbers just after New Year’s Eve should go some way to illustrating the fact that the company is currently fighting for its own survival. If NBN Co can roll out enough infrastructure and sign up enough customers over the next year, it faces a chance of continued existence under a Coalition Government; if its effort stall, it will fall victim to Tony Abbott’s oft-repeated promise to shut the project down.

The ISPs know this. And so, when faced with NBN Co’s intransigence in modifying the terms of its wholesale contract, at the eleventh hour, they bent the company over a barrel and reached for one of the easiest and most manipulable weapons available to anyone in Australian society: The media.

“NBN Co to bar defiant telcos,” screamed the Financial Review’s article on Monday morning, which painted NBN Co as a draconian monopoly, “threatening” to “ban” ISPs from signing up new customers. And the rest of the media swung into line, with more headlines: ‘NBN Co pressures telcos on access agreements’; ‘NBN Co stands firm on wholesale contract’; ‘Under 50% of ISPs sign onto NBN contract’; ‘Tension as NBN trial agreement ends’; the headlines went on forever.

On Monday, NBN Co was standing fairly firm, soberly highlighting its extensive 18 month consultation efforts and the lengths to which it had gone to meet the ISPs’ demands. But it only took two days for the company — flailing under a fictional ‘pressure’ entirely created by the ISPs and a media ravenous for fresh meat in the slow news days of the new year — to buckle. NBN Co’s bluff had been called as the ISPs refused to give ground.

This morning, it was again the Financial Review which brought us the new developments. “NBN backs down on agreement,” the newspaper reported. And “sources close to negotiations” — read: the ISPs — noted that NBN Co had retreated in precisely the areas the ISPs were complaining about.

Game over. Quelle surprise!

Now, I don’t want to go too far in alleging improper behaviour on the part of the ISPs. Solid journalistic efforts by the AFR’s reporter on this issue, David Ramli, did faithfully bring this important issue to light. And, of course, the fact that we know about all of this is itself a positive thing: Transparency in the NBN process is only to be lauded. Then, too, it is common commercial practice for companies of any stripe to use any legal tool at their disposal to bring negotiations to a successful close. Nothing illegal has been done here, and probably even nothing unusual for the private sector.

However, there are several disturbing aspects to what happened this week which I think bear further rumination.

The first is the adoption by several major ISPs of the sorts of language during this NBN process which we are more accustomed to hearing from the Daily Telegraph. Internode carrier relations manager John Lindsay, for example, raised a rather unusual scenario when speaking to the AFR about the liability issue. “You don’t want to be in a position where NBN Co’s installers have wrecked your customer’s house or have no incentive to do connections in a timely fashion, with you getting the blame,” he said.

Really? Painting NBN Co as house wreckers? I would have thought that below Lindsay.

Then there was this curious statement on the part of iiNet regulatory chief Steve Dalby, again on the liability issue: “It means that if customers are affected by outages they can sue us, but we can’t pass that liability through to the cause, which would be NBN Co, and that just doesn’t make any sense.” Really? It’s extremely rare — in fact, almost unheard of — for a customer to sue an ISP about their connection going down. I can’t imagine this will be a regular event under the far more reliable fibre future NBN Co has planned for us. NBN Co ‘wreckers’, customer lawsuits? Is the iiNode which we know and trust? It doesn’t seem like it to me.

Then there was the nature of the negotiations themselves.

Wikipedia defines a cartel as being a formal (explicit) agreement among competing firms, which Australia’s ISPs most certainly are. It then goes on to explain that cartels usually occur in oligopolistic industries, where there are a small number of sellers, usually selling homogeneous products. The aim of cartels, it adds, is to increase the profits of individual members by reducing competition.

Maybe I’m taking this argument a bit far, but when most of Australia’s ISPs gang up together on the same issues and force a major wholesale service provider like NBN Co to back down, by exerting pressure through the media, that sounds a great deal like a cartel to me. There’s no competition here; there’s no fair play; there’s only a gang of what — five or six ISPs, representing overwhelming market share — effectively publicly blackmailing a joint supplier.

Then there’s the political angle.

The whole reason why the ISPs are able to exert pressure on NBN Co is because the company has aims that are not commercial. NBN Co’s mission is to roll out telecommunications infrastructure around Australia and then sign customers to use it, through utilising relationships with retail ISPs. This isn’t a commercial business proposition — it’s a mandated government policy. And so while it doesn’t really have to ‘sell’ its products and services to ISPs as such, as they will be forced to use them eventually anyway (when other broadband networks are shut down), neither do ISPs have to buy them, until that shutdown date comes.

The difficulty is, however, is that while NBN Co is locked into its course of action and cannot deviate from its mission, the ISPs are not, and they all have varying degrees of cooperation with the NBN policy. Some, such as Internode (or should I say, iiNet?), are pretty much wholly on board, while others such as TPG are so far ignoring the whole thing altogether. This gives the ISPs an extraordinary degree of non-commercial negotiating power.

This week, the ISPs flexed that muscle. “Back down on your commercial contracts,” they told NBN Co, “or else we’ll make the NBN project look like it’s stalling, and your political masters very unhappy.” The pathetic statements they issued this afternoon, seeking the validation of the public and the media for signing contracts with NBN Co — whose public credibility they flirted with wrecking through their game — only makes blisteringly obvious their belief in the usefulness of the press in the negotiating process.

As a believer in free markets and the value of competition, all of this makes me very, very uncomfortable. We have collusive action by Australia’s telecommunications giants, leveraging political angles and the threat of the media. We have bluster from formerly honourable ISPs painting an important national project as “wrecking” people’s homes. And we have an 18 month NBN negotiation process undercut at the very last minute. Who knows what the long-term implications will be.

If I were the ACCC, I would be looking very, very carefully at the events of this week, as I’m sure Shadow Communications Minister Malcolm Turnbull and other elements of the Coalition are. How far can we trust the major players in Australia’s telecommunications sector? At this point, I am far from sure.

news Internode managing director Simon Hackett has strongly defended the pre-Christmas deal in which rival iiNet bought out his company Internode, stressing the strength and duration of his long-term relationship with iiNet’s management team in two outspoken forum posts published last week.

The transaction is expected to be completed by 29 February, 2012. Following the acquisition, Internode will trade as a separate business unit and Hackett will continue as the managing director with his existing team, although he will also hold approximately 7.5 percent of iiNet’s shares, making him one of the company’s major shareholders. Hackett has acknowledged that the Internode sellout to iiNet was partly triggered by Internode’s inability to gain enough scale to compete in a National Broadband Network (NBN) world.

Some online critics had speculated that Hackett would shortly take a seat on the iiNet board, despite Malone saying that Hackett would join the iiNet board only after relinquishing his executive responsibilities with Internode. “It’s just a little crazy to have me reporting to Michael Malone and the board and also being on the same board at the same time,” Hackett wrote on Whirlpool in response last week.

“Meanwhile you seem to be framing this as me turning into an inflexibly driven supplicant of Michael Malone, and that framing indicates that you completely fail to appreciate how business works at this sort of high level. It’s a relationship based on trust, not one based on my being a mindless puppet.”

Hackett said that he wasn’t finished with his current goals of finding new ways to drive interesting new strategic outcomes for Internode and its staff and customers. Referring to a potential future position on the iiNet board, Hackett said that it would definitely make him a key decision-maker in the company group.

Hackett expressed his frustration over forum commenters implying that everything he said since the announcement of the buyout was suspect: “So I make a business decision and now I’ve turned into a professional liar? I find that pretty insulting.” He also appeared angry about statements concerning Internode’s customer base being part of the assets he’d sold to iiNet and the possibility that Hackett and Malone would lie to the Internode customer base.

In response to a comment that the announcement of the deal gave no concrete information about the future of the company group, Hackett pointed out that the transaction was still incomplete. He called the board members of iiNet and Malone himself “very smart people who I enjoy working with.” He also directed commenters to the Internode blog for significant information. He termed the deal as an exercise in combining the strengths of two major companies in the market which would in turn, combine the strengths of the leaders of the two companies. “It’s exciting, and it’s got a lot of positive potential as a result. Will it all be perfect? Obviously not,” Hackett said.

Hackett also responded to a statement that Internode’s customers had always paid extra for a higher quality service which was alien to iiNet, providing statistics to indicate actual customer opinion.

Reacting to a suggestion that he would face pressure to make changes to Internode, Hackett said: “You may not appreciate how little respect for my own skills and abilities, or that of my large and capable staff, the above implies.” Hackett also emphasised upcoming positive changes, sarcastically saying, “You don’t seem to consider the potential that some of these unspecified changes forced upon the small and impressionable Mr Hackett by the big bad Michael Malone and his board might be good things. Internode does not begin and end with me.”

The Internode chief quoted examples such as “thriving as a national NBN leader, having the largest direct DSLAM footprint in Australia, and remaining in the marketplace as a sustainable and capable innovator instead of being slowly choked to death in a saturated market by larger players … these are things that don’t seem like bad things, at face value, to me at least!”

Following his statements, the executive signed off from Whirlpool by asking that commenters refrain from framing conspiracy theories. “I will now stop responding to your posts on this topic now because they’re solidly circular in their nature (as, by extension, are my replies to it),” he said.

Image credit: J. D. Hancock, Creative Commons