blog Over at his blog, seasoned technology executive and all-round nice guy Sean Kaye has some interesting thoughts on a wide range of matters involving the NBN, including his pessimism about Telstra’s multi-billion dollar deal with NBN Co:
“The deal with Telstra should be scrapped. I agree with the idea, but the truth is, you can’t put rules in place that prevent competition like what the government and the NBN are doing. If Telstra wants to run their own proprietary cable and limit access to it, then its their dollar – may the market decide … So long as there is an open infrastructure program like the NBN in place.
If Telstra want to build a parallel network, they should be entitled to and should be encouraged. Thinking about this longer term, if the NBN goes in and is the only game in town, what happens in twenty years when government neglect and lack of interest sees it looking like the Sydney Rail Network? No, if free enterprise sees and opportunity to provide a better product, than so be it.”
Personally, it seems like a little bit of an extreme idea to scrap the Telstra/NBN Co deal entirely. However, personally I agree with Sean that the NBN policy should not restrict other telcos or companies in general from rolling out their own infrastructure in competition with it. If it does, that is plainly anti-competitive and runs counter to what we know of how efficient markets operate. This is one of the things which most troubles me about the NBN project as a whole at the moment.
Image credit: Zsuzsanna Kilian, royalty free
Well that’s an excellent metaphor he’s framed there in the Sydney Rail Network. I’m sure if we have two completely separate rail networks each going to the exact same suburbs that wouldn’t have been seen as excessively costly and both transport providers would have thrived. Certainly neither would have compromised the quality of their service.
“If Telstra wants to run their own proprietary cable and limit access to it, then its their dollar – may the market decide”
I find it hard to disagree with this, even though I know Telstra will cherry-pick like mad and abuse its dominant market position to undermine the NBN. Letting them get away with this is bad, but the alternative in many ways seems worse.
I suppose the middle position is the one adopted by the government, ie private companies can install their own infrastructure provided it’s open access on the same terms as the NBN, but it’s easy to argue that this won’t allow for true competition as there will be no point of differentiation between the new player’s network and the NBN.
Rock and a hard place?
Mmm…rock and a hard place, catch 22, damned if you do – damned if you don’t, and other such similar clichés…
The key for me is this though – Telstra WANT this deal, they’ve agreed to it, and are negotiating final terms. If they felt they were getting dicked by it, they wouldn’t be doing it. Sure, the government threatened to cut them out of future spectrum auctions, but you’ve gotta give a little to get a little.
There are risks, but I’m still confident that in the fullness of time – (and this won’t be for 20 years, once the network is in and the benefits flowing for some year) – we’ll see that the risk will be worth the benefit.
The issue is Telstra abusing their market position, particularly during the build phase. It might be possible to sunset these limitations- prevent overbuild for say 10-15 years (which gets us past build phase) and then allow it.
The one thing that worries me about the Telstra-NBNCo deal is the duct leasing. NBNCo should be BUYING ducts or getting access under some sort of IRU type process. As it stands- how long is the lease?
Why The NBN/ Telstra deal regardless of its final shape is initiated driven and by enlarge imposed by the govt. And is in itself just a piece of the larger well established economic models that conclusively defined Govt enterprises don’t run efficiently.
Short answer, NBN needs 70% (approx. 8 M premises) subscription just to break even! In my humble opinion, highly unlikely. Without Telstra cooperation, completely and utterly impossible.
News Flash – Communism has failed. (At least as an economic system if not a political system.
In Australia, GSE’s sold by Govt – CBA, CSL, Qantas, Airports, QR, Telstra etc etc.
Regulation is important and absolutely necessary in the market. However get the regulation and perverse distortion in the market appear that destroy value, destroy efficiency.
In Telco industry in australia this point is well established.
In short.
Optus HFC was rolled out to compete against ACCC controlled and inferior Copper network.
Telstra forced to compete, rolls out its own HFC network.
This would be sighted as an example of competition at work.
ACCC drops price of access to PSTN, Telstra finds it more economical to keep customers on copper. Optus find it more economical to put new customers on old copper network !!
Both HFC network’s severely under-utilised. Predominantly if not completely due to bad Regulation.
It is immoral, and or professionally negligent if not criminal to blackmail Telstra to do a deal.
To buy off and shut down the working assets of the PSTN, and the HFC networks of both Telstra and Optus.
The Govt is acting very similar to the third world dictatorships and or failed communist states!
“Both HFC network’s severely under-utilised. Predominantly if not completely due to bad Regulation.”
Yeah, the fact that we should have only had one HFC network in the first place.
“This would be sighted as an example of competition at work.”
LOL.
The HFC networks failed because they are expensive, and there was always a cheaper option – copper. Competition didn’t work there. The NBN will be different because there will be no copper.
Do we get rid of the HFC networks? Maybe. But if they stay, they’ll still be the more expensive option, connection-by-connection, over the NBN.
So they will still be the second choice.
I think the biggest factor that will mean the NBN will be more popular over HFC is the limited footprint of HFC, and the limited providers of the service, which is exactly what we have now when compared to ADSL2+.
It’s the same reasons people buy Nike’s over a cheaper brand. They know Nike and what to expect from their product, even through they can get an as good, or better, from a less known brand.
I suggest – (through experience of pricing of HFC for customers) – that any street that has an HFC install AND fibre from NBN will see the NBN win out.
You assume that demand for such services is a norm (for the cost that NBN is delivering them). The fact is that demand to a significant degree is not there
If the telstra deal fails, for whatever reason, then NBN as a project basically collapses
“News Flash – Communism has failed. (At least as an economic system if not a political system.”
So, government intervention in the telecommunications sector is bad.
“Both HFC network’s severely under-utilised. Predominantly if not completely due to bad Regulation.”
So, government intervention in the telecommunications sector is good.
If you can’t even maintain a consistent argument within a single post, you need to re-consider your position.
Ok little Jeremy,
Based on your comments I’ll assume your 5 years old and wont insult you, but spend a moment to explain my oh so complicated earlier remarks.
Now Jeremy have you seen your mum using fire to cook you dinner. So fire is good.
But Jeremy if fire is used carelessly or by the foolish people they can hurt themselves and others. So fire can be bad. See the difference. Does’nt matter, just don’t play with match’s.
When you grow up, you might learn about sex. Some adults may tell you its a mutual activity, but actually its driven by selfishness !
Based on your comments I’ll assume your 5 years old and wont insult you
Bwhahaha…
…by the way, it’s “you’re” and “won’t“…
PS…
…how old do you think you appear to others with that childish rant?
I don’t understand how you can consider this an issue Renai. Taxpayers are footing the bill for the network buildout which will cover 93% of Australia’s population with fiber. That means using more profitable city returns to subsidize less profitable rural areas.
Would you rather have Telstra and other companies cherry pick the most profitable urban areas, sapping NBNCo (and thus the taxpayers) of money? That’s not a “fair” market, since NBNCo has a completely different set of rules to abide by.
And I’m seriously confused why you think it’s a good idea to have infrastructure competition. Do you have multiple power lines running to your home? Water lines? Gas? Not sane economist would recommend duplicating critical infrastructure. Why would you want that to happen with fiber?
On a completely unrelated note, I find it rather ironic Australia let its mining profits flee out of the country. Nationalize the mining industry and suddenly you have billions in profits every year to pay for the NBN. Taxing isn’t good enough. Those minerals are Australia’s. All of the revenue generated should go to the taxpayers/government.
Efficient markets are a mythical textbook construct. It they existed we wouldn’t have boom/bust cycles, bubbles etc etc.
Duplicate networks simply increase the cost for the consumer. If no-one uses the NBN network in high density/value cherry picked areas then the costs go up for everyone outside those areas, and if the cost goes up either the tax payer has to subsidize or people just won’t use the services as per HFC, and if they don’t use the services then they just decrease the market size for paytv or any other services that use the network.
Duplicate networks are a failed argument hence why the accc and fixed ULL price exists in the first place.
Regulating access to a private network is even worse because then some standover man (the accc) is going to demand you provide access to competitors at some arbitrary price that completely destroys your huge profit margin, and so you have exhibit A, Telstra which is behaving as it should by trying to block competitors as much as possible.
Imagine this regulatory nightmare played out over hundreds of networks across the country, and see what happens when it isn’t regulated with operators of greenfield estates behaving like little Telstra’s and charging extortionate rates for poor service. Again it just means people don’t take up the services and the the overall market is smaller for services.
Broadband regulation has failed in Australia which is why we have the NBN.
The difference between the NBN and State Rail is that public transport is subsidized (and crap like ADSL the further out you get in the suburbs), and will never cover it’s costs whereas the NBN should eventually be profitable hence why it’s not recurring expenditure in the budget.
The difference between the opposition and the government is that the government believes the market and economics of how the network is used is far greater and more important than the network itself.
The difference between NBN and Telstra is that the NBN has been regulated by legislation from day 1 because it is a monopoly whereas Telstra was regulated as an afterthought as competition failed, to the detriment of it’s shareholders.
The only thing I agree with is that monopolies don’t innovate, but wireless is what needs the innovation, since you can already push multiple terabits per second down a single fibre cable if cost was not a consideration, and it seems unlikely that we’ll outgrow the capacity for a long time.
Excellent post.
…”monopolies don’t innovate“…
NBN Co actually doesn’t need to innovate in this instance. How do you innovate at the Layer 2 level? It’s a bitstream, so unless someone comes up with a “better kind of bit”, as long as they are trucking the bits from one location to another, they are at the limit of their requirements…
They might get faster over time, but that’s evolution, rather than innovation.
NBN Co actually doesn’t need to innovate in this instance. How do you innovate at the Layer 2 level?
Clearly you are not open minded enough
Also everything that Brett Heydon said is rhetorical tripe
…”Also everything that Brett Heydon said is rhetorical tripe“…
Clearly you are not open minded enough.
“Also everything that Brett Heydon said is rhetorical tripe”
Thankyou for that thoughtful and well articulated analysis.
Thankyou for that thoughtful and well articulated analysis.
I don’t need to provide explanations anymore, what I am saying is already happening anyways, it would just be a waste of keystrokes
The only people that are now constantly defending the NBN instead of admitting the flaws are the dogmatic zealots of fiber or nothing
Ummm, ok dat ego, how about supplying, even just once…
Your explanation of how the Senate (according to you as “it is happening”…LOL) forms government…?
BTW – The NBN has flaws (nothing is perfect and I haven’t seen anyone say it is perfect). But it has many more positives than flaws, imo. It also has many less flaws than the opposition’s mish-mash proposal of nothing but flaws…comprehende`?
End of story… jeebus, just how hard is that for you FUDsters to actually understand!
Didn’t realise this post had kicked off a debate, good stuff.
It’s late, so I’ll be brief for now.
Everyone seems to have a fairly cloudy memory of why the HFC failed and it isn’t comparable in my view.
It was a cable TV war and the reason both parties lost had to do with poor regulation of television rights and the outrageous prices OptusVision and Foxtel were paying for exclusive content.
Think of it in terms of corporate accounting rather than your credit card bill. The capital for laying the HFC was raised capital and the cost depreciated over probably 30 years straight-line. If they each spent a billion dollars the actual expense of the cable on their P&Ls would only be about $30m per year.
The real cost that couldn’t be depreciated was the content. Those licensing deals with the American networks and studios were extreme and all paid out as expenses.
So from a business sense, the HFC roll outs didn’t hurt them, it was the dodgy content deals.
Now when it became apparent that OptusVision was a loser, then Optus had a big fat lemon on it’s balance sheet in the HFC. Also, remember when the HFC was started being rolled out, I was living in Canada where we had 90% coax penetration across the population and we didn’t had DSL because it hadn’t been brought to market.
The HFC was also partly a victim of the rapid commercialization of the Internet and DSL technology. In 1997 people were using 56k modems and there was no Google, YouTube, Facebook, etc…
The HFC needs to be viewed in it’s historical context, not be re-assessed by revisionist historians and then used as a reason for why the government should be forgiven for doing a rubbish deal on the NBN.
Also, remember that no matter how much you think the HFC was a waste, it didn’t cost the taxpayer a dollar. If the NBN is a complete screwup, we’re on the hook for a hefty bill.
My big concern with the NBN, and was the genesis of my comparison to Sydney’s Rail Network is, look at what happens when government controls big infrastructure at a loss. It’s fine now because the NBN is on the agenda, but what happens in 10 years from now and government spending priorities change? What if the NBN is still a bleeder? Then whoever is governing will do what governments do, they quietly cut the budget and move funds elsewhere. Then 20 years from now we’ll be where Barry O’Farrell is today when he looks at Sydney’s transport system.
I mostly agree with what you’ve said above, though I don’t agree that the whole Telstra deal should be scrapped just because of the HFC part.
My big concern with the NBN, and was the genesis of my comparison to Sydney’s Rail Network is, look at what happens when government controls big infrastructure at a loss.
But the NBN isn’t supposed to be run at a loss…
But the NBN isn’t supposed to be run at a loss…
I’m not sure you realize, but the assumptions in NBNCo’s business case are so overly optimistic (and every assumption has to hold) that its much more likely that NBNCo will run at a loss
In fact a study was done that showed, statistically speaking, government run projects run over cost and are delayed 90% of the time, and the NBN is so sensitive to so many issues that it running at a loss is incredibly likely
Even iiNet’s Michael Malone said it was obvious that NBN will never pay itself off
I’m not sure you realize, but the assumptions in NBNCo’s business case are so overly optimistic (and every assumption has to hold) that its much more likely that NBNCo will run at a loss
That’s your assumption, yes. But I’m sure when you state it as fact like that, it sounds very convincing.
That’s your assumption, yes. But I’m sure when you state it as fact like that, it sounds very convincing.
Have you actually read the assumptions. Do you know anything about labor shortages, change in political cycles, and anything else that can happen
Let me get this clear, only one thing needs to screw up (for NBNCo) and unless NBNCo backtracks in one area, it will raise the costs. There are like 10-15 things in the assumptions, all of which need to hold, for it to (barely) make a profit years down the line. There is a god damn reason why government projects almost always run overbudget and/or delayed, they cannot predict in the future, and are highly sensitive to political. economic and social issues
Dean,
The NBN Co has become so politicised I doubt it will ever be profitable – I certainly think it could be and at heart, I’m a supporter of a government owned and regulated, profitable national fibre infrastructure. Again the problem is politics.
On more than one occasion, I feel that I’ve laid out the single best way for the government to roll out the NBN while not spending too much upfront capital and underwriting SOME of the implementation cost to rural Australia. You MUST start in the “aspirational” suburbs of each of the capital cities. Here in Sydney, you should be targeting the Lower North Shore – Cammeray, Willoughby, Chatswood, etc… These are suburbs with young professionals, with children who will pay “premium rates” to have early access to the NBN.
Not only that, but rather than the government “Front-ending” the cost, they should “back-end” payment through tax rebates. So if I want the NBN in my house and I’m in one of these “early adopter” suburbs, then smack me with a $1000 installation charge. As soon as I confirm do a mail drop to the entire street telling them the NBN is coming and they too can get it for $1000. Now what the government can do is offer that up as a rebate at tax time. In essence, the government keeps their cash (which is important) and only has to manage their expenses (because revenue will be slightly lower due to rebates). Effectively the customers are underwriting the roll-out – for the most part.
Now over time the cost will diminish as the footprint spread, but by charging a “Premium” to early adopters, the government can ensure the NBN is PROFITABLE from day one by charging those who can afford it AND want it more. They can then use this pool of profit to underwrite the loss-making rural areas.
This strategy might be the ONLY way to get a single tier pricing schedule. Over time as the roll-out progresses and the capital works required lowers, the NBN can then across the board cut prices and everybody wins.
The problem with the government approach is that they are front-ending their debt. They have politically committed to rolling out this network to THE most expensive place in the country and providing the service essentially at a loss. The idea is that at some stage when they deploy to the urban areas the denser population will result in cheaper capital costs – so by charging the same rate, city dwellers’ service will be profitable and rural dwellers will run at a loss, offset by urbanites.
The flaws stick out like dogs’ balls when you think about it… First of all, in the government’s own costings they didn’t properly account for the working cost of capital AND they were borrowing the money at the government’s lending rate. That means their interest rates (on BILLIONS) is going to be at least 1.5% higher and therefore the front-end debt with money losing operations is going to be a cascading problem. The longer they run at a loss, the deeper the debt, the more interest they pay, the bigger the debt grows, etc…
Finally, I just think the thing has been an utter mess. Conroy’s arrogance and Gillard’s stupidity lead me to think this is going to be a disaster. The way the NBN’s mission has never been clearly defined is a problem. The regulatory regime is not in place – you can’t have the NBN be at the whim of the Minister like it is now. I mean Mike Quigley was effective a campaign tool during the last election. I’m not saying the Libs are any better – Abbott is just opposed for the sake of opposing and Andrew Robb is clearly simple.
The whole thing just leads me to think that we’ve got to find a solution where we get the outcomes we want as a nation, the regulation we’re comfortable with to ensure a well delivered service to everyone and find a way to make it profitable for the private sector to deliver this infrastructure. Maybe have an Network Infrastructure Tzar who’s responsible for making sure the NBN runs at 3% profit and sets access rates and the infrastructure program independently of the government. I also think a proper deployment plan needs to be established and look at doing it as some kind of open book, guaranteed margin “Alliance” contract with the companies like VisionStream who can deliver this project.
This thing is going to end up a serious blight on the country unless its managed better!
So let me get this straight.
You want to roll it out first to all the suburbs that already have the highest takeup of cable and get marginal extra benefit from fibre. Hmmm, I can just see the queue to pay $1000 up front to upgrade from that, rebate or otherwise.
I would think these suburbs (including my own) would be the LAST to get it , and I am almost certain that should the coalition win they will never get fibre from the NBN, since if you’re penny pinching then you might as well chop any scheduled suburbs already served by Telstra/Optus HFC.
The politics of doing that would be pretty hilarious, so I await with anticipation what Turnbull & the coalition will do with the minefield of cancelling the NBN rollout.
I’m not touching your debt arguments with a barge poll. There are plenty of parliamentary committees made up of the likes of Mary Jo Fisher who will do that for me.
Thank You Sean
I’m having serious trouble understanding your claims and concerns.
Do you honestly believe building out 2 competing HFC networks that ultimately failed didn’t cost the taxpayers anything? Where do you think private companies get their revenue and profits from? Uh… their subscribers. And who do you think pays for lost revenue in failed projects? The subscribers. And who are these subscribers? Almost every Australian taxpayer!
Corporations don’t generate money from magic trees that grow in the ground. You’re completely missing the point if you think NBNCo is somehow “wasting” money.
And I’m seriously confused as to why you think the NBN won’t be profitable. Do you understand that the opex (operational expenditure) of a complete and built network is TINY compared to the initial capex? Fixed line networks are absurdly profitable. Telstra’s costs had to do with maintaining a copper network literally rotting away. NBNCo won’t have to deal with any of those issues, since they’re laying down brand new lines and modern day sheathing material technology has advanced quite a freaking bit in 60 years.
Furthermore NBNCo is going to be a total monopoly. *Everyone* will buy wholesale from them. Everyone who wants TV will get it through NBNCo. Everyone who wants internet? NBNCo. Every giant business willing to shell out thousands every month for absurd amounts of bandwidth? Directly to NBNCo. Every wireless tower that requires backhaul and fiber to supply its 4G speeds? All the leases go to NBNCo!
The real question here is how can NBNCo NOT be profitable? Its business plan is insanely conservative. Companies like Verizon here in America have entirely profitable fiber networks after 30-35% penetration rates. The Australian government would have to mess things up to a preposterous level in order for the network to not be profitable. Even then, it would most likely *still* break even after another 10 years.
God gone it. You luddites have no idea how incredibly helpful this network will be. Your Liberal party cares far more about corporations and their profits than people, and that’s why they’re so desperately trying to stall this network. They know exactly how successful this network will be, and they don’t want their corporate lackeys losing out on those profits.
If you take the dollar estimates: spending $11 billion (or possibly $12 billion or even $20 billion depending on who you listen to) in order to achieve a saving of $9 billion in build costs seems pretty dumb.
However, the deal with Telstra is in effect a fingers crossed promise by Telstra not to compete with NBN in last mile fixed line infrastructure. The real sweetener for Telstra is not the money (although that helps), but the real sweetener is that the burden of Universal Service Obligation will be lifted from Telstra’s shoulders. NBN admit in their business plan that they really haven’t considered the full implications of USO (Telstra claims it costs them bucketloads, but people don’t believe what Telstra say on this matter because everyone thinks he can do a brilliant job of fixing someone else’s problems).
I can guarantee that Telstra will attempt to hand over to NBN all their low-value customers while keeping the high-value customers to themselves (and their design for achieving this should be obvious to anyone with basic logic, and even a little bit of industry knowledge, but don’t say it out loud or that would spoil the fun).
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