news NBN Co chairman Harrison Young gave a landmark speech in Sydney yesterday claiming that the Coalition’s policy of delivering NBN cost savings by using fibre to the node technology wouldn’t necessarily save money, and wouldn’t actually meet the objective of structurally separating Telstra either.
The Federal Government’s NBN project currently focuses on a so-called fibre to the home rollout style, which will see Telstra’s copper network decommissioned and fibre deployed all the way to homes and business premises. However, the Coalition has proposed to acquire portions of Telstra’s copper network and deploy fibre only part of the way to premises. This is a style which is popular in some countries internationally, such as the United Kingdom.
In a speech yesterday to a lunch held by the Committee for the Economic Development of Australia, NBN Co chairman Harrison Young said he didn’t want to enter the debate about which style was better. However, he said: “The point I want to make is that if you retain Telstra infrastructure as part of the national broadband network, even just the last bit, you will not have accomplished the separation of wholesale from retail that was a major objective of Project NBN.”
“You might address that issue by having NBN Co buy Telstra’s copper, or lease it, or whatever. You might find that negotiating such an arrangement slowed the project down more than you were willing to accept. You might find you were still tangled up in Telstra’s legacy IT, which could only be navigated with Telstra’s help, turning code into bottleneck infrastructure and giving Telstra ineradicable advantages. When you set the engineers to work on the subject, you might discover both problems and solutions you hadn’t imagined. I’m just recommending you bear in mind that an engineering solution does not automatically provide a market structure solution.”
In addition, Young said the cost advantages inherent in a FTTN solution were not necessarily apparent.
“… the prospective cost savings of fibre to the node depend on what time frame you look at,” he said. “Maintaining the copper that connects node to premise is expensive. Coping with legacy IT is expensive. The total system cost of fibre to the node is higher than its front-end cost. The same is true of fibre to the premise, but less so. The apparent cost advantage of fibre to the node decreases as you lengthen the time frame you look at. In the long run, as Keynes famously said, we are all dead. Estimating costs is an engineering problem. Deciding on the relevant time frame is a policy question.”
And Young also criticised a number of other aspects of the Coalition’s policy, such as its proposal that the HFC networks of Telstra and Optus be maintained and used as competitive infrastructure to the NBN. Young said that when those HFC networks were deployed, they were rolled out in “the most attractive geographies”, concentrating on wealth suburbs.
“So if you create an NBN Co that doesn’t serve the homes and neighbourhoods served with HFC, you will have a less profitable NBN Co,” he said.
“Because NBN Co is mandated to provide its wholesale services at a nationally uniform price, it will be subsidizing exactly those end-users that the HFC networks avoided. And if it doesn’t have access to the profitable customers the HFC networks already serve, it will find it harder to provide those subsidies.”
I want to note three things about Harrison Young’s speech. You can, by the way, find a full copy of the speech in Word document form here.
Firstly, Young has provided absolutely no evidence for any of his claims, and has been incredibly vague in many of them to boot. This is a common criticism which we like to level at the Opposition, but it’s also very evident here. Where is Young’s backing for his argument that fibre to the node costs could end up being quite higher than currently believed, and how much higher does he believe that they could get? We just don’t know … and with this in mind, I find it very hard to view Young’s comments as a useful contribution to the FTTN versus FTTH debate. Of course, he did note that he didn’t want to enter that debate, but then he did just that — so the executive could have at least done us the courtesy of providing us the evidence for which his claims were based on.
Secondly, Young does raise a very valid point about the wisdom of NBN Co avoiding being tangled up in Telstra’s IT systems if it can possibly avoid it. As we’ve seen recently with Telstra’s inability to sell naked DSL services, Telstra has very inflexible IT systems. One of the beautiful aspects of the NBN is that it allows the Federal Government to completely sidestep and avoid Telstra’s IT systems and network, and this is a wonderful thing. It cannot be overestimated enough.
Lastly, Harrison is right about the profitable metropolitan areas of the NBN subsidising the bush — this has always been one of the best aspects of the NBN: It’s a great leveller. I don’t think the Coalition has done enough to explain why it should avoid this kind of cross-subsidisation in its own policies. We’ll get onto Malcolm Turnbull’s response to this issue later on this morning.
Image credit: NBN Co