opinion The argument made by respected competition expert, academic and executive Fred Hilmer several weeks ago that the National Broadband Network is not a “natural monopoly” is somewhat convincing, but ultimately falls short by failing to acknowledge specific factors relevant to competition in the telecommunications sector.
One of the most common arguments made in favour of Labor’s previous, all-fibre National Broadband Network model right from the start of its development and indeed, consistently over the past decade, is that telecommunications infrastructure, like electricity cables, water, gas and sewerage pipes and even roads and rail, constitutes what is called a “natural monopoly”.
In short, or so the argument goes, there is no need for multiple, overlapping telecommunications networks because one is all that society needs. Just as each house and business premises in Australia only needs one electrical connection and one water pipe, so it should only need one telecommunications connection. Building multiple connections would appear to represent an inefficient use of society’s resources: Pure wastage.
This theory underpins everything that Labor’s NBN policy unveiled in April 2009 stands for. Its authors, led principally by then-Communications Minister Stephen Conroy, planned the NBN to be the fixed-line telecommunications network that would replace all other networks: Literally the ultimate platform which could never be superceded. Labor didn’t ignore the issue of competition, but it did shift the arena of competition, pushing it onto the retail broadband level, several layers about the infrastructure layer it has often sat at in the past.
Hilmer’s article published in the Financial Review newspaper on 28 April (paywalled) is one of the first thinkpieces I’ve seen published in Australia which successfully challenges this idea. In it, Hilmer argues that telecommunications does not constitute a natural monopoly situation, because other examples of such natural monopolies cannot be economically replicated by a competitor, while telecommunications infrastructure can.
Hilmer (pictured, right) argues that the only thing stopping competitors from overbuilding NBN Co’s infrastructure is not economics, as in a natural monopoly situation, but regulation. He refers to the fact that it was necessary for Labor to set up a complex regulatory regime, involving deals with both Telstra and Optus, as well as a specific contract between the competition regulator and NBN Co, and even supporting legislation, to ensure the dominance of the NBN infrastructure and block competition at the infrastructure level from challenging NBN Co’s supremacy.
And of course, Hilmer makes this argument at the perfect time.
As the UNSW vice-chancellor and former Fairfax chief executive points out, the whole idea of NBN Co as a natural monopolist is being challenged in the market right now, with rivals such as TPG threatening to cherry pick metropolitan residents who should be some of NBN Co’s natural customers. The reality of the situation, Hilmer argues, is that in keeping NBN Co’s model afloat, the Government is merely “cementing over cracks in the pavement”.
Now, to a certain extent Hilmer’s argument is extremely persuasive.
The commentator — who helped set up Australia’s competition policy in the early 1990’s — is right to be suspicious of applying the natural monopoly label to any company in the telecommunications industry. TPG’s actions right now — and the threats by fellow telcos Telstra, Optus and iiNet to follow its lead — do indeed demonstrate the threat that infrastructure-based competition poses to NBN Co’s financial viability. The nature of natural monopolies is such that they normally inherently deter such action.
Then too, a quick look at most developed economies will show any observer that this kind of infrastructure-based competition is the norm. Most residents of such countries typically enjoy a choice of telecommunications infrastructure, typically both copper-based broadband (ADSL) and HFC cable, sometimes with additional options such as with the Fibre to the Premises (FTTP) rollout that Google is expanding across the US. And mobile or wireless broadband has its role to play as well, although usually only at the low-end of the market.
However, Hilmer did make one critical mistake in his analysis which undercuts the narrative he is attempting to build around NBN Co as a flawed monopoly: He conflated the current Coalition Government’s broadband policy with Labor’s previous model.
Seasoned observers of Australia’s telecommunications industry will acknowledge that as long as Labor held power in the Federal Government and committed NBN Co to a universal FTTP model for its network rollout, powerful rival players such as Telstra, Optus, TPG and iiNet were willing to go along with and support the model.
Yes, as Hilmer points out, they did so because of the threat of regulation. However, they also did so because they were faced with an unstoppable economic force in the form of NBN Co, backed to the hilt — literally, to the tune of $40-odd billon — by the Federal Government’s overwhelming financial power.
Hilmer will be aware that Telstra is not afraid to throw billions of dollars of capital expenditure at a market in which its dominance is threatened. Telstra did precisely that in the late 1990’s when Optus attempted to overbuild its copper network with HFC cable. At the time, Telstra simply built its own HFC cable network in response, literally sending its trucks to roll out infrastructure down every street after Optus had been there. And we saw precisely the same situation when Hutchison’s 3G mobile infrastructure started challenging Telstra in the mid-2000’s. Again, Telstra threw cash at the situation in the form of its Next G mobile network.
Telstra could have done the same when Conroy and Prime Minister Kevin Rudd announced their NBN proposal in April 2009. Yet it did not, partially because of the threat of punitive regulation, but also because it knew it could not compete financially with the ultimate arbiter of power in Australia — the body which prints our money. And of course, lesser telcos such as Optus, TPG and iiNet also fell into line.
This situation remained static for as long as Labor remained in power and used that power to threaten a universal overbuild of Australia’s telecommunications networks. The only factor which caused it to change — and removed NBN Co’s natural monopoly status — was the Coalition’s radical watering down of the project. It was not the removal of NBN-related regulation which opened the doors of competition under our new Coalition Government (in fact, most of the NBN regulation remains intact). It was the Coalition’s decision to implement a less than perfect technical model for the NBN.
When the Coalition took power in September and switched NBN Co’s focus away from Labor’s FTTP model to technically inferior Fibre to the Node, Fibre to the Basement and HFC cable technologies, the local telecommunications industry took it as a clear signal that NBN Co no longer enjoyed natural monopoly status in the industry.
Before the election, there was no point trying to compete with NBN Co. As a Government Business Enterprise, the company had deeper pockets than anyone else and it planned to deploy the best possible technology almost universally around Australia. But after the election, and with that technological advantage removed, NBN Co became vulnerable again to market competition. If you could build a better broadband network in specific areas than its so-called ‘Multi-Technology Mix’ could offer — or, at least, if you could build something similar but get the rollout done faster — then you could compete. And that is precisely what TPG is threatening to do.
The key understanding here which Hilmer missed is the way that technological development changes markets.
Other sectors, such as electricity, gas and water provision, or even public roads, remain natural monopolies because new technologies have not been developed to challenge those monopolies. Sure, household solar power is chipping away at the edge of the energy utilities’ dominance, as are household rainwater tanks. But, at the moment, these can better be seen as incremental improvements to the overall efficiency of these natural monopolies rather than as fundamental challenges to their dominance.
Yet in the telecommunications arena, the fact remains that there is a gold standard which has not yet been widely implemented. Fibre to the Premises, as a technology, is the best on offer — the ultimate answer. If fibre has been laid all the way to a building, there will simply be no way for a competitor to challenge the dominance of that infrastructure. Nobody would bother. Yet, if fibre has not yet reached a building, the way is still open for infrastructure-based competition, as we saw very visibly demonstrated the moment the Coalition cancelled Labor’s fibre rollout.
What the Coalition is doing right now with respect to Labor’s National Broadband Network project is the equivalent of laying a water cable from a reservoir to a local neighbourhood well. Sure, that’s useful. But there will always be those who want to finish the rollout and bring pipes all the way to their house. Humanity, as a species, always desires progress. When Australia has an all-fibre national broadband network, much of that desire in the in the telco sector will dampen down. But until it does, people will always be looking for ways to complete the rollout, compete with it or even shut it down entirely. The same way they were when other fundamental infrastructure was still being built.
Many of us in Australia’s technology sector no longer refer to the Coalition’s broadband project as the “NBN”, because it’s not a uniform national network and it doesn’t represent the long-term future of Australian telecommunications. I would encourage Hilmer and other commentators to remember, when it comes to this project specifically, that it’s not just regulatory and economic factors which inherently influence the nature of competitive markets. Technological development does as well.
In his article, Hilmer does acknowledge technological change as this kind of force, speculating that new technologies will emerge and challenge platforms such as the NBN. But what he and other commentators often don’t recognise is that optic fibre has been the ultimate telecommunications platform for the past forty years; and that no technology exists which appears likely to supercede it. Eventually, over the next several decades, optic fibre will inevitably be deployed everywhere around Australia and will become a natural monopoly similar to that found in other industries. All we’re debating right now is the specific, nitty gritty details of how that inexorable outcome will occur.