Australia’s competition and consumer watchdog gave internet service provider TPG the OK to build a fast broadband network in competition with the NBN last Thursday. Does that mark the end of the NBN as a viable monopoly wholesaler of internet access? Is it the end of the NBN as we know it?

A year after the Coalition’s victory, we already know two-thirds of us won’t be getting fibre to the home. If you get pay TV now, you’ll be stuck with mediocre hybrid fibre-coaxial cable (HFC). The rest will be relying on souped-up copper, the slowest option, for an indefinite period. The Vertigan review decided that would do, because we don’t need that much fast broadband anyway … but failed to take into account details like, oh, the internet of things, when every vehicle, appliance and other doodad jumps online. They’re still thinking about demand in terms of streaming video.

Now we discover that if Telstra, Optus and others were to follow TPG’s lead and take advantage of a loophole in the Telecommunications Act to extend their existing fibre networks — really, an unintended consequence of Communications Minister Malcolm Turnbull’s decision to opt for the mixed-technology NBN — the business model of the NBN could be undermined completely, costing taxpayers billions.

NBN Co chief executive Bill Morrow warned on Friday: “If Telstra was allowed to go into this, and then Optus followed, then it becomes material in nature … yes, it becomes a problem.”

Down the gurgler goes the essential idea of using the once-in-a-century transition from copper networks to fibre as an opportunity to finally achieve the structural reform of our telecommunications industry, muffed in the privatisation of Telstra, by creating and ultimately selling off an NBN that has a monopoly on broadband infrastructure and sells access to retailers on a level playing field basis, under the watchful eye of the Australian Competition and Consumer Commission.

In other words, it is a complete disaster? Not so fast. Or not yet anyway. It is important to understand the ACCC was not making a general decision on whether TPG and others should be allowed to compete with NBN.

Rather the ACCC was investigating a complaint made earlier this year by NBN, which believed TPG was in breach of the anti-cherry-picking, or level playing field, provisions of the Telecommunications Act because it did not have the capability to deliver fast broadband services in January 2011.

“There is no doubt both Telstra and Optus also had the capability of delivering fast broadband at 2011, but it is not a foregone conclusion they will rush to copy TPG.”

To explain: the level playing field provisions bar anyone but the NBN from supplying fast internet access (defined as download speeds over 25mbps) to small businesses or homes, unless they do so on a wholesale-only basis and give competitors access to the network. This blocks retail internet service providers from competing with the NBN. But there was a loophole: anyone with a fibre network at the beginning of 2011 that was capable of being used to supply high-speed broadband to small businesses or consumers could continue to do so and extend the network by up to a kilometre. In hindsight, that looks like a mistake.

The loophole had particular relevance to TPG, which in late 2010 had spent almost $400 million buying PIPE Networks, which provided fibre to inner-city data centres and exchanges, and spotted an opportunity to cherry-pick high-value early-adopting customers by extending fibre to the basement (FTTB) of nearby multistorey apartment buildings, with fast internet supplied to units above through existing copper lines.

NBN complained to the ACCC early this year, arguing the PIPE network was dormant in January 2011. ACCC chairman Rod Sims told Crikey the regulator did a lot of work investigating the NBN complaint to determine TPG’s network capability at that time.

“Not only were they capable, they had customers,” Sims said. The ACCC had no grounds for legal action against TPG, and could not block its rollout of FTTB.

The desirability of competition for provision of fast broadband at the wholesale level played no part in the ACCC’s decision. “We weren’t giving a green light to anything,” Sims said. “We focused on the particular breach that was being alleged. We’re a regulatory/investigative body, not a policymaker. All we do is enforce the law.”

Analysts are unsure how big and profitable FTTB will be for TPG, and the company’s shares did not exactly soar — next week’s earnings update could shed some light. JPMorgan’s lead telcos analyst Paul Brunker wrote last Friday:

“TPG has made progress already on its build and we believe it has some live customers. However, we see the project as facing significant challenges and doubt that it will become a significant value driver for TPG in the fullness of time. …NBN Co is ramping up its own FTTB effort to limit the threat; while they are behind TPG (aiming for a Q1CY15 launch), this may be enough to make body corporates wait. The HFC network, when folded into the NBN as we expect, will become a significant competitor to FTTB proposals. Apartment builds involve complex negotiations with residents. Finally we question the number of apartments that will be economically viable.”

There is no doubt both Telstra and Optus also had the capability of delivering fast broadband at 2011, but it is not a foregone conclusion they will rush to copy TPG. Telstra, for example, wants to exit the infrastructure business — and will get paid handsomely to do so under its revised agreement with NBN.

The ACCC has now launched a long inquiry into whether TPG’s FTTB network should be declared as regulated infrastructure, to be made available to third parties, and the government will make it as hard as possible to compete with the NBN. Turnbull has flagged new telecommunications licence conditions requiring the owners of such high-speed networks to functionally separate their wholesale operations and open them up to competing retailers.

“This is a better outcome than if the government had mandated wholesale only,” wrote Brunker, “which we had thought likely given the regulatory challenge of overseeing multiple altnets [alternative networks].”

TPG is willing to offer wholesale access on NBN-like terms, and JPMorgan thinks it would make good returns on that basis, although functional separation could involve additional costs. Turnbull has left the door open to altnets — the question is who walks through.

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Peter Fray
Peter Fray
Editor-in-chief of Crikey
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