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Dec 15, 2014

Telstra wins, we all lose in NBN deal

We'll get the broadband network we can afford -- and unfortunately, we can't afford much.

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It is hard to escape the feeling that the taxpayers have been had by Telstra, which has secured crucial incremental advantages in its new $11 billion deal to help build the National Broadband Network (NBN).

While the headline figure is the same — in 2010 dollars — as the NBN deal Telstra signed under the Labor government in 2011, this is a much better deal for Telstra, as Business Spectator’s Alan Kohler explained in this excellent piece this morning and as has been underlined by the investor reaction, which lifted the telco’s shares by 1.2% in a falling market.

For example, under the new deal the cost of remediating Telstra’s ducts and pits onto the government-owned NBN Co gets a key potential liability off the books for Telstra, and while chief executive David Thodey was coy about the numbers in an analyst briefing yesterday afternoon, he fairly crowed the result was “unquestionably better for shareholders”.

The dollar figures being bandied about are confusing because they are given in net present value terms — i.e. the value of expected future income — which is a familiar concept for many in the financial community but meaningless for many. This NBN-Telstra deal is really worth more like $100 billion, which is the total amount that will be paid to Telstra over the next 30-plus years for access to its infrastructure and, after yesterday, additional design, build and maintenance work.

That income stream will make Telstra a desirable investment for decades and is a remarkable demonstration of the power of this corporate behemoth, which has turned a fundamental threat to its former monopoly franchise into a goldmine and has got its arms around a competitor.

Communications Minister Malcolm Turnbull has claimed the Coalition’s multi-technology-mix will save $30 billion compared with Labor’s promised fibre-to-the-premise rollout, and he says it will be delivered up to four years earlier.

We will never know how much Labor’s FTTP rollout would have cost or how long it would have taken, so it is hard to argue, but there are two costs that must be balanced against any upfront saving:

  1. As technology commentator and futurist Mark Pesce was tweeting yesterday, we forego the higher growth that would have flowed from faster internet — he cited this Ericsson study that claimed a mere doubling of bandwidth increased GDP by 0.3% — boosting tax revenues by the way and dwarfing any short-term saving; and
  2. The taxpayer was always intended to sell off the NBN at some point; it is a safe bet that a pure FTTP network would have more value than a mixed fibre, HFC and copper network. NBN appears increasingly dependent on Telstra, and while the Australian Competition and Consumer Commission will be under pressure to make sure the two companies do not get too close, this is situation normal for Telstra, which loves nothing more than a standoff with the competition regulator. (One has to ponder whether Telstra might one day even bid for the NBN — a laughable anti-competitive outcome that would defeat the whole purpose of structurally separating its wholesale and retail arms and ending its infrastructure monopoly.)

To rub salt in yesterday’s wound, taxpayers have also been had by Optus, which has now sold the NBN a dubious-quality HFC network that it has absolutely no need for, given it overlaps almost completely with Telstra’s HFC network. There was a crazy logic to buying both HFC networks when they were to be shut down in pursuit of a greater good. It makes no sense at all to buy both networks when you can only use one. Optus is being paid to stay sweet.

There was a familiar divide yesterday between the savage reaction of technology specialists — many of whom are understandably fibre zealots and see the NBN as essential infrastructure to future-proof Australia — and the mainstream media, who see the NBN as a project like any other, with costs and benefits to be weighed responsibly. It is tricky to debate the potential benefits of something we’re not getting. But Turnbull was right when he asked Lateline’s Emma Alberici, in a terrific pre-election debate on the NBN, whether Australia was suddenly “so rich that we can blast away billions of dollars without worrying about the cost?” And if Turnbull was right then he is more right now, as the country has only gotten poorer in the intervening 15 months as the mining boom recedes ever-more rapidly and manufacturing crumbles.

So we will get what we pay for. At least yesterday’s NBN agreements are technology-neutral, so as the relative costs of installing different technologies shifts, NBN and its partners will be free to roll out the most efficient option. Hopes are emerging that fibre to the distribution point — which gets fibre right down the street, much closer to the home than FTTN, and can therefore deliver much higher speeds down the shorter lengths of copper that remain — will prove increasingly competitive. The householder will bear more of the final, unpredictable cost of getting from the street into the home, but at least they will have an upgrade path to pure FTTP. Not so the millions of homeowners who will be stuck with souped-up HFC and no upgrade path to FTTP at all — ironically, the richest third of Australian homes may end up with the inferior network.

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25 thoughts on “Telstra wins, we all lose in NBN deal

  1. cud chewer

    Norman,

    You really do need to get out more and get your facts straight.

    [to back an NBN plan which made economic sense]

    Are you somehow under the delusion that Malcom Turnbull’s Misadventure is cheap? Its costing tens of billions of dollars. Borrowed money. Stuff that adds to the government debt. And here’s news to you. Its temporary. Where is the economic sense in spending tens of billions on something that will have to be replaced?

    [which pandered to marginal Electorates]

    Hate to burst your bubble here Norman, but this simply isn’t true. And the amusing part is that the initial set of Nodes is heavily skewed towards Liberal electorates but heck that’s probably coincidence based on how NBNco is now targeting easy to construct areas rather than under-served areas.

    [Pink Batts & Education Building Revolutions enough in the way of unmitigated disasters?]

    Are they? Or did you get this from the Daily TellMeCrap too?

    Both programs were largely successful. The BER in particular.

  2. cud chewer

    Norman,

    You really do need to get out more and get your facts straight.

    [to back an NBN plan which made economic sense]

    There is no economic sense in spending tens of billions on a temporary network? Or were you blissfully unaware that fraudband costs tens of billions to build?

  3. Bob's Uncle

    Can we stop calling this the “NBN” now?

    Direct Action replaced the carbon pricing, but it isn’t still referred to as the “carbon tax” (although it probably should be). The Gonski funding model was ripped up so despite some similar overall funding we no longer say we’re getting the “Gonski” model.

    Even Turnbull himself stongly objected to calling his Internet filter a “filter” because it wasn’t the same filter as the filter proposed by Conroy.

    “NBN” referred to a specific project which has now been replaced by Turnbull’s “MTM” rollout. Surely it is misleading and confusing to keep referring to it by the name of Labor’s now scrapped policy. It doesn’t have to be a derogatory name, just something different.

  4. drsmithy

    No comment: we have been sold to the lemon dealers. Thanks Malcolm. Hope you are happy with your o/s investments in FTTP.

    Oh, it’s even better than that.

    Having sold off the most valuable part of Telstra, and allowing private industry to milk the associated monopoly for 10+ years, we’re now buying back the dried out husk just in time to have to pay for the backlog of maintenance that said private industry neglected (because that would have cut into profits).

    Privatise the profits, socialise the losses…

  5. Norman Hanscombe

    If only those on all sides who now expend so much energy re the NBN, had shown a similar interest in pressuring the Rudd/Gillard Governments to back an NBN plan which made economic sense, instead one which pandered to marginal Electorates where they hoped to win votes?
    Weren’t the Pink Batts & Education Building Revolutions enough in the way of unmitigated disasters?

  6. Chris Hartwell

    Precisely cud chewer – all we’re doing is paying twice.

  7. AR

    Those fibre zealots are like those silly people in the 1920s who imagined that the Sydney Harbour Bridge would need to carry many of those horseless carriage thingies, as if real people would ride in the smelly things when there were boatmen on the shore to take them across to Sydney Cove.

  8. Stuart Coyle

    Someone commented earlier that the IT industry and other big business don’t care if we get a decent NBN because they already have access to fast internet. That is wrong headed. These businesses should care greatly that their clients can access fast broadband and thus consume their services at a greater rate, with less friction and less cost.

    The NBN is the road of the future. We need to drop the 19th century approach to infrastructure.

  9. cud chewer

    Graeski @3,

    [That even Crikey can describe those technical experts who favour the original architecture of the NBN as “fibre zealots” speaks volumes about the IT profession’s total failure in getting its message across throughout the whole sorry national broadband debate over the last few years.]

    See my post above. The real problem here is that Turnbull has turned this into a highly dishonest debate about “do we buy the cheaper model” when in fact no such choice exists. The MTM is not an alternative to a future proof fibre network. Therefore the cost comparison is also null and void.

    What the tech journalists need to remind their MSM friends about, loudly and often, is that there is no choice. That fibre is the only viable, future proof technology and no matter what else you do, you will have to replace it with fibre, and do so within a few short years.

    The core deceit in Turnbull’s rhetoric is to sell fraudband as an alternative. When its simply not. Its at most a temporary stop gap. And every journalist should be aware of this. And take Turnbull to task over his outrageous dishonesty.

  10. cud chewer

    Paddy,

    The reason us “fibre zealots” get so annoyed is that the cost argument is bunk. For one thing, MTM, even on Turnbull’s own figures represents a modest saving. But more importantly there is a fundamental fact that Turnbull can’t make go away, that the tech journalists understand, and that the MSM and people such as yourself should take to heart.

    [Fibre is inevitable]

    Consider the consequence of that statement. Anything you now do that purports to be a “cheaper” alternative, is not an alternative at all. Its simply something you spend additional billions on in a doomed attempt to avoid building the fibre network that will, with absolute certainty, replace it.

    What Turnbull is doing is (on his own figures) borrowing tens of billions of dollars, and “investing” it in into something that will be uneconomic or obsolete by the turn of the decade. This isn’t just a question of technical merit, Paddy. Its a matter of absolute certainty. Certainty that if we go ahead with MTM, we will end up paying twice. Certainty that we will spend additional billions of dollars and achieve nothing but delaying the inevitable fibre network that will then last 50 or more years henceforth.

    Why do this? Why spend additional billions to achieve nothing but putting off the economic benefits of a fully fibre network, and spending MORE in the process? You don’t need to be an expert to understand that this is pure insanity.

  11. old greybeard

    That doesn’t mean it wasn’t shortsighted. Great question on AM to Turnbull. Have you just bought back what the government sold? Turnbull had no answer. Either way the regions are dudded.

  12. drsmithy

    But Turnbull was right when he asked Lateline’s Emma Alberici, in a terrific pre-election debate on the NBN, whether Australia was suddenly “so rich that we can blast away billions of dollars without worrying about the cost?”

    Indeed. It’s far more important to blast away billions of dollars on keep the property bubble inflated than doing something productive.

  13. Scott

    The IT industry isn’t concerned about the NBN as those who work for the big corporates already have access to super fast broadband through their company’s infrastructure. It’s not like this stuff is new. Fibre has been around forever. Most businesses who need fast links have already paid the money to gain this advantage. It’s only the punters who need their super fast broadband to download “Game of Thrones” who want the government to pay for their privilege.

    As for Telstra being sold being a shortsighted decision, well those of us who became shareholders are pretty happy with our 8% plus yield thank you very much.

  14. GF50

    No comment: we have been sold to the lemon dealers. Thanks Malcolm. Hope you are happy with your o/s investments in FTTP.

  15. drsmithy

    That Australia sold its vital communications capability into private hands that has profit as its sole agenda demonstrates the shortsightedness of the Howard Government.

    I doubt it was considered shortsighted from the perspective of the people who benefited from it.

  16. John64

    Kevin bloody Rudd had one thing to do…

    Just one thing.

    Get that NBN in… but no…

  17. Dogs breakfast

    It’s not just technology specialists/zealots, it’s anyone who has looked at this with a clear head and functioning synapses.

    The promise to build roads at similar expenses never receives the sort of cost/benefit analysis that the NBN has had to endure, and the benefits are multitude, with virtually unimaginable yet to be invented uses if the NBN went through as planned.

    This is so dumb. If the MSM think this is just another project then they are dumb as well. Sure, in the most facile analysis it is, but of all the fruit on the tree, this is the lowest hanging, richest, juiciest, ripest fruit of all, by such a long way, it’s hardly even on the same tree.

    More roads inevitably leads to more traffic. That has been proven time and again.

    More NBN could, among other things, lead to less traffic, which means we wouldn’t need more roads.

    But that is just one tiny benefit of the NBN.

    This is an investment like no other that we could make. Only renewable energy comes close in terms of being worth government assistance.

    Oops!

  18. Gratton Wilson

    That Australia sold its vital communications capability into private hands that has profit as its sole agenda demonstrates the shortsightedness of the Howard Government.

  19. 20/20

    No one should now be suprised that the NBN has been changed to “Mal’s model”

    On first principles, Liberals never fund large massive projects. Because XX billion dollar projects, are in Liberal eyes, potentially XX billion dollar, political nightmares waiting to happen, if things go wrong

    Secondly, Malcolm is an investment banker – who years ago when the tech bubble was starting to roar along in the US, decided to get into Ozemail in Australia. His actual understanding of the technology is limited to what he needs to know from an investment standpoint only

    I agree with Graeski- IT professionals, could have done more on talking up what the NBN could mean to all Australians.

  20. paddy

    [There was a familiar divide yesterday between the savage reaction of technology specialists — many of whom are understandably fibre zealots and see the NBN as essential infrastructure to future-proof Australia ]
    Sheesh Paddy, I expected better of you.
    Then again, when even Adele Ferguson writes an utterly lame puff piece in the AFR [Here http://tinyurl.com/nyjkhtp ]lauding the brilliance of Malcolm Turnbull. While completely missing the point of what a turkey we’ve all been sold… I guess I shouldn’t be surprised by much at all any more.
    But I would have hoped Crikey could do better.
    BTW That link to the Kohler piece in Business Spectator is paywalled. Grrrr!

  21. zut alors

    ‘…whether Australia was suddenly “so rich that we can blast away billions of dollars without worrying about the cost?” ‘

    Good old Malcolm. He could also put that question regarding the controversial Joint Strike Fighters deal (value $24 Billion) or the unknown & never mentioned cost of fighting interminable unwinnable wars in which we have no interest nor any business.

    The Rudd/Gillard NBN was to be sold off eventually therefore those ‘blast(ed) away billions’ would have been recouped. Turnbull is smarter than this but he’s sold his soul, ho hum…

  22. Graeski

    That even Crikey can describe those technical experts who favour the original architecture of the NBN as “fibre zealots” speaks volumes about the IT profession’s total failure in getting its message across throughout the whole sorry national broadband debate over the last few years.

    Let me suggest an analogy. Let’s say the new Andrews government in Victoria decided to go ahead with the East-West link in a new form: in order to save a few billion dollars, the new freeway would consist of only a single lane in either direction and, where possible, it would be re-routed over existing suburban roadways in order to save money. Leaving aside the fact that they would be breaking an election promise, would they not also be howled down as proposing the ridiculous? And if anyone pointed out that a single-lane freeway was a ludicrous concept, would they be described as “zealots”?

    Liberal party supporters may be congratulating themselves that the issue is done and dusted and that they’ve “won” – but it ain’t over, folks. The current plan is a band-aid at best. The underlying wound still exists.

  23. drsmithy

    There was a familiar divide yesterday between the savage reaction of technology specialists — many of whom are understandably fibre zealots and see the NBN as essential infrastructure to future-proof Australia — and the mainstream media, who see the NBN as a project like any other, with costs and benefits to be weighed responsibly.

    This particular false dichotomy fallacy pretty much defines the whole NBN “debate”.

  24. Luke Hellboy

    This government obviously knows the value of nothing. If only they at least knew the cost of anything.

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