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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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