16 April 2009

The Australian NBN (National Broadband Network)

When we returned to Australia last year I noticed how slow and expensive broadband connections were compared to northern California. The majority of Australians live in a few large cities so the cost of the network should be no higher than in America and there must be some other reason for the high cost. As I called around the telecoms companies noting that the prices were high compared to America, the sales reps delighted in telling me that I was no longer in America and I would have to adjust to Australian prices.

The Australian government decided to something about broadband problem. Their reponse was called the NBN (National Broadband Network) and it consisted of:
  • Investing A$43 billion over 8 years in a public/private partnership (up to 49% private)
  • to build a fibre-to-the-home network reaching reaching 90% cent of Australians
  • resulting in a wholesale open-access network.
This was in direct competition with Telstra , the dominant Australia carrier who own most of the network infrastructure here. Spending A$43 billion and not re-using existing infrastructure sounded like a bold step and the press was soon full of reports.

Kenneth Davidson expressed scepticism about the scale of the project:
If we can take Rudd seriously, this will be the biggest public-private partnership in the world, which will, if required, be fully financed by the Government and then sold back to the private sector after it is completed in eight years. So we have moved from a failed policy involving expenditure of $15 billion to $20 billion to bring optic fibre to the end of the street in favour of a more ambitious policy designed to bring fibre to the home through a wholesale-only network for $43 billion. 
Many economists thought the NBN was a good idea, even making suggestions for implementing it
How the NBN will be implemented is still an open question? I strongly suspect that the model of a large government owned enterprise laying cable everywhere, working out some charges and seeing what happens will not fly. Broadband and telecommunications in general is too complex for that that commercial and social landscape of Australia too varied. Instead, we can imagine models whereby the government procures the backbone network and ...
Pragmatic solutions like building on existing infrastructure with a variety of modern technologies suited to particular groups of customers were soon ruled out by other economists
if we really thought that in the near future wireless technology could do everything that fixed-line technology can do then we wouldn’t need the NBN.
Alan Kohler gave the first explanation that made sense to me (not an indication that he was right)
But rather than go back to Minister Stephen Conroy empty handed, they devised, with the help of Graeme Samuel at the ACCC, a cunning plan: Telstra can end up owning the new fibre network and keep its monopoly, with the government even helping to fund it and take care of all the planning issues, as long as Telstra splits into two separate companies.
...Basically the project would involve the government issuing $17.3 billion in sovereign guaranteed AAA infrastructure bonds to fund the laying of optic fibre cables from Telstra’s exchanges to metropolitan homes and businesses, plus wireless and satellite connections in regional areas. Many regional cities are already fully cabled, so they wouldn’t need it. 
The government’s Building Australia Fund would supply $4.7 billion as equity. Telstra would put in $21 billion as a combination of existing fibre and cash, and eventually buy out the government’s equity. 
But that might not even be necessary. A long-term operating partnership between the government and a separated Telstra Wholesale utility (Telecom?) to supply wholesale broadband access would work fine.
Fibre Down Under: It’s All Part of the Master Plan… wrote an interesting pieces claiming that privatized incumbent vertically integrated wholesale+retails telcos like Telstra end up better off after they are forced to provide a high quality broadband wholesale network to their retail competitors:

It is almost painfully evident that the only model that has yet to deliver much fibre is the one with a regulated private incumbent and competing DSL operators; anarchy and technocracy both deliver, market-led regulationism doesn’t. And it is a real issue whether the many fancy options that have been discussed are anything more than outbursts of frustration at this fact. Not only that, but the New Zealand and Singaporean deployments are all intended to be point-to-point, active Ethernet jobs, which provides for a maximum of symmetrical connectivity and openness for competition, and the Australian one is rumoured to be so as well. Perhaps PON is just another inelegant effort to hack a fundamentally flawed model into some sort of functionality. 
There is much discussion of the “killer app” for FTTH - is it just more TV? Really good computer gaming? Telemedicine? Self-hosted servers? Although we don’t believe in killer apps in general, we think it could be something quite different; the survival of multiple competing Internet service providers. It would be a great pity to lose the diversity and liberty that the end of telco monopolies gave us; how long before we got it back? As the UK experience shows, access to the incumbent’s wires can be a poisoned chalice. Certainly, the example of Iliad would tend to bear out that one of the most important applications for fibre is to save the ISP business model.
So the report  that the FCC may demand that telcos share any fibre built with government money should fill us with inspiration, not fear. As Brough Turner points out, openness in fibre access networks is an excellent business proposition and one shareholders ought to demand.
The last two posts made sense to me. That doesn't mean they were correct. There I am going to finish with some posts that I didn't understand at all and challenged me to think about the NBN ramifications.

The Australian Government is one of the few that understand the importance of broadband across the various sectors in a holistic way. This network is not just for high-speed internet and entertainment but, more importantly, for healthcare, education, smart grids, etc. The $43 billion slated for the project also clearly indicates that the investment will go well beyond internet and broadband and that the Government recognises the need to use it to help develop the wider digital economy. This has the potential to set Australia up as one of the international leaders in this growing area. Rudd seems to appreciate the trans-sector approach that is needed to stimulate the digital economy.
That sounded to me like starting out with a load of money and trying to figure out how to spend it, which is an unnatural idea for many people including me. It would be interesting to get more detail on how this might work.

Joshua Gans wrote a post titled Understanding the telco game
In today’s Age, there is a spectacularly mis-guided piece by Kenneth Davidson on the NBN. In it, Davidson argues that Telstra may get up and start rolling out its own network to compete with the government. He expects the Government to lose that battle. But the entire premise is wrong. First, consider the likely scenario that it is not privately profitable for Telstra to roll out fibre to the home (you know, because that is what they say). In that case, how likely is it they will do so when perhaps facing some competition or the regulatory regime we currently have which will identify their monopoly and open up access to that network? Second, what if it turns out it was privately profitable to do this regardless of all that. Then the government can say “great, so glad you can do it. Build it where profitable, we regulate and save the taxpayer the dollars and we’ll complete the network elsewhere.” Hardly a dire scenario but also exactly something that isn’t going to occur. 
This raised some interesting questions.

First make the mild assumption that Telstra can build a fibre to the home (FTTH) broadband network for less cost than other companies because they own most of the existing infrastructure.
Consider the likely scenario that it is not privately profitable for Telstra to roll out fibre to the home (you know, because that is what they say). 
In that case it should cost the private/public consortium more than Telstra to do so.

There are several possible reasons for Telstra saying it is not profitable for them to roll out fibre to the home. Among them are:
  1. The resulting increase in revenue would not cover the costs of the roll-out.
  2. The money could be spent in other ways that achieve greater ROI. For example on 

    1. Retail
    2. Mobile broadband (registration required)

  3. An open wholesale network would harm their retail profits.
  4. This is Telstra's opening gambit in a bargaining process.
If 1 is true then the public pays, either through increased taxes or higher access charges if the project runs to completion, or through increased taxes if the project is killed due to cost overruns.

If 2.1 is true then the government will do better to split Telstra's wholesale and retail arms so that the wholesale arm can operate profitably in the nation's interests. A large private investment group might also be able do this by buying Telstra (a 51% stake would cost much less than A$43 billion) and splitting it into two companies.

If 2.2 is true then the NBN concept needs to tweaking to include a mixture of terrestrial and mobile broadband.

Alan Kohler explained how to handle 3 and 4 in the quote above. (I think he explained 2 as well).

I did not expect to gain an understanding of a complex subject by reading press reports about it, and I don't think I did. But it was interesting to read a variety of opinions.

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