Telstra's Thodey is NBN kingmaker after Oz election

The shape of yesterday things to come is about to be revealed

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With Saturday's emphatic election result putting almost certain to put Malcolm Turnbull into the communications ministry, the business of rejigging the National Broadband Network is about to begin in earnest.

Step one, once Turnbull assumes the ministry, will be a promised “100 day” review of the NBN. This will presumably include lots of in-office grilling of those in the NBN Co C-suite comprising highly detailed reports on construction progress. An examination of construction contracts to determine how much of the fibre-to-the-premises build is locked in is probably also on the agenda.

The wireless component of the network – the five percent of users between NBN Co's 93 percent fibre coverage target, and the last two percent under satellite services – will be revised, but not radically. Some might be deemed to be within reach of the copper network, since they already have a fixed-line telephone connection, but the combination of long distances and low densities probably won't turn make at the very edge of the PSTN any more viable to service from a node than under fibre to the home.

All of the fetch-the-popcorn action is going to be focussed on working out exactly where the Coalition government will be rolling out its $AU30 billion-ish fibre-to-the-node network, and under what industry structures.

Let's look at the complexities of “where” first. The Coalition's pre-election commitments include:

  • Retaining Telstra's HFC network;
  • Completing NBN Co fibre rollout where contracts oblige it to do so; and
  • Rolling out a fibre-to-the-node network for the rest of the NBN footprint originally to be served by fibre-to-the-home.

It might look simple, but it's not. To offer just one example: under the $AU11 billion (net present value at the time the contract was signed) contract between NBN Co, Telstra and the former government, Telstra is supposed to relocate its customers to the fibre when an area is complete, and decommission the copper within 18 months.

The partial coverage problem

If we look at places like the outer Sydney suburb of Blacktown, what we find are Telstra exchange areas in which NBN construction has started – but only for part of the exchange footprint.

In such areas, negotiations could get very sticky. The new government will resist new fibre construction to achieve full coverage of the exchange area, but it will be lobbied both by Telstra and by NBN Co.

Look at the situation from Telstra's point of view, for example. The exchange is already in place, with a lot of fixed costs – but with a shrunken customer base. So for any exchange service area in which fibre construction has begun, Telstra would have a good reason to argue for fibre completion.

And that leads to the pointy end of the multi-party negotiation Turnbull will have to execute with NBN Co and Telstra (along with the ACCC, and we can be certain, a lot of sideline lobbying from the rest of the industry).

Turnbull's two-fold challenge will be:

  • Craft an industry regulatory structure that delivers on the promise; and
  • Either negotiate or bludgeon Telstra into accepting his proposed industry structure.

The current circumstances Turnbull inherits have as their centrepiece an agreement that Telstra's customers will be moved from their current physical connection to the NBN.

On both the copper and HFC networks, Telstra retains the customer relationship. In the case of the fixed copper network, Telstra will decommission the network, and NBN Co will pay Telstra a per-customer transfer fee.

In the case of the HFC network, Telstra will hand over the customers and discontinue broadband services on the cable. It won't, as is commonly misunderstood, decommission the HFC – that will still exist to carry Foxtel's Pay TV services.

The HFC network will be a headache of a different kind. If it's retained, it will remove an unknown portion of the population from the FTTN footprint. Complicating matters, the HFC network passes four or five times as many homes as it can currently serve with fast broadband? What incentives would be needed to restart investment in new HFC infrastructure?

It's important to understand that on the fixed copper network, NBN Co is not buying the copper, only the customer connection. And therein lies the challenge for Turnbull.

Telstra standing firm

At the moment, Telstra says it won't renegotiate its deal with the government. Almost immediately after the election, CEO David Thodey told The Australian its starting point is that the $AU11 billion deal still holds.

One possibility for the government is to leave the deal in place, but impose a new separation on Telstra, splitting its copper network off into a separate entity it could roll into its proposed “NetCo”. It would need, however, to persuade Telstra to go along with such an arrangement without tipping in extra funds.

Prior to the election, Turnbull expressed the opinion that since an overbuilt copper network has no value to Telstra, he believes the carrier could be persuaded to go along with such an arrangement.

If it doesn't, the 100 day review period will become much more intense.

That raises a second illustration of what Turnbull will have to achieve.

While the state of the copper network is hotly debated, there is absolutely no doubt about one thing: an unknown quantity of remediation work will be needed, and the copper will need to be maintained in the future.

Telstra in the box seat

At every level, the new policy puts Telstra in the box seat - which could be good for the carrier's shareholders, but not so good for broadband policy.

There's only one company in Australia with experience of running the whole copper network, and that's Telstra. Sure, there are contractors, but the one repository of all the copper network information is the incumbent. That work won't be carried out for free. No matter what deal the new minister manages to reach with Telstra (and it should be noted that an obstructionist Telstra could easily wreak havoc with the new government's ambitious timetable), copper maintenance and remediation will have to be paid for.

The ambitious timing of the coalition's policy suggests to The Register that a co-operative incumbent is built into its assumptions. It expects to have its minimum-spec FTTN network operational in 2016, just three years hence.

Even if the government manages to transfer the ownership of the copper – rather than the customer relocation currently contracted – to NBN Co, that entity does not have the information base required to fast-track FTTN network design.

To The Register, it seems that the picture that emerges could be very messy indeed. Under time pressure, the new government could find itself ransomed by Telstra, a long-time expert at gaming government policy; with a contract already signed and being implemented, any legislative solution to the problem, such as forced separation of the copper with a handoff to the restructured NBN Co would be expensive and may involve the High Court; and any implementation would necessarily require Telstra's deep and intimate involvement in the project.

Unless a worst-of-all-worlds solution were adopted. The government could vest its ownership of NBN Co to Telstra and try to handle the FTTN rollout by regulation alone. But that would merely re-create the vertical monopoly the industry has struggled under ever since 1997. ®

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