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Flawed NBN structure undermines competition

Bevan Slattery’s scathing attack on ACCC boss Rod Sims in CommsDay might be a reflection of the attacker’s towering personality but he most certainly has a point.

When the government changed the NBN policy from full fibre to mixed technology they fundamentally changed the nature of the project, including the underlying fundamentals. That being the case, those underlying fundamentals should have been reconsidered and appropriate legal and regulatory changes should have been made.

The original plan was to quantum-leap all existing ageing telecoms infrastructure and replace that with a new one that would set us up for the next 30-50 years of telecoms infrastructure. As with other utilities it is not economically viable to build two or more residential FttH networks, so it made sense to turn that into a national wholesale-based monopoly. While there was some opposition – mainly questioning the government’s intervention from a political persuasion viewpoint – from a business perspective most people agreed that this was a valid argument.

Unfortunately at the early stage of the NBN the ACCC had already made its first mistake by caving in to vested telecoms interest and changing the number of POIs (points of interconnect) to the NBN from 14 to 121, making it far more difficult for smaller players to connect their services to the NBN in an economically viable way.

At this point I questioned the ACCC on this and they said that they understood the risks, but that they would rely on competition from the four major large players to ensure that the market would remain competitive. They also indicated that they would interfere if it turned out to be a problem later on. Five years later this hasn’t been done, so one must conclude that the ACCC still believes that the market is competitive enough – something that is indeed very questionable.

To show the implication of the POI decision, according to a recent report from the MNF Group, to connect to all 121 POIs requires a substantial upfront investment of $120,000, and the ongoing monthly cost of being connected to 121 POIs is $163,350 per month, regardless of the number of end-users that are being serviced. So it is clear that smaller players are far more affected by this than the larger ones (who lobbied for the 121 POIs).

On top of the POI issue there is a range of other wholesale charges that preference the larger players and make it more difficult for others to compete with them. They include the Access Virtual Circuit (AVC) and Connectivity Virtual Network (CVC) charges. Here also, right from the beginning, the industry (in particular Internode’s Simon Hackett) indicated that these charges would severely undermine a competitive environment, but, while minor changes have been made since that time, the underlying problem remains. Simon’s tenure on the board of NBN Co, however, has not resulted in a better wholesale policy for smaller players.

Because of these flawed wholesale conditions and in order to stay competitive many of the retail service providers (RSPs) are forced to under-provision their services to their customers so they can provide retail prices that customers are prepared to pay (around $60-$70 per month). This, of course, is unsustainable and is going to create significant problems once customers start to consume more bandwidth – annual growth in bandwidth use is around 30% and growth in video downloading is even higher.

With RSPs forced to under-provision the NBN service to their customers, other technologies (wireless) will gain a further advantage over the NBN, and this in turn will further undermine the business case for NBN Co.

When the current government changed its NBN policy in 2013 it changed the core of the project by no longer quantum-leaping old technologies by replacing them with an all-fibre network. Instead they continued to use the old and ageing infrastructure and decided to upgrade that instead. This changed the fundamentals of the NBN. Many of the telco players saw that as a backward step and wanted to provide their own fibre services to their customers, but the monopoly legislation does not allow them to do so.

So we are now saddled with a second-rate network and commercial organisations willing to invest in more future-proof networks but who are not allowed to do so under the current regulations.

Furthermore, the lack of a good quality high-speed broadband network will increasingly become a serious stumbling block to social and economic progress, as it will be more and more difficult for organisations (healthcare, education, media) and businesses that depend on the digital economy to deliver quality-based broadband services, as, due to the hopscotch nature of the NBN, it will not be able to carry such services – and certainly not in a universal way.

At the same time, as customers will increasingly demand better services the industry will not be able to deliver this because they are hampered by the monopoly of the second-rate infrastructure and are thus missing out on new business and revenue opportunities. Furthermore, a full fibre network also offers far greater network efficiencies that allow for lower costs. At the same time the ongoing maintenance costs of the NBN based on old underlying technologies will see an increase in these costs.

It is highly unlikely that the big 4 players will push for more competition and because of the stranglehold the NBN wholesale regime has on the smaller players, many of them will be forced to leave the market because they will be unable to deliver a quality NBN service in competition to the big 4. This, in turn, will stifle innovation, something the government was keen to stimulate.

The government decided for political reasons to change the nature of the NBN, but it shied away from also addressing the regulatory implications, and this is what is now starting to bite the industry.

And the situation is getting worse. With a second-rate infrastructure in place water will flow where it can go and, while wireless networks will never be a replacement for fixed network, they can eat away at market share from a service that is seen as being inferior.

So there is a massive investment from Telstra and others in 4G and soon 5G networks. These networks require thousands of extra base stations and over the next five years or so they will all be linked to fibre optic backbone networks. So what you get are fixed fibre networks with a wireless last-mile component. This will provide real competition to what will quickly become an inferior fixed network.

As we have mentioned before, all of this is pushing the NBN into the corner and in order to secure its economic and financial survival it needs more and more regulatory protection. This will make it increasingly difficult for the (smaller) telcos to stay economically viable and Slattery made that very clear in his assessment.

In relation to the blame game, surely the ACCC does bear responsibility for not pushing for a regulatory review after the fundamental changes made by the government. Ultimately, however, the legislative foundation on which regulations will need to be based is the government’s responsibility and for political reasons they decided to shy away from that.

Paul Budde