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The next NBN battle: Affordability vs Profit

The ACCC has announced an investigation into the NBN. The trouble is that the NBN needs a political solution; the current problems can’t be solved through regulatory changes. The underlying policy model is flawed and that issue will need to be addressed before we can solve the rest of the mess.

Sadly, this will not solve the much bigger problem: The once-in-a-lifetime missed opportunity of building a future-proof infrastructure that would have lifted us up among our leading trading partners. On the international ladder in relation to digital infrastructure we have dropped from number 20 to number 60. But once the political problems have been solved we can again start working on closing the gap, which will take us another decade.

I have always stressed the importance of NBN affordability, because – as is already clear with the current NBN offering – without it people simply will not use the network as this in turn undermines the commercial model of the project.

My concern about affordability goes back to the mid-1990s when I discussed the pay TV model of that time and indicated that, with the subscription rates offered by Foxtel, penetration would not grow much higher than approximately 25%. Foxtel said it would reach 75% by 2000. I said that at a price of $100+ less than 25% of the population would buy pay TV; at a price of around $50 it would be 50%+; and at a price of $25 penetration would be 75+. Now, twenty years later, pay TV penetration is still under 30%.

Ever since the broadband discussion began I have used similar examples to demonstrate the importance of affordability. I mentioned this to the previous government (Stephen Conroy) as well as to Malcolm Turnbull and I haven’t changed my opinion on it over the last 20 years.

Affordability, not technology, is the key to a successful telecommunications network. We also would have come across this problem if the FttH model had been implemented along the lines of its final version.

Several of the elements of the original NBN did work against my view of ensuring an affordable outcome. In the first four years of the making of the NBN (since my first involvement in 2005) there was no talk about a 6%-7% ROI, no talk about 121 POIs, and no talk of CVCs – all elements that I criticised when they started to arrive. I also opposed these developments during my many discussions with the then Minister for Broadband Stephen Conroy and I also made it very clear that the rollout plan that he and Michael Quigley had made was not my preferred option (I would have left HCF and ADSL2+ for later). I also expressed my concerns in relation to the 121 POIs to the ACCC at that time.

In relation to Prime Minister Malcom Turnbull’s comments re the NBN train wreck, by 2013 the current government was fully in charge of the NBN and they could have changed some of the issues that (in my view) needed correction. However, they didn’t do this, and instead rolled out a totally different – second-rate – network under the policy, regulations and legislation of the original FttH model. Such a network would have been built by Telstra anyway without any taxpayers’ money.

Telstra proposed a multi-mix technology broadband model in 2008 at no financial cost to the Australian taxpayers. Now, the government can’t expect to develop a working business model for the NBN based on a project that costs at least $25 billion more than what it could have cost if it was done by private industry.

Coming back to the original plan, a first-class digital FttH infrastructure (ubiquitous, affordable, reliable, high capacity and low latency) will eventually start paying for itself. The services that can be built on such a network will allow for totally new business models that in many cases will see the cost to the end-users going down. The current multi-mix technology model doesn’t have these characteristics and so will not be able to offer such benefits, and its price to the end-user will therefore have to go up. The benefits of FttH are also reflected in the fact that most other developed economies are now rapidly building out their FttH networks.

This is essential if you want to tap into transformative new business models and the economic and social benefits that can be achieved through them. We can already see that this is the case in relation to services such as Google, Amazon, Facebook, Uber, AirB&B, etc. Based on the availability of broadband infrastructure they could create totally new business models delivering innovations and savings across sectors.

If we move onto FttH a whole new range of business models will become available which will allow us to move beyond the Google examples – into healthcare, education, other government services, as well as business and entertainment.

So, over time I can see that at least part of the FttH infrastructure will be made available free of charge to the end-users – when the costs of the infrastructure get covered by other commercial gains that can be made by using the infrastructure as a tool. I often use the example that when you buy a (printed) magazine or a newspaper you are not asked to pay separately for the paper on which it is printed.

This is an area where we need to have a serious look at regulations in relation to the Over the Top (OTT) players who are rapidly becoming monopolies in their own fields and who could/will therefore use their market power in relation to the underlying network services to the detriment of future infrastructure investments.

I have never seen the NBN infrastructure as a profit-making business. In my view it would never be possible to build a national NBN on the basis that the underlying infrastructure in itself would be a profitable business. By pursuing infrastructure profits, one misses the whole point of building an FttH network, which facilitates opportunities that are many times bigger and will eventually be measured in the trillions of dollars.

In an NBN policy review the government will need to address these issues with the long-term national interest of such infrastructure in mind (the long awaited cost benefit plan). What are the opportunities to transform healthcare, education and other government services? What could be the savings here? What are the economic benefits of attracting new businesses and creating new jobs along new business models that will start to emerge along such new infrastructure? What is the effect on smart cities, smart energy, smart buildings? And so on ……

If a financial return is needed, then look at those of other utilities. Government-owned water and electricity infrastructure fetches around 2%-3% to be able to maintain it. Such a vision is a fundamental point of difference between two opposing views: one is based on the larger economic and social benefits and one narrowly focuses on a profit model of only the underlying infrastructure.

Last week I listened to one of Australia’s most successful telecoms entrepreneurs, Bevan Slattery. He presented an inspiring Charles Todd Oration. He talked about the ‘moonshot’.

President John F. Kennedy had a vision, and Bevan argues – and I agree – that this set America up for the next 40 years. Bevan praised this US government investment as ‘the single most successful venture capital investment in the last century’. When Kennedy made this one comment ‘we should put a man on the moon’, there was no plan, no cost benefit analysis, no economic modelling, yet it inspired a whole nation and increased the prosperity of the country to a huge degree.

In hindsight the social and economic benefits can be measured in trillions of dollars and it made America the richest and most innovative country on the planet.  Bevan also argued that apart, from the many other benefits the moonshot project delivered, it created Silicon Valley, which became the innovation engine for America’s new digital economy.  Silicon Valley would not exist without Kennedy’s vision of the moonshot.

Bevan criticised Australia for not being able to come up with inspiring ideas. In my acceptance speech of the Charles Todd Medal, following Bevan’s oration, I mentioned that the FttH program was a similarly inspirational project, and that I believe benefits like the ones that followed from the ‘moonshot’ project would flow from there. Could China’s ‘one belt one road’ project be the vision that will inspire their people to create similar massive economic and innovation benefits to flow on from this project?

Can you provide iron-clad success upfront through hardnosed economic modelling? No, of course not. Is it easy to kill such a vision? Yes, it is far more challenging to be visionary, inspire people and make it work. There will be setbacks, periods of despair, cost blow-outs, changes and so on, but if you create a project like this, and you inspire people, benefits not unlike the moonshot can be achieved. But, as Bevan said, unfortunately we don’t have such leadership in Australia and the country suffers from an absence of political bipartisanship, with each of the major parties simply committed to opposing everything the other says.

As has become clear in relation to the NBN, when you start wrecking such projects – which is rather easy to do – you lose the vision, stop inspiring people, and the whole project will collapse. In political circles you then look for scapegoats and it becomes very easy to blame the people who had the original vision.

Sadly, however, such an outcome will be a loss for the country. Politicians and their egos will soon be forgotten. The distressing drop in our position on the international broadband ladder is rapidly becoming an economic impediment, especially in the field of innovation, as fibre-based digital infrastructure is a critical conduit for all sectors in our economy and society. This is a ‘once-in-a-lifetime’ missed opportunity.

Was the original FttH ideal? No, of course not. But it did provide the country with an inspiring vision, and with bipartisan leadership we would have made it work. Wreck the vision and the passion and you see what happens. We missed a golden opportunity because at its inception the project inspired and was supported by 70% of people.

True, those who came up with the FttH plan are unable to prove that their solution would have been successful because we never got the chance to check it.  But while there certainly were flaws in their plan they can’t be blamed for the current troubles. In my (robust) discussions on some of these contentious issues with Stephen Conroy, his answer was always that he needed to get the project on the road; that he also had to cope with conflicting issues within his government; and that it was obvious to him that changes to the plan would have to made based in the reality of the day.

If Labor had stayed in government they would most certainly also have had to face problems, cost blow-outs, etc. but in that case it would have been more likely that adjustments would have been made to rectify the problems. Of course, we will never know, but it would be silly to think that such a plan would have been implemented unchanged. But for starters some of their potential financial problems could have been resolved more easily as the costs of rolling out FttH has already halved since the original FttH plan was launched.

It is somewhat ironic to observe that many of those who supported the ‘cheaper’ FttN model are now finally arguing for a model that does take the national interest into account.

In order to save the NBN the government needs to write off a significant part of the original government investment. While the government has indicated that it will not do this there is no doubt in my mind that, in one way or another, a solution somewhere along those lines will be found.

Unfortunately for the wellbeing of the NBN, the most important element for the government is not the NBN itself but the damage it can do to the political parties involved. If this political issue can be solved the financial solution will be around the corner. We will still have lost an innovative opportunity but at least the issue of affordability would be solved; and from that new base we can start building on a proper infrastructure. This could be a combination of full FttH and Fibre-to-the-Curb (‘kerb’ in Australian spelling). At the lower end of the market a deep fibre connection linked to a 5G network could be another last-mile solution.

But whatever we decide, the NBN first does needs bipartisan support. There is no other developed country that has such a partisan political approach to its telecoms policy. Shame on you, Australian politicians.

Paul Budde