Ofcom, the UK media and telecommunications regulator, has released its findings into a strategic review of the UK’s Digital Communications industry and in particular into BT’s Openreach ¹ network infrastructure arm.

Australia’s move to a Multi Technology Model for its NBN has taken much from the UK experience. NBN Co and BT have struck an agreement to share information and NBN Co’s CEO has congratulated BT on its “extraordinarily efficient network rollout” ².

NBN Co have also indicated they will follow BT in adopting G.Fast to achieve higher speeds over Australia’s copper infrastructure. ³

So, given the clear link between BT and Australia’s NBN Co, it is useful to unpack the Ofcom report to see what we can learn from an Australian perspective.

Comparing UK and Australia broadband history

After a review in 2005, Ofcom found BT had a substantial degree of market power in the wholesale markets for access and backhaul network services. To address this Ofcom accepted legally binding undertakings from BT to functionally separate its access network and retail businesses by creating Openreach which would supply network access products to BT’s competitors and BT’s retail divisions on an equivalent basis.

In Australian terms this arrangement would be similar to the long called for, but never achieved, functional separation of Telstra into wholesale network and retail businesses. In Australia the government decided to take a different path to address Telstra’s similar position of substantial market power. By creating and funding NBN Co to build a new, predominantly fibre, wholesale broadband network and subsequent negotiations and agreement for NBN Co to lease significant Telstra assets (ducts, dark fibre, space in exchanges) and for Telstra to use NBN Co’s network for access to its fixed network customers, the Australian Government achieved a unique from of “structural” separation of Telstra from its copper access network monopoly.

This re-structuring of Australia’s telecommunications industry is still a work in progress and depends crucially on the rollout of NBN Co’s network, which now in 2016, after the change of government in 2013, is focussed on using the existing copper and Pay TV cable networks rather building a predominant fibre to the premise network as originally envisioned.

Today, in the UK,  there is significant competition at the infrastructure level for the delivery of broadband services. Virgin Media is offering download speeds of up to 150Mbps using the PayTV or Hybrid Fibre Coax (HFC) infrastructure and DOCSIS 3.0. This network covers approximately 50% of UK’s households and businesses today and is being extended to cover over 60% of UK’s premises by 2020 ⁴. Other competitors are building FTTH networks (eg. Hyperoptic, City Fibre and Gigaclear).

Contrast this with Australia where Telstra has dominated the fixed telecommunications industry since its 50% owned subsidiary, Foxtel, saw off Optus in the Pay TV wars of the 1990s. Telstra’s resulting dominance of HFC and copper based broadband left it with minimal incentive to rollout newer fibre based broadband infrastructure such as VDSL using an FTTN architecture.

This situation continues today with NBN Co having only limited competition in the infrastructure market given the deals with Telstra and Optus to acquire access to the copper and HFC networks used for fixed broadband service delivery. TPG Telecom have announced an infrastructure rollout to approximately 500,000 apartments using VDSL technology, but this represents only some 5% of Australia’s fixed broadband market.

Network based competition has served the UK well. As Ofcom highlights in the report :

“it has historically been competition from cable that has played a greater part in driving network upgrades. In the early 2000s, one of the factors that drove BT to increase performance of its initial broadband service was the availability of cable broadband. Similarly, BT announced its rollout of superfast broadband shortly after Virgin Media’s upgrade to DOCSIS3.0. BT’s recent announcement of G.Fast investment plans was in the context of Virgin Media offering a maximum service speed of 200Mbit/s compared to a maximum of 80 Mbit/s available from Openreach…”  ⁵

To reinforce the success of the UK approach, Ofcom provides benchmark data against its European and international peers when it comes to “superfast” broadband. ⁶

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This good performance is also highlighted by comparing the UK’s performance against that of Australia using Akamai’s benchmarking reports. The graphic below highlights that the UK is significantly further ahead in adoption of 15+Mbps broadband services than Australia.

But Ofcom is not prepared to rest on its laurels.

Ofcom’s concerns about future investment in broadband

Ofcom highlights the UK’s “very limited availability” ⁷ of ultrafast broadband (Ofcom defines “ultrafast” as broadband with download speeds of greater than 300Mbps) with a specific reference to the UK’s lagging FTTP coverage.

Ofcom notes that there are investments planned by a number of participants that will increase ultrafast broadband availabilty, namely :

• BT’s upgrade of its copper network to G.Fast technology that could deliver 300 to 500Mbps download speeds.
• Virgin Media’s trials of DOCSIS3.1 technology that could deliver speeds up to 10Gbps.
• Some small scale FTTP investments that can deliver 1Gbps and have the “potential to go much faster”

However, Ofcom is not satisfied with leaving everything to the current market arrangements. Building on the historical success of network based competition, Ofcom states clearly :

“The best driver for investment and innovation is network based competition: and this is at the heart of our future strategy. We believe competition between different networks (including those built from scratch or built using duct and poles owned by others) is the best way to drive investment in high quality, innovative services for consumers”  ⁸

Specifically Ofcom will focus on three main elements of regulation for BT’s Openreach, namely :

• Allowing competitors to BT to access BT’s network of underground ducts and telegraph poles
• Continue to regulate access to Openreach’s networks and services
• Pricing regulated access to superfast and ultrafast services to give everyone incentives to invest

In other words Ofcom is looking to promote more competition and investment to ensure BT (and Virgin Media) are incented to continue to invest in their own networks.

Australia concerned with cost blowouts and competition harming NBN Co

But the story down under is very different.

Firstly, as stated above, NBN Co as a monopoly infrastructure provider faces only limited competition in Australia. Incentives for NBN Co to invest are driven by political rather than commercial imperatives. Specifically, the letter to NBN Co from the Shareholder Ministers of NBN Co outlining the government’s policy objectives states (with my emphasis underlined), requires, amongst other things, that :

• NBN Co will determine which technologies are utilised on an area-by-area basis so as to minimise peak funding, optimise economic returns and enhance the Company’s viability.
• The design of a multi-technology mix NBN will be guided by the Government’s policy objectives of providing download data rates (and proportionate upload rates) of at least 25Mbps to all premises and at least 50Mbps to 90% of fixed lines premises as soon as possible.

In essence NBN Co is being asked to invest as little as possible to achieve the 25Mbps for all and 50Mbps for 90% benchmarks. Any additional investment to achieve higher speeds may actually be contrary to NBN Co’s statements of expectations.

Government policy has also sought to discourage network based competition from the private sector with a particular focus on ensuring TPG Telecom does not become a significant network based infrastructure competitor.

Firstly, the Government has introduced a licence condition ⁹ on telcos supplying superfast ¹⁰ network services that requires them to “structurally” separate and create a separate company to provide such services on a wholesale-only basis.

In response, TPG Telecom stated that the licence condition “is a regulatory impost that is inimicable to the principles” ¹¹ of network based competition that Ofcom have so strongly endorsed in its report.

Secondly, the Government has announced a policy which will see owners of all high speed broadband access networks contribute to the losses incurred by NBN Co in deploying and operating the satellite and fixed wireless services of the NBN ¹²

This narrow cost recovery approach has drawn the ire of TPG Telecom and a number of small greenfield fibre operators. In submissions to the Government TPG Telecom and others have highlighted that the cost recovery should be borne by the wider telecommunications industry, including mobile services, especially as technology improvements are increasing the speeds and capacity of mobile broadband networks.

In particular, TPG Telecom highlights that :

“It is a subject of some sensitivity to TPG, with its legitimate investment in its FTTB network being by (sic) seriously impacted by Government intervention and now possible taxes that will affect TPG” ¹³

TPG Telecom also highlight the retrospective nature of the cost recovery on VDSL and HFC networks it has acquired.

“It is an important tenet of government in Australia that the economic signals are supportive of economic investment. The implementation of a tax on a network the investment case for which was built many years prior to the implementation of the NBN will act as a deterrent to investors of capital in Australia”. ¹⁴

So while NBN Co maybe following BT in a technology sense, Australia is heading in the opposite direction from an investment policy perspective.

It is clear that the Australian Government now finds itself heavily conflicted between the twin goals of minimising the cost of the NBN and seeking to improve Australia’s broadband networks. This conflict has extended to the extra-ordinary situation where private sector investment is being actively discouraged rather than promoted.

Australia and the UK are poles apart in terms of broadband policies.

The UK is pursuing proactive infrastructure competition rules while Australia is actively protecting NBN Co from any competition. Whilst today the technologies being deployed in Australia and UK are broadly similar (VDSL and DOCSIS 3.0), do not expect this situation to last long.

Ofcom is actively continuing a policy that will see more fibre based broadband deployments in the near future driven by competition and funded by the private sector. Australia is likely to remain with the same technologies for some indeterminate period until either the Australian Government opens up the purse strings further or takes true inspiration from the UK and implements a proactive infrastructure competition policy regime as is being pursued by Ofcom in the UK.