New NBN tax great for mobile carriers and pulling forward 5G investments

The Australian government has decided to levy a “tax” on competitors to it’s fully owned wholesale broadband company – NBN Co Limited.

As reported in the ITNews this will mean NBN Co gets a subsidy of $40 million to $60 million per year from its competitors to compensate for its loss making obligation to provide fixed wireless and satellite to Australia’s remote and regional areas.

The tax is actually called the Regional Broadband Scheme Levy which requires competitors to NBN Co fixed broadband offerings to pay $7.10 per service per month

This levy is yet another burden being placed on competitors to NBN Co. The Australian government has previously put in place tough regulations on companies such as TPG Telecom that announced plans to rollout competing FTTB networks and taken over existing broadband networks in Canberra, Geelong and Ballarat (see blog post – Is the NBN Co monopoly now safe?).

This new impost will require fixed broadband competitors to NBN to effectively compensate NBN Co for the “loss” of any monopoly revenue due to competition.

However, the more obvious purpose is to dissuade competitors from seriously competing with NBN Co. The end result will deter investment in fixed broadband infrastructure in Australia’s metropolitan areas and protect NBN Co’s own investment and boost its valuation for future privatisation.

The other major purpose is also clearly to benefit Telstra and Optus who will not have to deal with one of their main retail competitors, TPG Telecom, to obtain wholesale access to its broadband networks. This would only be necessary if TPG Telecom’s FTTB network grows to some significant scale and impacts significantly on overall broadband market shares. Currently the FTTB network is only targetting a build out to service 500,000 households or 5% of the Australian fixed broadband market.

The Vertigan commission endorsed a levy but only on the basis that its other significant recommendations to disaggregate or split up NBN Co were also undertaken by government.  It is clear Vertigan panel of experts were looking to create competition as a driver for investment in broadband. The government has now clearly given up on this line of thinking and instead looking to minimise its losses in any future privatisation.

As a result we are now heading to a future where NBN Co is privatised as Australia’s fixed broadband monopoly wholesale provider with no incentive to invest in future broadband infrastructure.

We have seen this story before when Telstra was fully privatised and allowed to keep Foxtel after winning the PayTV wars with Optus. With a fixed broadband monopoly it had no incentive to invest in further infrastructure. Sol Trujillo as CEO tried to lean on the Howard Government for broadband subsidies and the ACCC for regulatory relief to protect broadband investments without success. The end result was the creation of NBN Co itself by the Rudd Government to break open the log jam of investment in Australia’s fixed broadband infrastructure.

But today we have at least one loophole still open for investment. The regulations and levy will only apply for fixed broadband networks competing with NBN Co. Wireless broadband networks are exempt.

This is great for Telstra, Optus and Vodafone. They effectively can now look for technologies and investment business cases to by-pass and cherry pick the NBN. This will require fibre investment to install more cell sites around metropolitan areas. As licensed spectrum holders they will be able to use existing 4G and new 5G mobile technologies to “offload” traffic from the NBN – as very perverse outcome indeed.

Telstra has already announced plans to supply hybrid fixed and mobile broadband routers so it can leverage its extensive new investments in mobile broadband to potentially bypass the high costs of the NBN – see Telstra’s New Frontier Gateway Modem.

It will take some time. But by 2020, just as the NBN is being finished, expect Telstra, Optus and Vodafone to have found viable methods to by-pass the NBN, and its high monopoly priced services, for a growing percentage of Australian customers.

So the winners are likely to be the Telstra, Optus and Vodafone and their shareholders – the losers will be Australian consumers and taxpayers.

Consumers will be paying some of the highest prices for some of the worst broadband in developed countries.

Taxpayers will have lost money on their NBN investment because any new prospective owner will discount the price to buy NBN Co because of the threat from wireless broadband.

The one consolation maybe – but it is an expensive maybe – that Australia will be a leader in 5G mobile broadband deployments.

Unless of course the government closes the loop hole and captures wireless broadband networks in its expanding broadband regulatory and tax net.

I, for one, would not be surprised if that is not currently being suggested by NBN Co as it considers future threats to its monopoly business model.