While NBN Co may have declared  “Mission Accomplished” on the rollout of the NBN, where does that leave up to 250,000 premises who cannot receive the minimum download speed of 25 Mbps. ¹

NBN Co’s riding instructions from government, the so-called Statement of Expectations, makes it very clear that all Australian premises must have a broadband service capable of downloading at a minimum of 25 Mbps.

In a paper promoted by Huawei and TelSoc, and written by the consultancy firm Omidia, the number of premises not meeting the minimum requirement  is estimated at 200,000 to 250,000 households. These are customers on the Fibre to the Node (FTTN ) technology that are located too far (typically more than 1000m) from the node equipment for the copper network to be able to sustain download speeds of 25Mbps. ²

As outlined in the Omidia paper this poses a significant dilemma for NBN Co. Upgrades for these customers will be very expensive as these customers are located ‘on many thousands of different cabinets [or nodes]’. These nodes are in outer urban and semi-rural areas with low population densities making the cost per premise of the upgrades (by installing more optical fibre) significantly higher than the average cost published by NBN Co for the initial rollout.

At a conservative estimate of the cost at $5,000 per premise and assuming 250,000 premises the total extra cost for NBN Co would be approximately $1.25 billion. The revenue from these services, assuming a wholesale fee of $45 per month, would be $135 million per year – making any payback take at least 9 years. This is before any changes in wholesale pricing that may result from NBN Co’s pricing review that has been going on for over 12 months.

Rather than building out the FTTN network, what other options are available to NBN Co? Of course some customers could be migrated to NBN Co’s fixed wireless and satellite networks – however there are likely to be congestion and coverage issues with both of these options – hence the reason why NBN Co has put these premises on FTTN.

Another alternative for NBN Co would be to enlist the help of Australia’s mobile network operators. Telstra, Optus and Vodafone have either announced or are investigating plans to provide Fixed Wireless services as an alternative to NBN using 4G and 5G networks. Where these mobile operators have coverage and spare capacity they could offer services that could meet the 25Mbps download requirement. The outer suburban and semi-rural areas are likely to be ‘sweet spot’ for both of these criteria.

So rather than spending an extra $1.25 billion on building out the FTTN solution a more pragmatic and cost-effective way for NBN Co to meet its obligations could be to co-ordinate with mobile operators to enable them to service these households who have missed out on the minimum declared benefit from the NBN rollout.

Will we see this type of pragmatic approach from NBN Co? Or will NBN Co worry about the loss of customer revenue that would come from ‘losing’ these customers to the mobile networks? Will this also lead to more households moving to mobile network operators in other parts of the FTTN network that meet the 25 Mbps threshold but can get higher speeds on mobile networks?

NBN Co has not met its Statement of Expectations until all households can get a minimum of 25 Mbps. Rather than spending a lot more precious capital trying to finish off the job, NBN Co should think of more efficient ways of getting this remaining part of the job done.

The Minister for Communications, Mr Paul Fletcher, has made it clear that the government will not provide any further equity or debt funding to NBN Co now that the rollout of the network is largely complete – see AFR ($$$). A total of $49 billion has been provided by the government thus far with NBN Co raising an extra $6.1 billion from the private sector through a debt placement in May 2020.

With the rollout complete and funding from government now finished what will guide the board and management of NBN Co in its plans going forward?

From its very beginning and during the rollout period the government has formalised its expectations of NBN Co in a letter to the board referred to as the ‘Statement of Expectations’ or SOE. The last formalised version of the SOE is dated 24th August 2016 when the rollout of the Multi Technology Mix (MTM) was getting into full swing. Previous versions had been issued in 2010 (by Labor) and 2014 (by the Coalition to formalise the change to the MTM).

The board of NBN Co has relied on these SOEs to guide its decision process in its use of taxpayers’ funds to build the network and endeavour to implement a range of government policy objectives, such as :

• upgrade Australia’s broadband infrastructure to ensure download speeds of at least 25 Mbps for all and 50Mbps for 90% of the fixed line footprint.
• operating the network on a wholesale only basis
• structural separation of Telstra
• increased retail market competition

There is still lively debate as to whether these policy objectives have been achieved. For example interference with legacy ADSL systems have required NBN Co to slow the speeds of some NBN services (see here) and many of NBN Co’s wholesale customers (Telstra, Optus, TPG Telecom and Vocus) have been complaining about NBN Co’s direct contact with customers in the enterprise market (see here). However, absent any push by government to change some of these policies,  NBN Co’s business approach is unlikely to be changed substantially in these areas.

With these objectives more or less achieved by NBN Co what will be its guiding principles going forward?

Clearly, an unstated goal will be to reach a financial sustainable position so it does not need to continually go to the debt markets for more funding for operating purposes. NBN Co’s recent debt raising achieves this objective to some degree as long as it meets its forecasts for positive overall cashflows by 2023. This will largely depend on its ability to activate another 1.5 million customers to hit its target of 8.6 million active customers in the same timeframe.

But otherwise what is the NBN Co board and management to take as its direction from here?

Privatisation of NBN Co has been a long term goal of both Coalition and Labor governments. Should the NBN Co board start preparing for such an eventuality without an explicit direction to do so? The only reference in the current SOE is that it “should retain optionality for future restructuring or disaggregation”. How can the board prepare for such an open-ended future?

How does NBN Co’s recent launch of higher download speeds on FTTP and HFC networks fit into the SOE? There is no explicit reference to providing higher speeds in the current SOE. Perhaps such an initiative can be justified as a ‘commercial entity operating in a market environment and can compete and innovate like other companies’. Can this be used to justify investments in the technology upgrades necessary to extend the speed upgrades to more customers beyond the low numbers where they are currently available?

The Minister has acknowledged that growth in broadband downloads is likely to ‘continue to rise strongly’ – see AFR ($$$). How should NBN Co respond to this market dynamic? Investments in upgraded technologies, especially to replace the FTTN technology, may not be commercially attractive, especially in the majority of areas where NBN Co does not face competition.

While there may be speculation about privatisation of NBN Co, the Minister has indicated this is ‘a number of years away’. With the rollout now all but over and the government closing the door to more funding the pressure will be on the NBN Co board to map a way forward. An update from the government on its expectations of NBN Co would certainly help.

A joint media release from NBN Co’s shareholder ministers (Paul Fletcher and Mathias Cormann) on May 12 announced that NBN Co had secured extra funding of $6.1 billion in loans from Australian and international banks. This is $4.1 billion more than the $2.0 billion NBN Co had flagged in its latest Corporate Plan was still required in order to complete the rollout.

The media release went on to advise that $1.5 billion of the extra amount will be ‘reserved for working capital to provide the company with added flexibility’.

In other words, the media statement has flagged that NBN Co’s peak funding requirement has increased from $51 billion as of the last Corporate Plan to $52.5 billion.

This is the third increase in peak funding since the initial Corporate Plan for the Multi Technology Mix (MTM) estimated peak funding at $41 billion in 2014. Other increases were made in 2016 (increase from $41 to $49 billion) and 2019 (increase from $49 to $51 billion).

The total increase in peaking funding of $11.5 billion comes together with the elimination of $6 billion of contingency capex in the original MTM plan in 2014. As a consequence the initial MTM plan (which was the result of the quick fire Strategic Review in late 2013 after the Coalition came to power) has underestimated the costs of getting NBN Co to a self-sustaining position by $17.5 billion.

Interestingly the peak funding amount exactly half way between the lower estimate made in the 2013 Strategic Review for a predominantly FTTP build ($64 billion) and the original estimate for the MTM (ie. $41 billion).

The Coalition’s share of funding that is committed will now grow to 87% of this $52.5 billion.

The options for what NBN Co does with the remaining $2.6 billion ($6.1 billion less $2.0 billion to complete rollout and $1.5 billion of working capital) will depend largely on its free cashflow performance over the next few years. As the rollout phases comes to end, NBN Co’s capital and subscriber payment expenditures ($7.8 billion in FY19) will drop substantially ($1.4 billion of capex forecast in FY23). Free cashflows are forecast to be positive ($0.7 billion) in FY23.

If everything goes to plan then NBN Co should be able to start using the extra private sector funding to pay back its debt to the Commonwealth. This will produce some savings in NBN Co’s interest payments as the current Commonwealth facility is reportedly at an interest rate of 3.96%. The Commonwealth’s loan to NBN Co is due to be paid back in full on 30 June 2024, assuming of course the loan is not extended as it was in 2018.

While the private sector interest rate was not disclosed, it should be significantly less that the current Commonwealth facility given the reduction in global interest rates and also the implicit Commonwealth guarantee that investors would likely see backing up NBN Co’s debt position.

Some have speculated that the extra funding could be used for further investment in network technology upgrades. The business case for such investments would be interesting given that NBN Co’s network has just been completed and hence any replacement of network investment would be occurring well short of its useful life.

The only commercial reason for such upgrades would be the recognition that the choice of technology was wrong because the opex costs are too high (ie. fault rates are higher than forecast) or the risk of loss of customers to fixed wireless services (ie. NBN bypass by Telstra, Optus and Vodafone) is too high. Both of these would be difficult politically given the statements made previously that the technologies deliver sufficient speed and quality for what customers currently require.

A more politically acceptable area for extra investment would be for extra capacity in the transit, fixed wireless and satellite technologies which will require continuing investment as traffic grows, especially in the new Covid-19 normal economy. However, NBN Co has reserved $1.4 billion of annual post-build capex for this in its current forecasts for FY22 and FY23.

Another possible scenario is that NBN falls short of its operational cashflow targets due to lower revenues or higher operational expenditures. Although NBN Co is well short of its original revenue driver targets (ie. ARPU $51 per month and activated customers of 8 million by 2020) it appears likely that its revenue targets will be met by an increase in revenue from its controversial Enterprise segment. Operational expenses also appear to be on target with the corporate plans.

From a purely commercial perspective, NBN Co has created a number of positive benefits from its fund raising. It should be able to lower its overall interest rate, while ensuring it has the flexibility to keep its finances in order as it comes to the end of the rollout and searches for positive free cashflows so that it can escape the need for further funding.

However, do not expect that the extra funding will be used to start investing in more fibre infrastructure post the rollout. That is a bridge too far and would probably involve too many mea culpas to be politically advantageous.

It was “Too early to tell” according to the misunderstood reply from Zhou Enlai (China’s Prime Minister from 1949 to 1976) to Henry Kissinger in the early 1970s on the question of what he thought about the French Revolution.  The same can be said for Malcolm Turnbull’s NBN legacy.

A Bigger Picture, Turnbull’s recent memoir, has caught the headlines as it addresses the dramas of the last decade of Australian politics. However, it has not shed much new light on Australia’s fixed broadband dilemma and in particular the pros and cons of Turnbull’s NBN.

In the dedicated chapter on the NBN in his memoir Turnbull pronounces the NBN a ‘non-political and thoroughly technocratic’ project and a ‘success story’ ¹. There is little in the way of reflection on the policy choices he drove, the outcomes that have been achieved and most importantly where now for Australia’s fixed broadband industry. In short, Turnbull has called ‘job done … nothing more to see here’.

Many who have been involved as participants in the telecommunications industry or as frustrated customers may beg to disagree.

NBN Co’s own wholesale customers (such as Telstra, Optus and TPG Telecom) have regularly called out short-comings with the services being offered and the prices being charged. The ACCC has questioned the performance of the NBN network and customer complaints are still growing.  Meanwhile the financial performance of NBN is being questioned even while the current management fend off claims for a write-down of the government’s equity stake in NBN Co.

However none of these points are addressed by Turnbull’s chapter on the NBN in his memoir.

A question of Monopoly v Competition

But Turnbull does touch on some of the deeper structural structural problems that have plagued Australia’s telecommunications industry since the early 1990s. In a short passage referencing the Hawke government’s 1990s reforms he reveals himself as a supporter of separating Telstra’s (then Telecom Australia) network business from its retail business. He also recounts a meeting he and Chris Corrigan had with Paul Keating where they lobbied to setup an independent ‘wholesale-only cable company [as] a regulated monopoly funded by the private sector’ ². These points serve to highlight what seems to be the current Turnbull view that Australia is best served by a monopoly fixed network provider, albeit separated from the retail service providers such as Telstra, Optus and TPG Telecom.

But this Turnbull position, perhaps like the man himself, has been malleable over time. But before getting into the detail of Turnbull’s changing views it is necessary to do a quick recap on the core problem of Australia’s fixed broadband industry.

At the heart of Australia’s lagging broadband performance is the question of how to optimise the investment in new technologies to increase broadband performance as the digital era continues to drive increasing demands on fixed telecommunications networks. Australia has been a world leader in the investment and take up of mobile technologies since the early 1990s. Competition between Telstra, Optus and Vodafone has ensured 2G, 3G and 4G technologies have been deployed efficiently and effectively with minimum government intervention ³. Of course, private investment success in mobile has come with private investment failures by OneTel and Hutchison, as market forces have driven investment decisions. Consumers have been the winners as networks have improved and pricing has remained competitive.

Australia’s experience in fixed broadband has been diametrically opposite to the successes in mobile broadband. The equivalent to the  2G, 3G and 4G technology advances in fixed networks is the increased deployment of fibre closer to the customer with network architectures such as Hybrid Fibre Coax (HFC), Fibre to the Node (FTTN), Fibre to the Curb (FTTC) and Fibre to the Premises (FTTP) increasing the depth of fibre in the network. Telstra and Optus competed aggressively in rollouts of separate HFC networks for pay TV delivery in the 1990s, with Telstra and its Foxtel partner, News Corporation, eventually forcing Optus to wind-down its competing pay TV subsidiary Optus Vision. As with mobile, the fixed network industry saw winners and losers as new technologies were battle grounds for competitive advantage.

However, unlike in mobile, Telstra ended up with a near monopoly in local fixed telephony and broadband resulting in a significant pull back on its own fixed broadband investments – preferring instead to sweat its network assets. A period of regulatory battles ensued over pricing and access to Telstra’s networks.

A monopoly going on an investment strike is nothing new – anyone who has done even a smattering of economics will understand that a monopoly will increase profits if it restricts supply. So while broadband demand was building through the early 2000s, Australia had little investment in the new fibre based technologies of the time (ie. FTTN and HFC) as the newly privatised Telstra sought to maximise its profits and dividends to shareholders.

Opposing the ‘Socialist Paradise’

After experiencing first hand the frustrations of dealing with Telstra, Labor had thrown caution to the wind and embarked on building an FTTP network to 93% of Australian households via a newly formed fully state-owned company, NBN Co. In so doing, Labor was essentially making a ‘Hail Mary’ play to bypass Telstra and build the necessary infrastructure itself. A key plank of this project was the creation of a wholesale-only network monopoly, not too dissimilar from the one that Turnbull had proposed to Keating, albeit a government rather than privately owned monopoly.

Labor was able to cajole Telstra into a deal with NBN Co using a fistful of dollars and the threat of missing out on key mobile spectrum and onerous regulation if it did not co-operate with NBN Co. To strengthen the monopoly Telstra and Optus agreed to close down their 1990s’ era HFC networks and transfer the customers to the NBN.

Despite his earlier advocacy for a wholesale-only monopoly himself, Turnbull was highly critical of Labor and NBN Co’s moves. In May 2012, in a speech to parliament Turnbull clearly articulated a very different view  :

But here in the socialist paradise [emphasis added] of Julia Gillard’s Australia the government is building a massive new fixed line telecommunications monopoly and, just in case there would be any competition with it, the government is paying Telstra and Optus to decommission their HFC networks as well as paying Telstra to decommission its copper network. It is difficult, therefore, to think of anything more anti-competitive than a new government owned Telco, the NBN, paying Optus $800 million to shut down the HFC network, which is currently offering high-speed broadband services comparable to those that will eventually be offered by the NBN itself. ⁴

Later in 2012 Turnbull, after a number of visits to investigate international markets, went even further and specifically criticised Labor’s monopoly policy of ‘stamping out’ infrastructure based competition.

The problem with this thesis is that it basically denies the dynamic, creative forces which only competition can deliver. A monopoly is always likely to be complacent – there is nothing to stir it to innovate, to improve its efficiency.

…

And that is why, no doubt, that in every other comparable country a central telecoms policy objective is to promote facilities [or infrastructure] based competition where this is possible (typically built-up areas). I am not aware of one other country where the policy is to actively stamp it out. ⁵

This advocacy for infrastructure competition over monopoly in the provision of fixed broadband infrastructure was in line with most international policy developments at the time. ⁶ It followed the success of the same policy in mobile networks as recounted above. However, Australia had not been able to manage the transition from incumbent monopoly network provider to competition in urban markets as other markets had done

Turnbull even went so far as to say that, if elected to power, the Coalition would ‘seek to reverse’ the Telstra and Optus HFC network deals.

[W]e will remove as many of the barriers to competition with the NBN Co as possible – for example we would seek to reverse the arrangement whereby Telstra and Optus are obliged not to use their HFC to compete with NBN Co on broadband data and voice, the extent to which that is possible obviously depends on negotiation. In every other country of which I am aware, government policy seeks to encourage and promote facilities based competition, including by HFC, not suppress it. ⁷

Monopoly wins back Turnbull’s heart

On becoming the Minister for Communications in September 2013, Turnbull initiated a quick fire Strategic Review of the NBN that reported in December 2013. The outcome was the Multi Technology Mix (MTM) where NBN Co would deploy a mix of FTTN, HFC and FTTP (mainly to new estates and apartment blocks) along with continuing the Labor policy of Fixed Wireless and Satellite in regional and remote areas.

The back tracking on the arrangements for the Telstra and Optus’ HFC networks to be decommissioned was the first sign that Turnbull’s previous pro-competition rhetoric would be completely turned on its head. These networks, which had been largely starved of maintenance funding for over a decade, were to be taken over by NBN Co and re-purposed for the NBN. Ultimately both networks would cause more pain than gain for NBN Co with the Optus HFC network not up to the task and largely jettisoned and Telstra’s the subject of many faults that halted the rollout and required significant expenditure to remediate.

The MTM was held up as a policy in line with international developments. However there was no mention of the fact that the multiple technologies being pursued in other markets were a direct result of infrastructure competition and not the result of a central government planning which technologies should be deployed where across the nation. Where some degree of government funding for infrastructure was provided (in Singapore and New Zealand for example) there was only one technology being subsidised – namely FTTP.

Along the way to becoming the Minister in charge of NBN Co, Turnbull had become a fully paid up member of the monopolist club for fixed telecommunications – again.

This reversion was re-inforced after TPG Telecom, sensing an opportunity with the move by NBN Co away from FTTP and perhaps Turnbull’s previous pro-competition stance, announced it would rollout a competitive Fibre to the Building network to compete with NBN Co across 500,000 premises (or 5% of NBN Co’s total addressable market).

Turnbull, with the help of the ACCC, enacted a number of regulations and planned levies that built on the previous Labor legislation that actively discouraged any competition with NBN Co from new alternative fixed network competitors. What Turnbull had referred to as a ‘massive new fixed line telecommunications monopoly’ needed even more protection under the new MTM policy given that the technologies it was now deploying could be more easily challenged by new competitors.

Turnbull’s monopoly policy backflip was further highlighted by his own hand-picked expert enquiry (lead by Dr Michael Vertigan) in its NBN Market and Regulatory Report of August 2014. The report recommended NBN Co be disaggregated along technology lines so as to “improve the prospects of infrastructure competition now and in the future”. On publication of the report Turnbull quickly distanced himself from this recommendation, pushing off any reform until after the completion of the build of the MTM network.

Irish jokes aside

We are now in 2020 and the network Turnbull planned for is all but complete. Despite the many complaints and issues that have been raised, the network is an improvement on the old Telstra ADSL network it largely replaced. But it is a network that is using technologies that were largely developed and deployed internationally from 2000 to 2010. FTTP is now the most used technology serving broadband consumers globally.

Turnbull has not put forward a position for what now with the NBN. Australia still has a monopoly based fixed network industry model, much like it did in the period in 2005 to 2010 when Telstra went on an investment strike. For the same commercial reasons, NBN Co, as the new monopoly, will be unlikely to make further investments to upgrade the network using its own cashflows when (or if) they turn positive.

Privatisation of NBN Co has been mooted and Telstra (via its new business unit InfraCo) has sought a ‘seat at the table‘ in any discussions. Will Turnbull, free from politics and again active in investment banking circles, be their advocating for the private wholesale only monopoly he raised back in the 1990s? It would of course be one of the most blatant examples of the private sector ‘socialising the losses’ and ‘pocketing the profits’ if NBN Co is written down at taxpayers’ expense only to be turned over to a private company to extract the monopoly rents with minimal ongoing investment.

As Turnbull recounts in his memoir he often likened his “predicament with the NBN to the man who gets lost driving around Ireland. He walks into a pub and asks for a direction to Dublin only to be told, ‘If I were you’, I wouldn’t be starting from here’ ⁸.

Turnbull has never really outlined his answer to this question. He did not put Australia on a path towards sustainable investment in fixed broadband. In the grand sweep of time he will likely be seen as just another Australian broadband policy maker who went from from pub to pub, with a bunch of mates, recycling old monopoly style policies from a bygone era.

The Australian government has announced plans to make a Covid-19 contact tracing app available to all Australians. The privacy and security concerns that inevitably accompany such initiatives are now being debated as the government moves into ‘sales pitch’ mode to convince Australians to download and activate the app.

But the government has a hard hill to climb to reach its goal of a 40% voluntary take-up of the app to make it effective. While government ministers may be calling for a ‘Team Australia’ moment, many Australians will ask whether the government is really on their side. Why?

The Australian government has some of the most extraordinary powers of surveillance in the Western world.  Australia is unique in having laws that require technology companies (eg. Facebook, Google and telcos) operating in Australia to provide encrypted information personal information to government authorities without any judicial oversight (eg. warrants).

Recent police raids on the offices and homes of journalists who have uncovered information that does nothing more than embarrass the government have made headlines.

Citizens will rightly question whether their government that is seeking them to be part of the team is actually on their side.

Not surprisingly some of the right wing members of the government have raised questions about the Covid contact tracing app. The hyprocrisy of these politicians belly-aching about not wanting to share their personal information with the government but being part of the government (and also the Cabinet) that approved Australia’s uniquely tough surveillance laws would be astounding if not for the fact that it is par for the course.

The benefits of the Covid contact tracing app in helping the country’s exit from the Great Lockdown are clear. It sits crucially between the necessary testing regime (where Australia has been a world leader) and the need to isolate individuals who are exposed to the virus. An efficient contact tracing regime will be critical in avoiding the need for multiple lockdowns over the next months and (perhaps) years.

However the app will only really be useful in situations where people are mixing in close proximity with people outside of their immediate social circles. The app reportedly only logs contacts for people being within 1.5m for a total of 15 minutes. Situations where this does not involve immediate families and friends will mainly be public venues and facilities such as restaurants, cafes and public transport.

As a result the app should be extended beyond its current scope to include the ability for it to act as a ‘ticket’ for Australians to start resuming a normal life without social distancing. Venues and facilities where social distancing is impossible could make it a condition of entry that patrons have the app installed and activated. A quick, secure method for checking a phone’s Covid tracking status should be included in the design.

Many such venues and facilities will struggle to re-open their businesses if the public is unsure of the ability of the health system to cope with new outbreaks. Venues can decide to make the app a condition of entry to help build confidence and entice more of the public to download and use the app.

Such an approach could benefit the government in reaching and exceeding its goal of 40% take-up. A positive ‘sales pitch’ is always much stronger than relying on some nebulous concepts of ‘Team Australia’.

The Australian government has a tough sell with the Covid contact tracing app. Its track record of increasing its surveillance powers sits uncomfortably with its notion of invoking ‘Team Australia’.

Better to enlist the help of all those businesses who are looking to reopen their businesses that are currently impacted by social distancing.

NBN Co released its latest Corporate Plan on 30 August 2019 with the headline that it is on track to finish the build of the network by June 2020. After a decade in the build phase NBN Co is highlighting how it now plans to move to an operational mode with a focus on customer experience.

This provides an opportunity to review how the Corporate Plans have changed over the period of the build phase. Officially seven Corporate Plans have been released with the first in 2010. A draft Corporate Plan was prepared in September 2013 but never officially released due to the change of government, but was leaked to the press in 2014.

Below is a comparison of the various costs (forecast and actual) for the period from FY10 to FY21 for four of these plans released at key stages of the projects and Australia’s changing political masters.

The Rudd 2013 figures are based on the last predominantly FTTP architecture plan and are taken from the draft 2013 version that was never officially released. The Coalition conducted a strategic review in late 2013 and came up with revised peak funding figures of $64 to $73 billion for a predominantly FTTP network architecture which it used to justify the switch to the Multi Technology Mix (MTM) network plan.

The Abbott, Turnbull and Morrison figures are all based on the official Corporate Plans that have been released on a yearly basis. Under the Coalition the peak funding requirement has increased by $10 billion to be now $51 billion. Furthermore approximately $6 billion of contingency in the first Coalition plan has been eroded to zero making the actual increase in forecasted costs equal to $16 billion.

This $16 billion is made up of a loss of $3 billion in revenue and an extra $13 billion in capex to complete the Coalition’s Multi-Technology Mix network rollout.

As the end of the NBN rollout nears the question of further technology upgrades is becoming more topical. Upgrades of the FTTN and HFC network to FTTC and FTTP are likely to cost an additional $10+ billion in capex. The cost of such upgrades will need to be funded by taxpayers or private financiers in the short term. An increase in capex to fund technology upgrades may see the total peak funding approach the Coalition’s own estimates of $60+ billion made back in 2013 for the predominantly FTTP network.

The initial plan by the Labor government for an FTTP network based on the Coalition’s own 2013 strategic review costing is looking more and more compelling with the benefit of hindsight.

The newly minted UK Prime Minister, Boris Johnson, has doubled down on his campaign promise to ensure all UK households can get full fibre broadband connections by 2025. During his first round of Prime Minister Questions (PMQs), Mr Johnson committed to “accelerat[ing] the programme of full fibre broadband by eight years, so that every household in this country gets full fibre broadband within the next five years.”

Although such a commitment may be taken with a grain of salt given the other problems facing the UK at the moment, this statement highlights that high quality broadband remains a political issue in those countries that are falling behind in global broadband rankings.

The genesis of this policy appears to have been some Lincolnshire farmers who “smote their weatherbeaten hands together and roared their assent” when they heard of proposal from Mr Johnson. In his article advocating a reboot of “left behind” Britain by a turbo-charged broadband revolution, Mr Johnson contrasted the UK’s seven percent full fibre coverage with Spain’s 85% coverage.

Australia has seen this all before with Labor promising a National Broadband Network (NBN) rollout of full fibre to 93% of Australian households back in 2009 (yes – 10 years ago).  If the policy had been kept by the incoming Coalition government in 2013 it would be highly likely that Australia would now be in the closing stages of having a full fibre network that was ahead of not only Spain, but also comparable to many modern broadband economies in Asia such as South Korea, Singapore and Hong Kong.

However, the Coalition government, after many years of criticising the Labor NBN project, decided instead to follow the UK broadband model of the time and put most of the investment in Fibre to the Node (FTTN) technology. Malcolm Turnbull, speaking as the Opposition Communications spokesman at the time in June 2013, articulated this most clearly in his usual combative style in an interview with the ABC which he recounts on his blog site:

And I asked, for the umpteenth time again, why the ABC with all of its global news gathering resources continued NOT to examine the broadband experiences in other comparable countries. The approach we are taking is the same, essentially, as that taken by BT in the UK. They speak English, the ABC has an office there, they have upgraded around 19 million premises with very fast broadband for a cost of 2.5 billion pounds and in about 3 1/2 years. They have done 90% fibre to the node, 10% fibre to the premise. Very relevant you would think. Very interesting too and useful for the Australian public to know about.

But the UK has since changed its broadband plans dramatically.

In July 2018, the Conservative Government announced a target of 15 million households (about 50% of the UK) to have full fibre by 2025 with nationwide coverage by 2033. British Telecom’s fixed network subsidiary, Openreach, driven by competition from other broadband providers and active government pressure, announced in February 2018 a rollout of full fibre to 10 million households by the mid 2020s.

The UK telecoms regulator, Ofcom, has developed a pro-competition, pro-private investment policy framework to drive these full fibre targets. At the centre of this policy is network based competition and shared access to duct and pole infrastructure.

Source : Ofcom

It is clear that the British Telecom FTTN project that Mr Turnbull copied for the Coalition’s Australian NBN was only a stop-gap and is now being over-built by the future proof full fibre network that dominates fixed broadband network rollouts worldwide. This is best illustrated by the surge in full fibre connections that has occurred in the last five years on a global basis.

Source : Point Topic

The UK has recognised that full fibre broadband is a necessary investment for the network economy that now dominates innovations and growth opportunities. Mr Johnson articulated this superbly in his article announcing the accelerated target :

A fast internet connection is not some metropolitan luxury. It is an indispensable tool of modern life. You need it for your medical prescription, for paying your car tax, for keeping up with the news and with your family and friends. It is becoming the single giant ecosystem in which all economic activity takes place. It is the place you find bargains. It is the place you find customers. It is not only the place you can find a job. It is the means by which you can be interviewed, and your talents uncovered, without incurring the cost of a rail ticket. If your area has a truly fast broadband connection, that area will be a better place to live, to invest, to set up a business; and that area will have a better chance of retaining talented young people, and allowing them to start up businesses and bring up their families.

The Australian conservatives (ie. the Liberal/National Coalition) need to take a long hard look at the UK’s broadband policy development under the UK Conservative Party in the last five years. Mr Turnbull may have thought the “old dart” had a smarter broadband back in 2013 but the UK and the rest of the world have moved on to a full fibre future.

Will Australia be able to make the change soon enough to limit the damage?

NBN Co has announced a review of its wholesale pricing. This review will be done in private with no public consultations – just consultations with its RSP customers (ie. Telstra, Optus, TPG Telecom, Vodafone etc).

This review comes after both Telstra and Optus voiced their concerns about NBN Co’s pricing and consultation methods in their feedback to the ACCC’s review of the non-price terms of NBN Co’s Special Access Undertaking.

It also comes after the ACCC chairman, Rod Sims, raised concerns in early April regarding NBN Co’s withdrawal of pricing that allows retails customers to remain at prices broadly in line with the ADSL broadband prices available in pre-NBN days.

Both of these statements have put some pressure on NBN Co and it seems the old pricing review strategy has been dragged out to try and placate the industry, the ACCC and customers. The duration of the review is not clear from NBN Co’s press release but NBN Co has deferred announced changes to its CVC charging that impacts low usage customers until 30 June 2020.

The first impression is that the review will allow NBN Co to buy some time to keep its major customers and the ACCC off its back.

Under this scenario, it is unlikely NBN Co will make substantial changes at this stage. It cannot afford to allow its ARPU to drop if it is to meet its financial objectives. NBN Co still has to raise its ARPU by around 13% to achieve its ARPU goal of $51. Any reduction in prices to allow for cheaper access for users on low speeds and low usage will make this target higher.

This is especially the case given that approximately 1 million households (or 20% of connections) are still using 12Mbps services.

However, another view could be that NBN Co has finally recognised it has an issue in the low speed, low usage market segment with competition from mobile networks and fixed wireless broadband services from Telstra, Optus and Vodafone. Low usage customers are probably better off using these networks than paying the higher charges that NBN Co is trying to squeeze out of the industry to meet its ARPU target.

NBN Co admits as much in its press release when it says that “low-income households, older Australians, renters and single person households generally have a lower incidence of connection to the nbn™ network”.

If NBN Co does not act to pick up these customer segments it may fall short of its other key metric of 73-75% of households connecting to the NBN.

So another take on the pricing review is that NBN Co is looking to find a way to balance the two competing objectives of ARPU and takeup as both are coming under pressure.

The problem for NBN Co is that the customers it is consulting with are predominantly also mobile operators who would be keen to service the low speed, low usage market segment directly with their own wireless networks.

So just maybe this is the first step on a long journey by NBN Co recognising that the NBN business model is fundamentally flawed financially.

This will not be a happy journey for NBN Co Chairman, Ziggy Switkowski, who only late last year told a Senate Estimates hearing that his personal view was that the government would not need to write-down the estimated $51 billion (equity and debt) funding required by NBN Co.

This post first appeared on the 13th May 2019 in the Australian telco newsletter CommsDay under the heading “TPG continues to be the whipping boy of policy inconsistency”.

TPG became a successful operator through keeping to itself while building its business through aggressive competition, investment in its network and smart acquisitions. As an industry outsider TPG epitomised the disruptive challenger that technology industries need to drive competition and investment.

However, since September 2013, when TPG announced it was going to build a FTTB network as an alternative network to the NBN, it has been the target of continuing intervention by government policy makers and regulators – stakeholders who would normally be looking to promote investment and competition.

NBN Co was clearly spooked by the FTTB rollout that was planned to cover 500,000 urban premises. In April 2014, NBN Co Chairman, Ziggy Switkowski, publicly stated that NBN Co needs to be a monopoly wholesale provider for it to be economically viable and that it was committed to upgrading technologies where alternative companies (ie. TPG) were not.

“NBN is a commitment that will endure for a long time and has an upgrade path built in; alternative companies may not have the incentive to do so,” Dr Switkowski told ABC Radio.

A complaint was made to the ACCC in April 2014  that TPG’s network rollout plan was in breach of the so-called NBN “level playing field provisions” enacted by Labor in 2011. The Coalition’s Expert Panel on the NBN, lead by Dr Michael Vertigan, also weighed in by recommending the ACCC investigate regulation of vectored DSL services being used by TPG. This recommendation was completely at odds with other statements from the panel which encouraged the development of alternative superfast network providers entry.

Did the Coalition Government and NBN Co successfully ‘spike’ the Vertigan Panel’s recommendation to force this spurious recommendation for an ACCC investigation? We may never know.

The ACCC dismissed the “level playing field” complaint in September 2014, but it nevertheless announced an enquiry as recommended by Vertigan into regulation of vectored DSL services. The Coalition government also introduced compulsory licence conditions that would force TPG to split its wholesale and retail delivery components of the FTTB service. Such heavy-handed regulation is usually reserved for large dominant incumbent telcos. But in Australia it was perversely used to thwart TPG’s efforts to compete with NBN Co, the new monopoly provider.

In July 2016, the ACCC made its final decision that would see regulation imposed on all superfast 24Mbps+ fixed broadband services. The Coalition Government also announced a new levy to target the same services to compensate NBN Co for its loss making regional services. These regulations made it very difficult to profitably rollout the FTTB network and TPG  admitted publicly that it had no projections to increase the build beyond 115,000 premises in August 2017.

TPG had lost this battle with NBN Co not through competition but because of targeted  government action. However, in line with its disruptive and innovative spirit, TPG announced it would build a national mobile network in April 2017. Telstra’s share price immediately dropped by 7% as the market anticipated increased competition in the Australian mobile market.

But NBN Co was also concerned. Bill Morrow, CEO of NBN Co, admitted in October 2017 that the NBN business model was under threat from wireless broadband.

“Forget about 5G for a moment, even the antenna technology using 4G is a viable alternative to NBN where the towers are already up”, he said.

TPG commenced building a wireless network in 2017 using Huawei equipment. Later statements from TPG indicated that the network was planned to consist of 1500 antenna sites and use the latest small cell technology to provide high speed wireless services. 

TPG took an even bigger step in August 2018 when it announced a merger with Vodafone. TPG’s plans to build its own mobile network were undoubtedly a factor in getting the two parties to get to a mutually agreeable deal. The threat of more competition for Vodafone undoubtedly lowered the price they were willing to accept for such a merger to be completed.

But the merger coincided with the ACCC getting quite excited about the prospects of alternative wireless networks as a way to keep NBN Co honest. NBN Co’s monopoly network’s service standards and high pricing had become a major issue. The ACCC wanted competitive pressures on NBN Co to ensure the monopoly would be forced to respond.

Rod Sims, the Chairman of the ACCC, espoused these views clearly in his comments supporting NBN bypass by wireless operators in a conference address in October 2018 :

“So for those [providers] with an alternative mobile or wireless network, it may be more cost-effective to offload some fixed NBN data traffic onto their own network (where consumers have a hybrid modem) or seek to supply some services entirely over their own mobile network, completely bypassing the NBN,” he said.

Ironically, given the ACCC decision to declare superfast fixed broadband services in 2016, Rod Sims went on to say, “What we must never do, however, is seek to restrain others in order to protect the NBN business model. This would be a disaster for consumers”.

The ACCC’s approval for the merger looked in doubt when it announced in December 2018 it had preliminary competition concerns. TPG’s mobile network plans (and actual rollout commencement) had seemingly convinced the ACCC that it was on track to become the 4th mobile operator in Australia. Faced with the prospect of being thwarted again by the ACCC again, TPG announced in January 2019 that it had ceased building its network. TPG claimed the ban was independent of the planned merger with Vodafone, but rather caused by the Australian Government’s ban on the use of Huawei for 5G networking for national security reasons.

Last week’s formal rejection of the merger by the ACCC is based on a view that TPG would restart its wireless network build due to a “commercial imperative … to deliver both fixed and mobile services at competitive prices”. By specifically referencing “fixed” services, the ACCC now seems to be pushing for the 4th wireless network as a way to keep NBN honest as well as sharpening up mobile competition. The ACCC appears to be taking a converged fixed and mobile services view of the broadband market where wireless based services can be substitutes for fixed broadband. Such a market structure would definitely challenge the NBN Co fixed broadband monopoly.

COMPLICIT?

The irony that the ACCC was complicit in the actions by the Coalition Government and NBN Co to thwart TPG’s FTTB network through regulation in 2016, but in 2019 is now using its powers to block a merger to encourage the build of a converged wireless broadband to compete with NBN Co is overwhelming.

Is the ACCC trying to correct an earlier policy error that locked in the NBN Co monopoly by taking a hard line on the TPG – Vodafone merger? The ACCC should know that market structures are path dependent – earlier policy interventions are very hard to reverse and as a result the consequences for competition are large. The last 10 plus years of NBN policy mis-steps are a classic example.

Could the same outcome be achieved by the ACCC seeking undertakings from the merged TPG – Vodafone company? A commitment to build a small cell wireless network designed for both fixed and mobile broadband services would enhance competition in a converged market. Such a network would help to keep NBN Co honest much like the TPG FTTB network would have originally.

Whatever the answer regarding the ACCC’s intentions and plans, TPG has been on the receiving end on both occasions. The extent to which TPG, the most successful challenger and disrupter in Australia’s telco industry, has been the victim of policy and regulatory decisions is an indictment on the Australian telecommunications regime.

HK COMPARED

When I left Australia in 2015 to join Hong Kong Broadband Network, a company similar to TPG that has disrupted the larger tycoon backed incumbents to become the number two telco in Hong Kong, I could never have contemplated the obstacles that would have been thrown in the path of TPG.

Thankfully, Hong Kong’s telco policy makers realised long ago it is best to stay out of predicting winners and letting market forces drive innovation and investment. As a result, Hong Kong’s  residents now get some of the best and cheapest broadband anywhere in the world, unlike Australia’s.

Disclosure : I would like to declare that I have no relationships with any of the team at TPG. I have never actually met David Teoh or any of his TPG colleagues in my time working in the Australian telco industry with Siemens, RequestDSL, AAPT and NBN Co and I have never had an interest in TPG shares.

Malcolm Turnbull, the most recent of many Australian former Prime Ministers, has called for the US and its “Five Eyes” allies to take urgent steps to create a home-grown 5G network builder.

As Prime Minister, one of Turnbull’s last decisions was the banning of Chinese network vendors (ie. Huawei and ZTE) from building Australia’s 5G networks for any of its mobile operators.

He also revealed his request to US President Trump :

“I encouraged the president to take the lead and ensure that we had at least one viable and secure 5G vendor from the United States and its five-eyes partners,”

Turnbull seems to be calling for the US-led Western Alliance to recognise the challenge of Chinese technology development as another “Sputnik” moment. The launch of the world’s first man-made satellite in 1957 by the Soviet Union was the moment that galvanised US public opinion to support a huge investment in technology to ensure the West would not be left behind in the dawning Space era.

The creation of NASA and the Apollo program demonstrated US leadership in technology and military matters. It also had huge spin-offs for other industries such as aeronautical and semiconductors where the US retains significant leadership today.

But is the call by Turnbull and others in the West regarding the 5G technology threat really another Sputnik moment?

Firstly, is there really a demonstrable gap in the technology capabilities between China and the West?

Huawei is definitely a leader in the telecommunications field with continued strong growth. This is despite the clear threat imposed by the Anglo-Saxon based Five Eyes intelligence community (ie. US, UK, Canada, New Zealand and Australia) in its push for Western alliance members to deeply consider the use of Chinese technology in 5G networks.

While there is no 5G network builder with headquarters in the Five Eyes community countries, the Scandinavian based companies Nokia and Ericsson, do have large R&D and operational functions based in the US and Western Europe. Both Nokia and Ericsson have excellent technology pedigrees and are fully committed to the 5G ecosystem.

Furthermore, the US has companies that dominate the key underlying radio, cloud and optical technologies, such as Qualcomm, Intel, Broadcom and a vibrant industry of smaller specialised companies.

These underlying component technologies are critical for telecommunication network builds as was seen during the ban on US vendors supplying ZTE in 2018. The supply chains for the technologies are long and intricate and specialised components are vital for the building of all networks and especially the brand-new 5G networks.

The big name brands of Huawei, Nokia and Ericsson rely on an international network of suppliers in which the US is strongly positioned.

Even more importantly for 5G is the fact that the standards for the ecosystem are open and available globally. In fact Huawei, Ericsson, Nokia and many others have collaborated over more than a decade to ensure the 5G equipment they supply is interoperable with each others’ equipment. The large mobile network operators (eg. AT&T, Verizon, British Telecom, Deutsche Telekom etc) have demanded such openness for decades in telecommunications to ensure competition drives innovation and keeps pricing efficient.

Unlike with the Sputnik moment, the prospect that China can dominate the global 5G network ecosystem like the Soviet Union threatened to dominate space appears far-fetched.

So the next argument is whether the cybersecurity threat of having Chinese sourced equipment used in the digital infrastructure of a Western country can amount to a national security issue.

This is a more difficult argument to analyse because it naturally involves the question of cyber espionage and cyber warfare. These issues that are inherently related to how well a country can protect its key assets from unauthorised cyber intrusion. In the 21st century these are critical issues of not only national defence, but also for corporations and individuals.

Does having equipment, with its accompanying software, sourced from a potential future foreign adversary create national security risks that cannot be mitigated?

This answer will depend largely on the cyber security capabilities of the country that is a potential target. All critical infrastructure such as electricity, transport, water as well as telecommunications needs to be defended. Today, and increasingly in the future, all of these assets are essentially monitored and managed by software and digital communications.

As the corporate and political (ie. the US Democrats) sectors know by now very well, the weakest links in defending these assets in a digital environment are the human beings themselves that use the digital networks to access and manage these assets. Simple passwords, phishing emails and disgruntled former employees are the vectors that allow cyber intrusion most easily and effectively.

Counter cyber intelligence at the national level needs to seriously monitor all critical assets for intrusions and probe for weaknesses in their defences. This is necessary to stop not only threats on the national security level but also to protect against rogue cyber “terrorists” who could wreak havoc to civilian populations.

The presence of Chinese equipment and software in these critical infrastructure assets is unavoidable. Equipment and software sourced from China is omni-present in practically every type of digital device in industrial and personal use. A blanket ban on Chinese equipment is clearly impossible and would not remove existing equipment anyway. The only way to have avoided this would have been keeping China out of the globalised digital ecosystem from the beginning. The horse bolted on this back in the 1980s and 1990s.

Comprehensive cyber defence initiatives are the only way of protecting today’s societies from national and rogue cyber intrusions that can jeopardise our economy and social fabric. Selective banning of equipment in certain industries will only lead to a false sense of security.

It seems many of the Western allies of the US and Australia are coming to a similar conclusion. Germany and the UK are heading down a path of allowing Chinese 5G equipment vendors build networks under strict security regimes that aim to protect these assets from cyber intrusion. New Zealand is also signalling that the 5G ban is not a done deal.

It seems that many in the West are now taking the enhanced cyber defence approach rather than relying on an outright ban of Chinese equipment for 5G.

Turnbull is on the record as having met with Huawei’s founder Ren Zhengfei and rotating CEO / Chairman Guo Ping prior to becoming Communications Minister in 2013. At the time he was prepared to review the first national ban of Huawei equipment imposed for the Australian National Broadband Network (NBN) by the Rudd and Gillard Labor Governments.

However, he is now clearly of a very different view and is leading the charge on an international scale to pressure Australia’s Western allies to distance themselves from Huawei.

Turnbull is now calling for the creation of an Anglo-Saxon 5G vendor to match Huawei and presumably Nokia and Ericsson. This could even go as far as nationalisation of 5G in the US (perhaps an equivalent of NASA for 5G) as was mooted by some US national security officials in January 2018.

The big question is what has changed Turnbull’s mind in the intervening six years. Is he really so concerned by Australia’s cyber defence capability that he believes we are at another Sputnik moment? 

Disclosure : I was the Chief Technology Officer of NBN Co at the time of the initial ASIO advised ban of Huawei equipment for use in the Australian NBN in 2010 which later became public in 2012.