From monopolist to little Aussie battler

commentary Legislation setting up the regulations for the National Broadband Network could be introduced to parliament as early as this week, which means Telstra will soon get some clarity about whether it's in a lot of trouble or just a little bit.

Telstra and its shareholders are on tenterhooks, waiting to find out whether the government-sponsored NBN will go into a price war with them or into a partnership — compete with them or buy their network. The NBN legislation, and in particular ownership restrictions, should provide a clue ... but just a clue, not the full answer.

It is a melancholy fact for Telstra shareholders that the company's management has no idea what's going on and there are no talks taking place with either the government or the NBN management, led by Mike Quigley. Relations have improved, but Telstra is still on the outer.

The crucial question of whether the NBN Co, which now has a management and a board, decides to simply buy all or part of Telstra's wholesale network and get its customers that way, or whether it tries to take the customers off Telstra by competing with it, is, at its heart, a simple "buy or build" decision — that is, it depends on price.

It is not true that the NBN Co must deal with Telstra and that the former government telco is in the box seat in dealing with the new government-owned telco.

Telstra owns 6 million kilometres of telecommunications fibre (it could go around the earth 150 times), but the government does not have to buy it. And it especially doesn't have to buy, and almost certainly won't buy, the copper "last mile". The NBN could do with Telstra's pipes and ducts, but it doesn't have to buy those either.

The NBN can simply get statutory short-term access to any of Telstra's networks and assets that it wants, while building its own $43 billion fibre-to-the-home network.

The question of whether it buys anything from Telstra — fibre backbone, pipes and ducts, or copper last mile — will come down to price.

One model being considered, for example, is that the NBN Co does not duplicate Telstra's fibre backbone (the network that connects its 5000 exchange buildings to the major regional centres and capital cities) but doesn't buy it either — it gets access to that network under ACCC rules. It could also buy the fibre backbone, separately to the copper last mile (if Telstra wanted to sell it at the right price).

The NBN Co would then lay its own fibre from each exchange to houses and businesses alongside Telstra's copper, getting enforced access to the underground ducts and then turning its wholesale service on, one city at a time.

Telstra would then be forced to compete with its former owner in a price war, or rather to compete with the NBN's customers — Optus, Primus, iiNet, AAPT.

It would be like The War of the Worlds: Telstra versus the governments of Australia and Singapore (ie, Optus), and others — copper versus fibre. Telstra becomes the little Aussie battler with cheap, old technology — no longer the ugly monopolist.

And if you think the NBN Co, Optus and the others wouldn't be able to compete because the cost of the fibre would be too high versus the sunk cost of Telstra's copper and fibre network, think again.

This would not just be a broadband internet price war, but fixed line phone calls as well — bundled telecommunications. The NBN/Optus deal could, for example, be fixed price for everything — below cost at first to get the customers, with the health and education departments helping with the funding.

Then again, the government could just come to an all-encompassing deal with Telstra where it buys the fibre backbone as the basis of the NBN and owns and operates Telstra's copper-based wholesale access network while it replaces the copper last mile customer access network with fibre, one town at a time.

That depends entirely on the price. It will be one of the nation's most interesting and important negotiations ever, but it hasn't started yet.

This article by Business Spectator's Alan Kohler is reproduced on ZDNet.com.au courtesy of a reciprocal publishing agreement.