commentary With Mike Quigley now appointed to head the government's National Broadband Network Company (NBN Co), is the long promised network at last set to become reality?
Much will depend on the negotiating skills of Quigley and his Telstra counterpart David Thodey.
Mike Quigley
(Credit: Alcatel-Lucent)
The NBN has been the subject of torturous, high-stakes negotiations between Telstra and the government — negotiations that are now entering their fifth year. It started with Sol Trujillo's August 2005 proposal; for a government subsidy of $2.6 billion, Telstra would build a 6Mbps network to serve 98 per cent of premises.
The government rejected that offer, as it did Telstra's November 2005 proposal for a 12Mbps network.
Despite the public rejections, negotiations continued between Telstra and the Australian Competition and Consumer Commission and then Communications Minister Helen Coonan, throughout 2006 and 2007.
The key sticking point: Telstra would allow its competitors to use the network, but only if a price was set in advance by the government. Under Trujillo, the price Telstra wanted was simply too high and Coonan rejected the deal.
When Labor came to power in November 2007, the next round of negotiations began. The new government's policy was to invest $4.7 billion in a joint venture with a private sector company to build a national 12Mbps fibre-to-the-node network.
But in November 2008, when bids from interested private sector companies were due, Telstra failed to lodge a compliant bid. Telstra was excluded from the bidding process, its share price dropped sharply, and within months its chairman and chief executive were gone.
In April 2009, the Rudd Government proposed a $43 billion fibre-to-the-premises network delivering 100Mbps to 90 per cent of the population. A majority government-owned company would build the network.
There are strong incentives for the government and Telstra to negotiate with each other. Both sides have a lot to lose if they cannot get a deal. Telstra could lose significant traffic and revenue if it finds itself competing with a ubiquitous majority government-owned network using the very latest broadband technology.
But equally, the government might find that its shiny new network fails to generate the expected commercial return because it carries only a small fraction of the available traffic unless it can land a deal with Telstra, the company that has most of the customers today.
The real question is whether the two parties can do a win-win deal in which Telstra agrees to shut down its network and carry its traffic on the NBN. The obvious path forward is for Telstra to sell its existing copper access network to the NBN Co. This network would then be substantially upgraded so it was optical fibre all the way to customer premises.
While the solution may be obvious, the negotiation to get there will be complex. Telstra's board and management cannot agree to a deal unless it leaves shareholders better off than the status quo.
The real question is whether the two parties can do a win-win deal in which Telstra agrees to shut down its network and carry its traffic on the NBN.
If Telstra sells its network, it will need to receive a price that compensates it for the earnings it forgoes as a consequence. Given the lucrative monopoly profits Telstra earns from the fixed-line network, the earnings forgone and hence the required payment will be very substantial.
Assuming that Telstra receives its payment in the form of an equity stake in the new company, two additional problems will complicate the negotiations. The first is that the government has set limits on the proportion of NBN Co that it will allow Telstra to own. So the government may not be able to issue Telstra a big enough equity stake to provide the required value.
There is a solution: when NBN Co acquires Telstra's access network, it can pay for it by issuing shares not to Telstra but to Telstra's shareholders. But this outcome may be resisted by Telstra's board and management.
The second problem is that some parts of the new network, particularly in rural and remote areas, may never generate a commercial return on the capital invested. The government may be able to justify non-commercial investment on social and equity grounds.
But non-government shareholders in NBN Co will value their shares based on the company's likely earnings stream including the earnings drag from the parts of the network that do not generate a commercial return.
So a successful negotiation will require the government to recognise the must haves that Telstra and its shareholders will bring to the table. Conversely, it will require Telstra to recognise the government's non-negotiable requirement: a more competitive market for broadband services.
Paul Fletcher is a telecommunications consultant, former Optus executive and author of Wired Brown Land? Telstra's Battle For Broadband (UNSW Press, 2009).
4%
2%
Lots of it!! (say ~ $80 Billion!) = conservative estimate!!
They way I see it Rudd/Conroy must honour their election promise regarding broadband.
So, if they want this badly enough the Commonwealth should pay in full for Telstra's network which sharholders quite rightly bought of them in the first place!! Cash!!
They (Thodey/NBNco) then must agree on a fair price. Thodey must at ALL times act on behalf of shareholders interests.
This means he must be prepared to "walk" because Telsta has the goods and can easily upgrade their own Network. Rudd and Conroy know this with an election coming!!
Having said that, they then should pay cash (No equity) in full for the Network owned and operated soley by Telstra known as the PSTN.