commentary Perhaps Stephen Conroy should have a quiet chat to Graeme Samuel and rethink his own plans to toughen up the telecommunications regulatory regime ahead of the building of the proposed $43 billion National Broadband Network (NBN).
The prospects for the NBN would be enhanced if, over time, access to Telstra's copper became less attractive
Last week Samuel, the Australian Competition and Consumer Commission chairman, announced the watchdog had rejected, for the third time, an application from Telstra to increase its monthly wholesale charge for access to its unconditioned local loop (copper network) in metropolitan Australia from $16.75 to $30, with the potential for it to be increased eventually to $46.54.
Earlier this month, when announcing the Federal Government had abandoned its original proposal for a private sector-led NBN involving $4.7 billion of taxpayer funds, Communications Minister Stephen Conroy also released a discussion paper on regulatory reform and made it clear the government wants to increase the competitive pressures on Telstra in the lead-up to the NBN build. The paper has been viewed as the stick with which to threaten Telstra into cooperating with the new NBN process.
Neither the ACCC decision on unconditioned local loop (ULL) access nor the proposed toughening of the regulatory settings, though, are actually helpful to the economic case for a new NBN.
To make the NBN viable, and to create a business case that attracts private sector participation, either in kind (through contributions of existing fibre infrastructure) or in cash, Conroy has quite correctly said that the new NBN needs to convince internet service providers (ISPs) rather than their end-customers to switch from Telstra's copper to the new NBN's fibre. The NBN will be a wholesale network and its customers will be the ISPs.
There is no doubt that the NBN would be faster, at 100Mbps, than the speeds Telstra's existing ADSL network is capable of delivering. The doubts lie in the cost of that speed and the content that would utilise it.
While estimates vary, there does appear to be a rough consensus that the NBN is going to have to charge ISPs at least $45 to $50 a month to cover its costs and generate some sort of return. There are other estimates that are considerably higher. Then there would be the ISP's margin and the cost of the content that would actually allow customers to take advantage of the higher speeds to consider as well.
There are plenty of estimates of retail charges of more than $100 a month and AAPT's Paul Broad isn't alone in saying that even if the new NBN attracted all existing fixed-line broadband customers, retail charges would be more than $200 a month.
Even in Japan, where there's been very high-speed broadband for more than a decade, and where the service is subsidised, cheaper copper-delivered broadband still represents about 35 per cent of the market. The key challenge for the NBN is to convince the ISPs to abandon their investments in digital subscriber line access multiplexers (DSLAMs) and shift their customers onto the fibre-to-the-premises (FTTP) network.
The ISPs were overjoyed when they heard the government had abandoned the original NBN concept, which would have cut over Telstra's copper to use its "last-mile" access to the home, for an FTTP network that would leave the copper network intact — and therefore not strand their DSLAMs.
That's because they enjoy massive margins from reselling the copper — more than 60 per cent — on the back of an investment that pays for itself within a couple of years. The new NBN, unless access to it is very heavily subsidised by the taxpayer — or retail customers are prepared to pay multiples of their current charges for the faster speeds and new applications — won't offer margins remotely competitive with that.
Thus reducing access price, or in the case of ULL, leaving them at levels that Telstra argues are below its actual costs, might help the ISPs make more money today but will continue to act as a disincentive for the ISPs to shift their customers onto the NBN.
It is arguable that the reason there has been so little investment by Telstra's competitors (some of them organisations larger than Telstra) in fixed-line infrastructure is that the regulatory regime, by continuously lowering wholesale access prices, has made it more attractive to simply plug into Telstra's network.
The prospects for the NBN would be enhanced if, over time, access to Telstra's copper became less attractive and therefore the trade-off between speeds and margins for the ISPs narrowed.
Instead of toughening the regulatory regime around Telstra and trying to drive down access prices and terms further, it could make more sense, in preparation for the NBN, to gradually relax it and create a glide-path for wholesale prices that would, over time, remove the disincentive for the ISPs to migrate their customer bases to the NBN, without adversely affecting the consumer take-up of fixed line broadband by introducing a sudden pricing shock.
The government would also have to keep working on a strategy for convincing Telstra itself to move its customer base onto the NBN — without those customers the NBN's economics can't work — but in the scheme of Telstra's affairs, the $97 million a year of additional revenue that the ACCC estimated Telstra would gain from a $30 a month ULL access charge wouldn't have a material effect on Telstra's decision-making.
This article by Business Spectator's Stephen Bartholomeusz is reproduced on ZDNet.com.au courtesy of a reciprocal publishing agreement.
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"Loosening the regulatory controls on Telstra might actually make it easier to attract customers away from its copper network and onto the new and shiny National Broadband Network."
It won't. It will do the exact opposite. If Telstra is allowed to raise their prices then obviously their competition would also do so by a similar amount. Why should we pay more than we need to?