NBN plan 'tantamount to Telstra separation'

Analysts have responded to the Federal Government's new NBN strategy with optimism, noting that while risky, the plan makes an important break from years of stagnation and promises an important new foundation for Australia's broadband future.

It made no sense to proceed with the original concept because it was clearly going to get bogged down [in regulatory conflict]

Ovum's David Kennedy

Ovum research director David Kennedy, for one, sees the announcement — which will see the government ditch its plans for a fibre-to-the-node (FTTN) network and spend $43 billion over eight years to build a national fibre-to-the-premises wholesale infrastructure — as the best way for Rudd to put the government's ongoing conflicts with Telstra behind it and focus on the future.

"It became apparent during the tender process that the FTTN approach was creating a lot of problems and uncertainties around Telstra's response to the use of its copper network," he explained. "It made no sense to proceed with the original concept because it was clearly going to get bogged down [in regulatory conflict]."

"This new approach simply cuts through all of that by building out a brand new access network. It's achieving structural separation of Telstra by another approach. It's a good outcome for the industry, and a better outcome for the country."

Analysts at research firm Market Clarity were equally enthused about the announcement, pointing to the decision to launch a wholesale-only network as a sign that the new NBN was on the right track. "It would have been inappropriate to have the government as a retailer as it did when it owned Telstra," said Market Clarity associate consultant Richard Chergwin. "This bid offers a chance to align Australia's telecommunications infrastructure with that of other national infrastructure."

IDC senior analyst David Cannon pointed out that the decision was both a network investment and a way for the government to leave behind a Telstra privatisation that had fundamentally failed to deliver the benefits expected at that time.

"The government left the nation with a legacy 1900's network and at the mercy of a private organisation which has done its utmost to protect the revenues generated by the legacy network assets, which they bought at cost plus interest," he explained. "This decision will right the wrongs of the previous government's decision to sell Telstra in the manner that it was done."

Yet Telstra shareholders can expect some turbulence in the short term as the implications of the new NBN strategy and Telstra's role in that strategy becomes clear. "You cannot blame either party for the decisions they have made," Cannon explained, "but there are many losers in this whole broadband mess. Telstra shareholders have and will continue to suffer until its regulatory exposure is mitigated."

Risk, reward
Yet even as generally positive telecommunications industry players come to grips with the implications of the new network, observers are warning that the government faces a risky and difficult value proposition with an investment that will never be recouped simply through sales of basic internet services.

"Voice and wholesale internet is not going to cut it," said Ovum's Kennedy. "They will have to have considerable other applications to justify this. It's a nod to market failure, and it goes back to that chicken-and-egg situation: do you build the infrastructure and then develop the services, or is it the services that draw investment into the infrastructure? The level of risk involved in building this network is simply too high for the commercial sector alone to bear."

IDC's Cannon pointed out the new strategy presented a real opportunity for Telstra, which has substantial cash reserves it can now shift from infrastructure investment to building complementary content.

This decision will right the wrongs of the previous government's decision to sell Telstra in the manner that it was done.

IDC's David Cannon

"Telstra is arguably the most advanced player in the country in terms of over-the-top services, and will see the NBN as the reason to keep driving its services play," he explained. "It will use its large cash reserves to secure exclusive content and to enhance its hosted unified communications offerings for both business and consumer markets."

Telecommunications analyst Paul Budde, long an outspoken critic of Telstra's obstructionist policies regarding copper loop access, sees the new network as a much-desirable alternative to the FTTN and believes latent demand for broadband services will quickly see the emergence of new, revenue-generating usage models.

"The government is taking the sting out of this by basically guaranteeing the investment money for the project and also indicating the use of the infrastructure for other sectors," said Budde, who believes that healthcare applications such as telemedicine will account for 25 per cent of the new network's capacity within a short time after its eventual launch.

Education, energy and environment services could account for another 25 per cent, Budde predicted, with "traditional telecoms and internet services" making up just 25 per cent of the total volume.

"It's not that these latter services have shrunk in volume or revenue," he added. "This simply demonstrates the volume of additional growth that will be unleashed on this open network infrastructure. Healthcare can independently provide e-health services to all Australians.

Media companies could do the same if, for example, they want to finance their applications through advertising. There won't be a gatekeeper involved who clips the ticket of everything that is happening over the network."