Optus HFC sale could be NBN victory

commentary After being comprehensively beaten by Telstra in the cable wars of the 1990's, Optus is positioning itself to outmanoeuvre Telstra in the great National Broadband Network asset purchase program.

Although the SingTel Optus cable network is superior in design to the Telstra cable network, it has suffered from chronic under-investment.

SingTel subsidiary Optus has first mover advantage in trying to sell its $1.5 billion HFC cable to the NBN for equity in the NBN Company. But Broadband Minister Stephen Conroy and his team of telco specialists should be wary of Singaporeans bearing gifts.

Although the SingTel Optus cable network is superior in design to the Telstra cable network, it has suffered from chronic under-investment. Capital investment will be needed to bring it up to the standard needed to match the broadband capabilities of fibre-optic cable.

Nevertheless, there are good reasons why Conroy and his senior NBN policy adviser Kate Cornick should seriously consider taking the HFC network assets off the hands of SingTel Optus. Conroy could achieve some very early big wins for the NBN if he buys the assets and upgrades them.

Cable broadband expert Dermot Cox of C-COR Broadband says Australia's HFC cable networks, including the SingTel Optus assets, could be upgraded and delivering 100Mbps broadband speeds by the end of 2010. Conroy could be able to boast of having delivered the promised 100Mbps of broadband to 25 to 30 per cent of households before the next federal election is due in April 2011.

Of course, if the NBN opted to buy the SingTel Optus cable assets it would make no sense to buy the Telstra assets. During the 1990's cable wars Telstra spent billions chasing its rival down the suburban streets of Australia. We ended up with two HFC networks passing the same 2.2 million premises.

However, because the SingTel Optus network was built first and designed by cable guys from Bell South in the United States, it is superior to the Telstra HFC network. The Bell South engineers designed the network to handle voice, data and pay TV. Telstra's network was designed as a spoiler, with voice services kept on the PSTN. From a services perspective it was a lesser network.

Unfortunately, Optus never showed the innovation and creativity seen in cable operations overseas. It never used any of the spare channel capacity to deliver innovative services. In the US, cable operators have generated good cash flow by selling ads on local channels and selling channels from overseas.

In Australia, SingTel Optus never made the necessary investments to be able to offer its cable customers better services. Instead of utilising the spare capacity on its network it put all its funds into broadband services riding off the Telstra copper network.

Cable is superior to copper. Cable has a technology evolution path that has already put ADSL2+ in the shade in terms of upload and download speeds. Telstra this year decided to upgrade its cable network in Melbourne at a cost of up to $300 million. It won't reveal what services it will be offering on that network.

Telstra is rolling out the latest high-speed cable technology — called DOCSIS 3 — past 1 million homes in Melbourne. However, the 2Mbps upload speeds promised by Telstra on its upgraded HFC cable are woeful compared to what is available elsewhere.

Cox, in his submission to the NBN regulatory review, says that cable operators around the world are working on implementing DOCSIS 3 technology in combination with a feature called channel bonding that can deliver super fast broadband.

This technology can deliver 200Mbps download and 160Mbps upload speeds per customer cable modem. Cox argues that there will be no need for costly fibre overbuilds in areas where the NBN Company owns a HFC network operating with the latest technology.

If the sale of the SingTel Optus HFC network to the NBN Company goes ahead, it could mark the first significant strategic victory by the company since it lost the cable wars a decade ago.

Based on the Telstra experience in Melbourne of about $300 per household, you would think that upgrading the SingTel Optus cable network would require at least $600 million in capital investment to install the latest technology for super fast broadband.

But that would be wrong. The superior original design of the SingTel Optus network means it could probably be upgraded for less than $100 million, according to industry sources. There is more to the SingTel Optus offer to sell its HFC network into the NBN than first appears.

According to a report in The Australian, the sale of the HFC cable would be part of a broader strategy to free up capital by listing SingTel Optus on the Australian Securities Exchange. The business would be worth between $6 billion and $8 billion, based on current industry multiples, and the company's flat profit outlook. SingTel Optus had earnings before interest and tax of $584 million in the year to March and revenue of $8.3 billion.

SingTel has used up virtually all the huge tax losses it acquired from Cable & Wireless, so a sale through stock market listing would be timely. Funds released in Australia could be used by SingTel to pursue expansion opportunities in high growth markets in Asia.

If the sale of the SingTel Optus HFC network to the NBN Company goes ahead, it could mark the first significant strategic victory by the company since it lost the cable wars a decade ago.

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