How the NBN will actually work – and why Telstra’s position may change: Kohler

NBN chief Mike Quigley has managed to reveal how the relationship between Telstra and the NBN is going to work without even once mentioning the word ‘Telstra’. His revelations yesterday were stunning, and have changed everything.

In his speech at the government’s national broadband conference in Sydney, Quigley gave the most complete details yet about how the NBN will operate.

The speech indicates that most of the public discussion about the negotiations between Telstra and the NBN – and their future relationship – has been wide of the mark, and confirms my speculations earlier this week.

Quigley said the NBN would work through a series of Points of Interconnect (PoIs) scattered around Australia. He said there’ll between 100 and 200 of them.

And then this is what Mike Quigley said about the PoIs: “We will locate them where there is contestable backhaul.”

Think about that statement. When I heard it I had to replay the webcast a few times to make sure I heard it right, and then I got a printed copy of the speech so I could study it.

Backhaul is the fibre that connects cities and towns to each other. A customer access network (CAN) operates within each populated area and connects to the backhaul.

The first implication of Quigley’s statement is that the NBN will not own any backhaul but instead just be a customer access network – that is, the last ‘mile’. We did not know that before.

The second implication is that Telstra will not be selling its backhaul fibre to the NBN – Quigley’s not in the market for that.

And the third implication of the statement is Telstra will not have a monopoly of backhaul anywhere in Australia, as it does now.

Optus, Leighton’s NextGen and SP Telemedia compete with Telstra in providing backhaul in some places, where there is enough wholesale traffic to make it worthwhile, but there is a lot of what the government calls ‘regional backhaul blackspots’ (RBBs) where Telstra is the only supplier.

As part of an RBB programme that pre-dates the NBN, the Department of Broadband, Communications and the Digital Economy earlier this week awarded a $250 million tender to NextGen for 6000 kilometres of backhaul fibre to cover regional black spots.

Two things were not made clear in the announcement of that tender, and which I learned yesterday. Firstly, the government directly, not the NBN Co or NextGen, will own that fibre and it will be operated by NextGen for five years under a public private partnership arrangement. Secondly, Telstra already provides backhaul to those areas – after all, people have the phone on. That means the government is going into competition with Telstra.

To repeat: this will be government-owned fibre, not part of the NBN, operated by one of Telstra’s competitors, in competition with Telstra.

It seems to me the implications of this, combined with Mike Quigley’s statement about his PoIs, are profound.

It means the government’s vision for broadband in Australia – never clearly spelled out – is for contestable fibre backhaul everywhere, with the government itself the competitor to Telstra where necessary, connecting to a government-controlled last-mile fibre customer access network.

In his speech yesterday, Mike Quigley explained that there will be several types of PoIs, and he discussed two of them.

The first is a ‘Fibre Access Node’ which will terminate a multitude of fibres and contain an Ethernet switch that access seekers (ISPs) can connect to (via backhaul operators). These will operate where there is contestable backhaul.

Where there is only “uncontested backhaul” (Quigley’s phrase for “only Telstra”) the fibre access nodes won’t be points of interconnect – they will simply be intermediate stations before the traffic is hauled back to an ‘aggregation node’ located where there IS contested backhaul.

So what does all this mean for Telstra and the negotiations that are currently underway with Quigley’s NBN team?

Well, Telstra currently owns two CANs: the last mile copper network, and the hybrid fibre-coaxial (HFC) cable that delivers Foxtel and cable internet.

Neither is perfect. The copper requires expensive maintenance every year and the HFC is not ubiquitous, since it was only built to match Optus’s fibre and drive it out of business.

When the NBN arrives in a particular town or suburb over the next eight years, with its PoIs and its fibres, Telstra can choose whether to connect up to a PoI and use the NBN last mile fibre access network, or stick with its own copper and/or HFC.

That decision will be all about price versus cost of maintenance and the speed of the network. If Telstra doesn’t believe its customers want 100 megabits per second and it is happy to maintain the copper, it will bypass the PoI.

What Telstra’s David Thodey and Mike Quigley are negotiating now is about the price of Telstra’s access to the NBN customer access network. Quigley needs to underpin the viability of the NBN with a long-term contract with Telstra; Telstra needs to underwrite its own future in the light of the NBN.

Telstra has always wanted upfront cash payments in return for migrating its traffic across to the NBN. This was an ambit claim, and won’t happen – except as described below. What it will get is volume discounts.

In other words David Thodey is now deciding Telstra’s future as an ‘access seeker’ and negotiating the best deal possible.

The volume discounts could be paid in the form of an upfront cash rebate, to help make the announcement more palatable with angry Telstra shareholders, but as I pointed out in my last comment, the NBN is not in the market to ‘buy’ customers.

Nor is it buying Telstra’s assets, except for the network of ducts and trenches, which is, in theory, extremely valuable.

The problem is that the ducts and trenches network is not in good shape. It is very old, and only part of it – passing about 1 million homes – was upgraded when the HFC cable was put through it 15 years ago.

So that’s the other thing David Thodey has to do: get a good price for a second-hand network of ducts and trenches that is a ‘renovator’s delight’.

Quigley does not want to string his fibre cables between light poles like Optus did, and although he could theoretically rent access to Telstra’s ducts, he really needs to own them. So Telstra should get a decent price for them.

And finally, there’s the legislation designed to force Telstra to split – to structurally separate. As I wrote on Tuesday if Telstra migrates its customer access traffic to the NBN, then that legislation is redundant.

There might be a case for forcing separation of its wholesale backhaul business, but if that’s going to be fully ‘contestable’ it doesn’t really matter. Telstra will have to separate it internally to free that business to compete with Wal King’s Leighton and Phil Sykes, the former Telstra executive now running NextGen. They will murder Telstra if Thodey is not on his toes.

Communications Minister Stephen Conroy hinted at that the legislation will be redundant in his press conference yesterday.

He was asked: “Are you committed to bringing the Telstra separation legislation back for debate in 2010 in the same shape it is in now?”

CONROY: “Absolutely. We’re committed to passing the legislation. I mean, obviously if discussions with Telstra progress and we reach the agreement that we hope we’re going to reach, you know, and those discussions continue to be constructive, then there could be changes.”

So, yes – the legislation, as we have suggested before is simply a baseball bat at the negotiations.

Not nice, but that’s the ALP for you.

This article first appeared on Business Spectator.