Why Telstra and the Government are finally getting somewhere on the NBN: Kohler

There’ll be an announcement today from the Government and Telstra about the national broadband network negotiations, but it’s unlikely to be much more than an announcement that things are going nicely, thanks for asking, and that they’ve figured out what they are negotiating about.

That’s a sort of breakthrough. As we’ve been suggesting here, it’s not about the sale of assets by Telstra to the NBN, but the gradual migration of Telstra’s traffic to the NBN and the payment of compensation to Telstra for being forced to use a better, faster, more expensive network.

But today’s announcement will really be the first public notice that Australia’s fibre broadband train is back on the rails – for the moment.

It should really say: “Phew! We’ve both messed up big time in the past 12 months, but it looks like we’ll be able to scramble out of it.”

Australia has been, and remains, close to an expensive shemozzle on broadband, with the government competing against an incumbent – that it sold not long ago – in the midst of a manure storm of litigation and legislation, with taxpayers, shareholders and consumers all potentially copping it in the neck, government politicians on the backfoot in Question Time and well-paid executives looking for new jobs.

Now it’s turned into a wrestling match inside a cage, from which neither side can escape and no one can see in. Today will mark the end of round one, as the combatants pant on stools in their corners.

Communications Minister Stephen Conroy and NBN chief Mike Quigley need Telstra’s traffic to fund the NBN. Without it, the project would have to be fully paid for off the Federal Budget as subsidised public infrastructure – another Hume Highway. Nothing wrong with that, perhaps, but definitely not what was intended.

There would be no private equity or bank funding because if it’s competing with Telstra for wholesale customers, the NBN would not be able to service the capital for a decade or more. Think about it: if the cost really is $43 billion it would need to make about $6 billion in profit, which is close to the total profits of the entire Australian telecommunications industry.

So, for Conroy and Quigley, the idea of a long contest for market supremacy between their own government-funded greenfields network starting from scratch and a well-resourced, experienced competitor that’s using a sunk-cost network with 90 per cent market share is unthinkable.

On the other side Telstra has completely stuffed up both its relationship with the government and its own fibre broadband transition.

That was done by the previous board and management, and now new Chair Catherine Livingstone and CEO David Thodey have got themselves into a corner where they must be able to announce a decent lump sum figure that they will get from the government as compensation – ‘fair value’ for shareholders. It can’t simply be an access deal.

For them, the price of slamming the door and walking away from these negotiations is the structural separation of Telstra with massive destruction of value and the threat of litigation. Also, while ADSL 2+ on the copper network might be okay for a while, eventually Telstra must move to fibre, and if the government has built one already, Telstra will be cornered.

So the time for both sides to deal is now, but while today’s announcement will no doubt be up-beat, they are possibly a zero apart on the number.

To be fair, it’s complicated. The NBN will be rolled out gradually with between 100 and 200 ‘points of interconnect’ (PoIs) and fibre running from them to 90 per cent of the nation’s homes and businesses, with satellite and wireless connecting the other 10 per cent.

Telstra has 5000 telephone exchanges, with fibre running up to them and, usually copper running from them to the premises.

To get a basis for the price negotiation they have to figure out how Telstra will switch across from the exchanges to the PoIs and then how much it will pay the NBN to use the fibre to access its customers.

For each stage of that migration a net present value (NPV) of the cost must be worked out and compared with the cost to Telstra of continuing to use its own copper for access.

The difference between the two NPVs is theoretically what Telstra will want as compensation, although presumably there is also an argument about the different service levels.

“The copper requires constant maintenance,” Quigley would say. “With ours there’s no maintenance for you at all.”

“And our network will be so much faster than your old copper thing. Look at it! It’s a relic. Come on…you know you want to use it. It’s beautiful. And this is a one off deal – you’ll never get it again.”

Geoff Booth: “Look, I’m sure your fibre will be lovely, Mike, but the copper is perfectly okay for what we need. We’ve got 100Mbps on our cable now and no one wants it. We’ve got 42Mbps on wireless and it’s faster than anyone needs. We’d love to help you out here, Mike, but you have to make it worth our while. Our shareholders will kill us if we can’t announce a decent figure.”

Quigley: “Listen, Geoff, don’t you understand that Conroy and Rudd will kill you if you don’t do a deal? And they’ll throw in some torture as well.”

Booth: “Are you threatening me?”

Quigley: “Absolutely.”

Booth: “STUFF YOU!”

Quigley: “STUFF YOU TOO!”

Conroy: “Okay guys let’s just settle down. I know! I’ll put out a press release.”

And all this came about because Telstra mucked up its tender for the government’s fibre-to-the-node project last year and the government responded to having no viable FTTN bids by suddenly announcing a $43 billion fibre-to-the-home project without a business plan.

But out of such chaos, hopefully, will come order – not to mention cash from taxpayers.

This article first appeared on Business Spectator.