The solution to the NBN mess: Kohler

There is a paradox staring everyone in the face with the National Broadband Network and the negotiations now underway with Telstra that makes the whole thing illogical and difficult, although it also provides an easy way out for everybody.

It is that if Telstra were structurally separated the government would not need to build the NBN; if it does build the NBN, Telstra can’t be separated because the network side would not be viable.

Today’s column is fairly long, but bear with it because, by George, I think I have finally nailed the NBN/Telstra problem and come up with the answer (until the next amazing development of course).

The truth is the government went for overkill by proposing legislation that forces Telstra to split while also announcing that it will spend $43 billion on a new a fibre-to-the-home network.

One or the other would have been enough. If Telstra split itself into separate network and retail companies, the network company would have to gradually replace its copper with fibre – probably just to nodes (neighbourhood stations) to start with and eventually right up to the premises, as long as there was a business case for that.

The regulatory issues that stopped the company from building its proposed fibre to the node network in 2007 would not exist, since it would no longer be integrated.

On the other hand, if the government had simply announced the $43 billion NBN, hired Mike Quigley on $2 million a year to build it, and left it at that, Telstra would have developed a strategy of migrating its retail customers to the government’s fibre and gradually shutting down the copper network that is so expensive to maintain.

Either of those two things would have made sense. By doing both, Communications Minister Stephen Conroy has unnecessarily complicated what could have been quite simple.

In the past couple of days there have been two windows into the problems that have been created.

It’s widely assumed that the legislation to force Telstra to separate is actually designed to buttress the viability of the NBN, by forcing Telstra to sell network assets and/or customers into the network.

But on Sunday, in my interview with ACCC chairman Graeme Samuel on Inside Business, Samuel said the government is not exempt from Section 50 of the Trade Practices Act, and that in considering any asset transfer proposals from the NBN and Telstra over the next few months the ACCC will assume the NBN is already built.

In those circumstances it is hard to imagine approval being given for Telstra to sell its network assets to the NBN, either in full or in part.

If trade practices law assumes the NBN is built, then it also assumes infrastructure competition in Australia already exists. Clearly putting the two competitors together would create a monopoly, and would be disallowed unless a special law was passed (see below). If Telstra is negotiating the sale of parts of its network to the NBN, then we’re talking regional monopolies, which would be just as prohibited.

Telstra could probably sell its ducts and trenches to the NBN because it would only involve the transfer of a monopoly asset, but that simply means Telstra would be renting access to them from the NBN instead of the other way around. Telstra would still own a national copper network, in competition with a national fibre network, which would be less than ideal for both.

And as for “selling customers” … what does this mean? Would I get a letter one day from Telstra explaining that as a result of a deal with the new fibre network, in which Telstra has received payment of a ransom, I am now a customer of the NBN Co? If anyone’s getting any cash for transferring my business, it’s me thanks very much, not my previous supplier.

The idea that Telstra will be paid compensation for losing customers to a new competitor, even if it is owned by the government, is nonsensical.

Yesterday, speaking at a telecoms conference in Sydney, Telstra’s head of public policy and communications, David Quilty, explained what Telstra and the government/NBN Co are negotiating about, at least from Telstra’s point of view.

He said, according to reports in the trade press this morning, that Telstra wants a “mode of structural separation that would satisfy the company’s requirements”.

These include “fair financial consideration should Telstra’s assets be transferred into the NBN, a locked-in agreement that cannot be altered or appended at ministerial or ACCC discretion, and the right to continue to access wireless spectrums to develop next-generation products.”

The last two things are fine, but “fair financial consideration” is problematic, as outlined above.

David Quilty then said this: “My question overall is why should we do this at this point of time? The industry is actually moving out of the legacy environment. The NBN will provide a structurally separated, wholesale-only access network beginning as early as next year to be rolled out over the next eight years.

“But why at the same time, when the NBN is being built, would one burden an entire industry with a hugely disruptive functional separation that will be rendered obsolete by the time it is finished? It is a wasteful and backwards-looking process.”

Indeed. The fact is, in my view, that if the NBN is built, then Telstra will naturally separate over time, as implied by Quilty. Alternatively, if Telstra separates now then the new, fully separated Telstra network company would build an NBN.

The fundamental problem is that Stephen Conroy’s overkill has set up the prospect of two national wholesale network companies that will not be allowed to merge, but neither of which can be commercial viable on its own.

There are only two outcomes of the current negotiation that make any sense, and one of them is probably impossible.

They are:

• A separated Telstra network company takes over the building of the NBN and employing Mike Quigley and the team, or
• The government drops the split legislation in return for a long term network supply contract with Telstra.

The reason the first option is impossible is that Telstra shareholders would have to agree not only to structural separation but also to become owners of the NBN, and they hate it. Too hard.

So the only solution is the first: build the NBN but underpin its business model with a network supply contract with Telstra that would mean the company would migrate its customers gradually to fibre at a lower cost, increasing its profits and ensuring that private capital could help fund the NBN.

So there! What do you reckon?

This article first appeared on Business Spectator.