The NBN lemon

While the Communications minister Stephen Conroy and his opposition counterpart Malcolm Turnbull danced a familiar jig on the NBN earlier this week, neither was quite willing to push the envelope with regards to what’s in store for the Australian public. The fundamental question routinely sidelined in the political discussion is whether either NBN policy proposal, especially the Coalition's alternative, is offering the public a bargain or a lemon?

So, what do we mean by a bargain? A dictionary definition usually points to price where the cheapest things are bargains. But a genuinely favourable deal is not quite the same as getting something at a lower than normal price. Bargains imply both value for money and notably lower than normally expected price. Purchase price is only one of many factors influencing value.

If you've bought any second-hand cars, you know that what looks like a great bargain on the day might turn out to be "a real lemon". A $2,000 "classic" car that winds up needing extensive rust-repair or hidden accident damage repair can quickly turn into a $15,000 vehicle. Just because the sale price is low, doesn't make an item "a bargain", unless you can afford to discard it, for free, when it proves unserviceable.

Which NBN are we buying, as voters and taxpayers?

As things stand, we are facing a choice with regards to which NBN we are happy to buy at the next election. To make the right decision we need to understand just what’s being sold. What is the up-front price, what's included and not included, what hidden costs might there be and what are the future costs that are reasonably predictable? 

So are the two options even roughly equivalent, or is one a beat-up old "paddock car" and the other a shiny, new beast?

First things first, the GPON Fibre-to-the-Home (FttH) solution being rolled out for 93 per cent of premises is not $37.4 billion. The fixed-line fibre is $26.8 billion and the rest is for fixed wireless, satellite and other system/project costs.  

The Fibre-to-the-Node (FttN) solution, without copper-line leasing or purchase costs, for 98 per cent of premises was estimated by Telstra to cost around $15 billion. Former Optus executive and Liberal MP Paul Fletcher, in his book Wired Brown Land, suggests a cost of up to $10 billion for over 90 per cent of premises. The last 1.1 million premises were estimated to cost between $4 to $5 billion, more than four times each than the first four million premises.

To be generous, let's compare a $10 billion FttN with $26 billion FttH, both to roughly 90 per cent of premises.

The elephant in the room is what will Telstra charge to use its copper? While the current agreement pays Telstra $11 billion in NPV, for access to ducts, pipes, pits and exchanges. It does not pay for access to copper, as the payments accrue when copper lines are disconnected. But here's a surprise, the single biggest component of replacement cost of Telstra's customer access network (CAN) is the "ducts and pipes". Together with copper cables this represents well over 50 per cent of replacement costs. One estimate from the ACCC suggests that it will cost a competitor over $40 billion to build a replacement copper customer access network.

Telstra 'ducts and pipes' network runs pretty deep, extending 100mm conduit well into the local neighbourhood, with 25mm conduit on service drops to premises for the lead-in. A large part of the $11 billion NPV given to Telstra is for access to that network. NBN Co will be upgrading parts of the network and installing its own pits and probably many new service drops (old, congested, collapsed and to wrong location on-site). 

It must be noted that the current SSU contract doesn't buy anything from Telstra but rather allows access and allows Telstra to decommission and remove its copper after a declared date in each region. There is a deadline that NBN Co must meet to declare a service, or Telstra gets to keep its copper in service. The Coalition can't rely on the existing SSU and automatically acquiring the pipe-duct network. To be an "apples-and-apples" comparison, they still need to provide an irrevocable right-to-use the $10 billion pipe-duct network and to upgrade it to the minimum usable standard, as NBN Co will.

The GPON FTTH project is two projects in one:

  • For around $10 billion in Telstra payments and their own upgrade costs, build and upgrade 100,000km of pipe (conduit) and associated connection cabinets.
  • For $14 billion to $16 billion lay a GPON FttH inside the new pipe/conduit network.

So which prices do we need to compare for FttH and FttN?

  • $40 billion for a copper CAN to $26.8B for GPON FttH?
  • $10 billion FttN to $14 billion for the GPON component of the FttN (plus the $2 billion or so for upgrades)

Neither of these support the Coalition's assertion that the FttN will be three to four times cheaper to build than an FttH.

The first bargain NBN Co is delivering is the $10 billion conduit-to-the-premises network that is included in the price. If ever new cables need to be run (upgrades or maintenance), the majority of the construction costs will already be covered. The FttN model does not include this new and very important feature. This new "structured cabling" approach became standard in computer network nearly 20 years ago. It's not a new idea, nor outrageous to expect. 

For a proper comparison, an FttN has to include the same options: conduits and cabinets to 75 per cent of premises served. This apples and apples comparison for FttH to FttN comes down to $26.4 billion versus $20 billion. Not that much of a difference.

Running costs, repairs and maintenance

All of FttN’s proponents acknowledge that the ageing copper network will incur rising maintenance costs which will be higher than fibre optic in general and a brand new fibre network. However, nobody has been willing to put a figure on that. Line faults coupled with the operational and maintenance cost of the little grey cabinets spread across the countryside pose a formidable cost headache for the Coalition’s plan. That's the second bargain NBN Co will deliver: much lower operational and maintenance costs, because upgrades will always be many-fold cheaper than an FttN. 

Project costs

In the ACCC report to the NBN Expert Panel in 2009, the cost modelling states that for unbundled local links (ULLS), the cost of capital was 75 per cent of Telstra's costs. The cost of capital is the overwhelming cost in every NBN solution.

The Federal Government, with its AAA credit-rating and "risk-free" status, borrows money much cheaper than anyone. The ACCC analysis added a 6-7 per cent "risk margin", on top of the "risk-free" rate, to the modelling of a privately built FttN. Funding NBN Co with "risk-free" debt effectively halves the dominating cost in the project. 

What the ACCC didn't discuss was the internal rate of return (IRR) and profit margin. NBN Co is expected to deliver a return at 350 basis points (3.5 per cent) above the reference rate: this is barely above household mortgage rates and much, much lower than any business loan for this project.

The IRR and the profit margins demanded of NBN Co are extraordinarily low, certainly much lower than what Telstra or a private consortium would charge.

Do we get a 15,000 km or 150,000km warranty?

The new equipment installed for both FttN and FttH solutions will have a 30-year economic design life. Whichever we choose, we are locked into the decision for a very long time. Most FttN proponents acknowledge the capability gap between ADSL/VDSL and GPON Fibre. However, their usual response is "nobody will ever want or need more than DSL can deliver" or "fibre is so expensive, who'd want to buy it?"

The speed difference, out of the box, is 80:1000Mbps at best, but for guaranteed rates 12-25:1000Mbps. That's the difference between walking and a Ferrari. So essentially, for twice the upfront price and one-tenth the running costs, the FttH model delivers forty times the speed and better quality. Is that the bargain of the century or what?

Another thing to consider is that while the new nodes and electronics installed for an FttN will have a 30-year economic life, the ageing fault-ridden copper network won’t come with a warranty.

It was just 15 years ago that most of us used 14.4k-28.8bps over the same phone lines that are delivering 4Mbps on. It’s these very lines that will now be upgraded to provide 12-25 Mbps under an FttN model. Is that a 1,000-fold or 6-fold improvement? That's really impressive but how much more can we expect from copper DSL services? At best, over the next 10 years we can expect to see a two to four fold increase in DSL speed but that will probably be it. Pay 50 per cent more and get a lifetime warranty on a new product, sounds like a pretty good deal to me.

The great unknown

The proponents of the FttN are often quick to point out that the network will be more than adequate for our immediate needs. That may be true but do we really know what we will be adequate a decade or two from now. Chances are you'll want a lot more bandwidth than 12Mbps and what happens if the Coalition then decides to adopt a GPON FttH? That replacement will cost only marginally less than the current implementation. Building a DSL FttN juts to throw it away later down the line doesn’t seem like a great deal and disposing tens and thousands of nodes won't be cheap, quick or easy.

Combine that with the fact that we don’t know how much Telstra will try to squeeze out of the Coalition when they renegotiate the deal and the DSL FttN model starts to look a little unpalatable. It might seem cheaper up-front but just like a clapped out old car on its last legs it might end up costing us dearly to maintain.

This is an edited version of a blog post originally published on November 26. Steve Jenkin has spent 40 years in ICT in wide variety roles including large and small software projects, 7 years writing real-time Exchange software in a Telco and Admin, Software and Database work on PC's Unix/Open Source software and mainframes.