A $7 billion NBN warning

Those who remember the 1990s in the telco industry know of the massive investment destruction in telecoms infrastructure that was carried out by Telstra and Optus.

At that time Optus saw the strategy to build a high-speed broadband infrastructure based on the HFC technology as a way to break Telstra’s telecoms monopoly. This infrastructure was to deliver far superior broadband and cable TV services than Telstra could supply over its copper cable network.

However, under a self-regulatory regime, Telstra saved no money or effort and chased Optus through every street it was working in to overbuild the new network with its own HFC infrastructure. In the end this led to a $7 billion investment destruction and resulted in a very small alternative network (roughly covering 25 per cent of premises).

Obviously Optus’ aim was to become that alternative telecoms provider based on a nationwide (or at least metro-wide) network. Apart from the enormous financial losses, Australia also ended up with a half-baked solution that has been a millstone around the neck of Optus – since that time it has never been able to position itself as a real facilities-based competitor to Telstra.

Telstra, as the victor, retained its monopoly, which led to the greatly diminished competition during the 00s. As a result the cost of all of this to Australia was that it became one of the last countries to get broadband; and its prices were higher and its speeds lower than anywhere else in the world.

While there are many lessons that we can learn from this disaster – the key one being that building competitive national telecoms infrastructure is economically unviable – we will concentrate here on another element, that of ubiquity.

As we all know, devices and services such as telephones, faxes, emails, internet etc will only create economic and social benefits if they are ubiquitously available. It is something of a chicken-and-the-egg situation – once ‘everyone’ has them these new services unleash enormous personal and societal benefits.

Of course, the same will apply to the next generation of broadband infrastructure. This will facilitate the transformation of complete sectors of the economy such as business, finance, media, healthcare, education, etc. But here also the social and economic benefits can only be achieved if those services are ubiquitous.

In many situations these services will not be economically viable if they can only be delivered to, let’s say, 25 per cent of the population. Pay TV in Australia never really took off due, to a large extent, to the lack of scale and as a result the country ended up with the most expensive pay TV services in the world and high-speed broadband over HFC is only available to a small proportion of the population.

If we had got it right at the beginning and HFC had become that alternative infrastructure we certainly would not have needed the government’s NBN intervention – we would have been able to avoid the market failure that followed that HFC disaster.

Are we now going to make that same mistake again?

The Coalition’s official line continues to be stopping the FttH rollout in the event of it winning government.

Presumably they will not go that far in capital destruction and the work that is underway at the time will be allowed to be completed. However, without the level of network ubiquity needed for such infrastructure, the investment ‘in the ground’ at that time will be fairly useless, as very few companies will start delivering services over such a limited infrastructure. The capital destruction, as well as the massive disruption to the telecoms industry, will cost far more than the $7 billion destroyed during the HFC rollout.

If we have a repeat of the HFC network debacle and end up with a half-baked fibre-based infrastructure, this destruction of capital, plus the damage to the economy and the Australian society, will be many times greater than the $27 billion of taxpayers’ money that will be spent over a ten-year period to establish a ubiquitous high-speed broadband infrastructure.

Paul Budde is the managing director of BuddeComm, an independent telecommunications research and consultancy company, which includes 45 national and international researchers in 15 countries.

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I have to take issue with Budde's views (A $7 billion NBN warning, April 2). He is accurate in much of whhat he says but fails to mention one thing. Optus did indeed start to build a network, but chose to cherrypick and only build in the areas of highest subscriber concentration and thus highest, or indeed any, profits. They clearly never intended to build a real network, just the most lucrative bits of one. Telstra by virtue of the legislation requiring only it to have the conscience of a Community Service Obligation was forced to build a total country wide network. Then in the name of "competition" Telstra was required to allow Optus access to it's country wide networks wherever Optus wasn't prepared to build. Hardly the mythical Australian level playing ground! Another less pleasant Australianism of years gone by harshly but accurately describes this treatment of Telstra - bludging.
I do agree with Budde, the previous mistakes must be avoided. If a Telco wishes to go into business and compete, it must do so fully, not be able to rely on meddling politicians to force it's competitor to fund much of it's infrastructure. Then with truly competitive full networks we would have real competition.
What we have now makes as much sense as Holdens, in the name of competition, being required to manufacture all of every other car brand's engines, with the price allowed to be charged for them set by a Government Department, and no-one would call that sensible.
There appears to be some destruction inherent in the NBN where every existing connection is disconnected and re connection required. Also no comment here about a new monopoly who's minimal profit forecast was predicated on shutting out competition, and restricting points of interconnection, and also with restrictions on advertising alternatives such as wireless (A $7 billion NBN warning, April 2).
Then, with eye to the latest federal political polls, it appears the Coalition will win the next election and curb the NBN roll out. A major problem with this is that the initial focus of the NBN was on the least profitable and most subsidised connections out to the Bush. So the NBN will really show losses when not rolled out through the most profitable areas; then a question is will the Coalition continue with the budgeting skulduggery of keeping the continued investment and losses off of the federal balance sheet?
One thing said for the Optus and Telstra HFC rollouts is that they went for the areas with the most profit potential, unlike the NBN. The Optus and Telstra moves were not harmful to the federal budget as is the NBN.
Even if the NBN cost $40bn instead of the $27bn over 10 years as cited (A $7 billion NBN warning, April 2), this amounts to a mere $4bn per year (for 10 years) or less than 0.33 per cent of the GDP.
If Australia is a household would you be prepared to spend 0.33 per cent of what you earned to improve the fixed wireline and wireless LAN (reads NBN in this comparison) in your house so we - mum and dad and the kids - will enjoy better quality of life and not to mention business opportunity - through faster and better communications with everyone at home (reads Australia) and with our community (reads the rest of the world)? Our house communications requirements will also be future proof for the next 30-50 years.
Alternatively, do we want to keep extending and patching up our old copper network in our house, which was never designed to delivered broadband in the first place, and hope it will keep working and keep abreast with the rest of world as it marches on. I think our children deserve better.
It's only a mere 0.33 per cent of GDP per year for the next 10 years, even less in percentage term when we have an expanding GDP. Putting in the context of an average household income of $60,000, this is equivalent to spending $200 per year or about a cup of coffee per week. Many of us spend more than that on our contracts with telcos, smart phone upgrades and other computing, communications and storage devices like ipads, PCs, hard disks, wireless routers, PS3/4. etc.
A very interesting article Paul (A $7 billion NBN warning, April 2).
Especially your comments on the cable roll out in the nineties. To me it shows one glaringly obvious thing - that competition policy as we have it in this country is appallingly flawed. Also, leaving Telstra as both a wholesaler and retailer was stupidity at it's worst.
This era showed the very worst aspects of what can happen if companies are simply competing, yet have little accountability.
The fact that many third party retailers give far better and cheaper service than the big two (while having to pay to use their networks!) shows just how stupid the situation has become.
As for the NBN, you are right to say that if it's going to be done it needs to be ubiquitous.
However you are assuming, as many NBN advocates do, that it is a worthwhile venture in the first place.
I, like many australians, think a far cheaper, slightly less speedy network would do fine. The NBN is just too expensive. It's far better to spend that money elsewhere in the economy. Or better yet-don't spend it at all, especially with a massive budget deficit looming.
Right now I think it's most sensible to finish the NBN projects that are already started and cut the losses.
The HFC rollout failed and it had nothing to do with scale (A $7 billion NBN warning, April 2). You are right about ubiquity but the NBN is not the kind of ubiquity that the economy needs in the second decade of the 21st century.
The comments on this article seem to indicate some of your readership are apologists for return of the appalling Liberal policy of "do nothing" which we endured for 10 years under Howard (A $7 billion NBN warning, April 2).
Even at $50 billion, the NBN will cost less than 0.5 per cent of GDP to build. In the overall scheme of things that is not a lot.
Alas, I fear the Liberals are determined to make exactly the same mistake as per the HFC network fiasco.
As a result, Australia's internet connectivity will once again, become a laughing stock around the world just like it was under Howard, Minchin, Alston and Coonan, none of whom had a clue.
So $50 billion is not a lot of money? (A $7 billion NBN warning, April 2.) NBN advocates are reduced to nonsensical arguments. Plus you need a backup battery in every house.
Talk about horse and buggy!
In most markets 25 per cent coverage would be considered a very viable slice of the market, so it seems to me that part of the argument is flawed (A $7 billion NBN warning, April 2).
Also, I think that Optus was incredibly naive in thinking that any incumbent would let them walk in and take away a lucrative chunk of the market without putting up a fight. The outcome of that strategy was inevitable from the time it was announced, and they only have themselves to blame for where they ended up from it.
What's worse is that it seems Optus built HFC on the cheap, and their HFC network is pretty much life expired in any real sense, so they are now struggling with many issues arising from the cheap build. At least Telstra engineered their HFC network properly. And let's not forget that the HFC networks were built primarily for Pay TV, and broadband services only came later.
No, I think we should stop the NBN when it is half built. Then it will match our rail, road and port systems. Oh, I almost forgot. Why invest in alternative energy when we have thousands of years worth of coal to export? Soon Palmer and Rinehart will be running the country via Abbott (A $7 billion NBN warning, April 4).