Commentary

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Committed to market failure

Alan Kohler

Published 7:07 AM, 4 Dec 2008


A fun day was had by all at the Shangri-La Hotel in Sydney yesterday as CEDA presented its contribution to the broadband debate, entitled: Australia’s broadband Future: Four doors to greater competition.

As usual in the broadband debate there was plenty of fascinating, passionate argument, mixed with ardent confusion and talking at cross-purposes. And as usual more heat than light was generated, or so it seemed it at the time.

Michael Porter, the director of CEDA research, led the conference with his proposition that government policy must be modified to encourage competition between what he calls the four doors of broadband: copper, wireless, HFC cable and fibre. It seemed a fine and sensible suggestion.

But later a light bulb went on above my head: I realised that the task before the government and its expert panel assessing the National Broadband Network bids is the exact opposite of what he was putting forward.

For a fibre network to be built, competition from the other three doors must be prevented at all costs.

This is what might be called the Great Australian Broadband Conundrum, and it comes about because of the tyranny of the bush: the fact that politically we can’t separate the cities, where broadband can be perfectly competitive, from regional Australia, where it is not.

If it wants to fulfil its election policy of getting a fibre to the node network (FTTN) built that reaches 98 per cent of Australia’s population, the government has to figure out a way of protecting it from competition. And that may be impossible.

As I wrote last week (How to play monopoly, November 28) the bids for the NBN amount to no more than four requests for a monopoly. If the monopoly is granted, they’ll find the money (Telstra plans to use more internal cash flow gouged out its existing monopoly, which it steadfastly denies having).

But it can’t be just protection from “overbuild” (another FTTN network). There’s also the existing wireless and HFC networks, each of which are already delivering speeds above 20 megabits per second to much of the country.

Unless the government finds a way to protect the proposed non-Telstra fibre networks against competition from extensions of Telstra’s NextG wireless network and/or its Foxtel HFC cable network, or unless it agrees to Telstra’s demand to remain integrated and to get an access regulation holiday, no new network will be built at all.

Communications Minister Stephen Conroy and his boss Kevin Rudd, who actually made the election promise last year, are over a barrel.

If they don’t overrule the ACCC and bastardise Australia’s competition policies, this will be a big promise they don’t keep. Conroy would be shuffled off to Veterans’ Affairs and Malcolm Turnbull would have one over Rudd.

And the irony is that we already have plenty of broadband competition because the ACCC forced Telstra to open up access to its copper network at a low wholesale price.

One side effect of that has been to limit the use of Optus’ HFC cable: it’s cheaper for Optus to buy access to Telstra copper to deliver broadband than to upgrade and extend its own cable (something Greg Winn of Telstra understandably made a big deal of yesterday).

But Kevin Rudd and Stephen Conroy promised us a fibre network. Rudd probably would have won the election anyway, but it’s in the policy so we’re all stuck with it.

It’s going to lead to an excruciating decision: keep the promise or keep competition.

All of the would-be NBN builders – Telstra, Optus, Acacia and Axia – are no doubt shouting as they read the above: “But our FTTN network will be open access – there WILL be competition.”

Yes, but can there really be a viable non-Telstra network unless Telstra is somehow blocked from using a combination of copper, NextG wireless and existing HFC cable to kill it? There is no doubt that it can, and will, do this.

And that assumes the thing gets to first base, which is that the High Court allows legislation forcing Telstra to switch its copper wires over to a competitor’s fibre inside that competitor’s nodes. And Telstra will definitely take this to the High Court.

As for Telstra, it simply won’t build the network unless it is allowed to remain fully integrated, including Foxtel and the HFC cable, and it gets some kind of access declaration holiday.

As Maha Krishnapillai of Optus pointed out yesterday, Telstra’s whole purpose in announcing in 2005 that it was going to build a FTTN network was to kill off the growing competition from the ADSL providers who were installing equipment in its exchanges and buying access to its copper.

The idea was, and still is, to bypass the exchanges where the competitors are located, and run fibre direct to neighbourhood nodes, where Telstra would have a holiday from access regulation. But neither the Howard government nor the ACCC was prepared to give it that holiday, so the network wasn’t built.

Telstra’s position hasn’t changed, and it said so in a perfunctory proposal in the NBN tender process, which may or may not be a complying bid (the expert panel still has to decide that). Greg Winn, Telstra’s head of operations, said it again at the Shangri-La yesterday, plainly and forcefully.

Speaking next, Maha Krishnapillai threw out his prepared speech and let his hair down, accusing Telstra of “gross abuse of market power” and stating that Australian telecommunications is characterised by market failure because of the dominance of Telstra.

That failure can be traced back to bad decisions by previous governments: allowing Telecom, as it was, to take over OTC; allowing Telstra, as it became, to expand into cable and pay TV content; allowing it also to be the largest mobile phone operator; and then selling the resulting monster for a bucket load of money.

Those bad decisions are all in the past and can’t be reversed, but they mean that Kevin Rudd may not be able to keep one of his central election promises without making another bad decision.




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