[LINK] NBN & Telstra

[stephen at melbpc.org.au]

Personally, i'd like to see our NBN extended to provision Layer 2 services
for government agencies such as education and health. Probably better data
security, and removing commercial profit-taking for essential gov services


Telstra and NBN Co: damned if they do ... 

March 5, 2010 
<http://www.smh.com.au/business/telstra-and-nbn-co-damned-if-they-do--
20100304-pltl.html>


A report commissioned by the federal government into the implementation 
of the national broadband network has, predictably, decided that the 
business case for the proposal is strongest if it is the sole national 
land-based network.

Strongest, in other words, if Telstra accepts a payment of about $8 
billion to co-operate fully with its introduction by progressively 
shutting down its copper network and transferring its copper customers 
over: Telstra is particularly important to the returns the network 
achieves in its early years, as it seeks economies of scale.

But the as-yet unreleased report by consultants McKinsey & Co and KPMG is 
also believed to conclude that the network can generate an acceptable 
return over its projected 20 year-plus commercial life without Telstra.

The report has just been completed and the government has not committed 
to release it, but it obviously must do so as soon as possible, given the 
importance of the broadband network project. 

When it does, the report's findings and the assumptions behind them will 
be examined: and if they survive scrutiny, the Hobson's choice that has 
driven Telstra's shares to a new low of $2.92 will become painfully 
apparent.

Talks between Telstra about its possible participation in the network 
project are described by both sides as extremely complicated, and the 
process is being strained by the Government's use of threats as a 
negotiating tactic.

It has introduced but not yet pushed through the Senate legislation that 
would punish Telstra for not co-operating with the network introduction, 
by forcing it to functionally separate itself from its existing network, 
barring it from future spectrum auctions that will enable the expansion 
of wireless services, and forcing it to sell off its half-share of 
Australia's dominant pay TV provider, Foxtel.

The legislation is set to return to a finely balanced Senate next 
Thursday, a crowded day that gives it little hope of progressing. 

Telstra is watching to to see if the Communications Minister, Stephen 
Conroy, turns up the heat by moving it to a slot earlier in the week, 
when it can debated and moved more quickly towards a vote.

Senator Conroy last week also revealed draft legislation for the network 
that might allow it to expand from being a wholesaler of broadband 
services to Telstra and its competitors into the provision of services 
to "certain end-users; for example, government agencies".

Telstra's profitable business supplying services to the government sector 
would be undermined if this occurred, and on Tuesday the Telstra 
chairman, Catherine Livingstone, and the group's chief executive, David 
Thodey, wrote to shareholders declaring that the bill contradicted 
the "core purpose" of the network as a wholesaler, and warning that 
Telstra would need to be paid more to co-operate with the network's 
creation if the network was also a competitor.

But Telstra's real counterpart in the network talks is NBN Co itself, and 
a simple commercial equation sits at the heart of the fraught talks.

Telstra can choose to co-operate with the physical construction of the 
network by selling some of its own infrastructure into it, in particular 
by selling access to pipes and ducts that carry its existing, copper-
based network.

It can also agree to allow its copper wire to be ripped out and replaced 
with the new fibre, something that would have the effect of progressively 
transferring its copper wire customers over to the new broadband network.

Either or both moves will accelerate the growth of the network, adding 
value to NBN, and accelerate the decline of Telstra's own copper network, 
generating a loss of value for Telstra.

A payment to Telstra that both sides can commercially justify needs to 
balance those outcomes, by fairly compensating Telstra for the loss it 
will incur, but from NBN's perspective, not exceeding the value to the 
network of Telstra's co-operation: if the payment exceeds the network 
value-add, the network is better off going it alone.

The network implementation report is said to place a net present value of 
about $30 billion on the project - well below an early headline 
government estimate of $38 billion to $43 billion that loaded in price 
inflation during the eight-year construction phase, but closer to the 
original estimate if it is revised down to between $33 billion and $35 
billion using the same net present value methodology.

Telstra has suggested three compensation amounts in return for its co-
operation so far, and one of the reasons it reacted strongly to last 
week's draft network legislation is that the legislation surfaced after 
the third one was made, and before the NBN Co responded.

The first two offers were quickly rejected as too high, however, and the 
delay in a reply to the third may reflect the fact that Telstra is 
getting closer to a price that works for both sides. Even if if does 
strike a deal with NBN, Telstra will still need the approval of its 
unhappy shareholders, of course.

The sales pitch could be that with the network rated a goer with or 
without its help, an upfront payment and perhaps a side-deal giving it an 
income stream from the network is the best of a bunch of bad options, and 
certainly preferable to taking its existing, ageing network into head-on 
competition.

--

Cheers,
Stephen