19 June 2009

Ovum: Separation the key issue in Australian next-generation network debate

18 06 2009 - With the publication last Friday of the submissions to the government's regulatory review, the Australian industry is clearly split. The incumbent Telstra is on one side and everybody else (including the regulator, the ACCC) is on the other. But there is still a chance for a manageable transition to FTTH.

image Battle lines are drawn

In April 2009 the Australian government committed itself to investing up to A$43 billion in a national wholesale-only fibre-to-the-home (FTTH) network to be built over the next eight years. A national broadband network company (NBNCo) is being created to own and operate the FTTH access network.

It also announced a review of telecommunications regulation. The review canvasses both short-term changes to promote the current ULL-based competition and long-term changes that might be required for a next-generation network. A government response is due at the end of 2009.

The submissions to the government's regulatory review were released last Friday. They show little common ground between Telstra and the rest of the industry. The regulator is firmly in the camp of Telstra's competitors.

Telstra has proposed adjustments to the current competition regime that leave the broad pattern of regulation unchanged:

“Telstra delenda est”

During the Punic Wars, Roman senators ended every speech to the Senate - on whatever topic - with the words “Cartago delenda est”: Carthage must be destroyed. This sentiment is evident in the ACCC's submission, which is reasonably representative of non-incumbent views:

However, there are also some jarring notes among the submissions. For example, Optus, Telstra's largest competitor, argues that a national FTTH network is only sustainable in the absence of fixed infrastructure competition. This implies a transition to a statutory monopoly by rolling all of Australia's access networks into the new NBNCo. This clashes awkwardly with the ACCC's contention that a divested HFC network would provide valuable competition in the transition period to a national FTTH network.

Common ground is still possible

Telstra cannot ignore the groundswell for separation. Under the government's FTTH plans, separation is the end game anyway. Its challenge is to manage the process and defend its own financial interests.

But nor can the government ignore Telstra's capacity to damage the NBNCo's business case. If the NBNCo must build its network and fight Telstra to peel away customers (separation takes away Telstra's copper, not its customers), then the government's subsidy costs will be vastly inflated.

The model that is now being widely discussed in the industry is for Telstra's copper access network to be rolled into the NBNCo. This would achieve structural separation in the short term, while creating a sustainable access operator with an established revenue stream. In order for this to be attractive to Telstra, it would need to get a lot of equity and some kind of guarantee on the financial return on that equity.

This model reduces the FTTH upgrade from a commercial challenge to an engineering one to be managed by the NBNCo. Customers will be cut over to the new network automatically rather than having to be captured. This will allow the NBNCo to focus on growing new revenues as FTTH is rolled out.

If acceptable parameters for such a deal can be found, the government will have pulled off a remarkable coup. If not then a lose/lose scenario seems inevitable.


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