Follow up analysis of the Telstra – NBN Co agreement
The proposed Telstra – NBN Co agreement has generated a great deal of media attention, and from various comments which have already been made there are many more aspects of the agreement which will now be subject to further scrutiny and analysis, here is a first start.
Even though the agreement is still in principle, Telstra would not have become a party to it if it was not sure that this is the best way forward for the company, so this is clearly an indication of Telstra’s vision on how it intends the company to grow into the future.
Many critics have argued that there was no business case for proceeding in a structurally separated way, but Telstra’s agreement is vindication that this is a viable business model.
It is already obvious that potentially the individual elements of the company may be worth more than the whole. Provision of the $100 million training fund is also of interest as that shows that Telstra will maintain its focus on engineering. NBN Co will not purchase Telstra’s network assets but will use the services of Telstra and use its infrastructure. This of course will require Telstra to maintain a high level of engineering skills to maintain, upgrade and manage the network, and this will generate a secure, ongoing revenue stream. Telstra has amassed enormous expertise over the decades and can use its skills to match the new business opportunities that will result from selling, leasing or renting out its services to NBN Co. The exact details of how this will operate are not yet known, but what is important is that this decision is a strategic one.
As yet it is unclear where Telstra’s emphasis will lie in two other key areas, one being the ICT operator on top of the NBN infrastructure, as a value added infrastructure operator – where it will compete with Optus and other large providers. This is also the area where companies such as Google, Apple Hewlett Packard, Microsoft, Facebook, IBM and many others will vie for the business of in general larger organisations.
As the wholesale services will be volume discount-based, it will be interesting to see what kind of impact this will have on others effectively competing with Telstra in the retail market; this is an other area where it is yet unclear what Telstra long-term position will be.
The role of the Australian Competition and Consumer Commission (ACCC) will now become more important as definite proposals emerge, and it will be obliged to analyse them in greater detail and make a proper judgement. It is also imperative that Parliament finalises the proposed regulations which will formalise the structural separation and will further secure the long term competitive environment which is still desperately needed in Australia.
While theoretically Telstra has the advantage of size, other players should be able to compete very effectively, particularly in the areas of customer service, product innovation and a range of different price packages, something which we already start seeing happening in Tasmania.
BuddeComm does agree with some economists who say that the early stages the NBN will concentrate on traditional services such as basic access to broadband. The trans-sector benefits which BuddeComm has often written about will come about in the long term, as it will take quite some time for other sectors such as healthcare, education and energy to start developing large-scale digital services. However, over time these benefits will overtake the basic assess services, as well as in commercial value.
However, before this eventuates media companies and other content providers will become active on the NBN. This could also result in different pricing packages where broadband access will be offered at no cost as part of broader media or content services that will either be made available on a subscription basis or a pay-per-view basis, fully or partly sponsored by advertising, and very much along the lines of the current marketing and distribution patterns in the media industry.
Prime Minister Kevin Rudd has put significant emphasis on the healthcare areas of these trans-sector services, which indicates that there might be some movement in this area. He has spent quite some time on healthcare issues and is very much aware of the economic benefits of e-health, which would be an enormous cost-saver in the future where there will be more and more pressure from an ageing population for healthcare services. It will be beneficial for the Prime Minister for his e-health policies to be accepted. The NBN will benefit greatly from this as the health identifier plans will depend to a great extent on a first class digital infrastructure. An FttH network is not just about speed – it also provides superior security, reliability and privacy, which are all critical for a healthcare service.
Because some government organisations can become so bureaucratic that they stifle innovation, we need to be vigilant about ownership of the NBN. Because the NBN Co is a very basic infrastructure provider, generally there should not be a problem with government also looking after basic broadband infrastructure; however we need to stay vigilant on this issue.
As long as the $11 billion deal with Telstra will not undermine the viability of the rest of the industry and will not be used to undermine competition, in principle this amount should not pose any problems. The majority of the money will be used for services rendered by Telstra to NBN Co and will be paid-out over many years.
This agreement also provides an opportunity to accelerate the roll out of truly fast broadband and Australia should use this momentum and build on it as soon as possible so that the opportunity is not wasted. Australia is still running behind Europe and many Asian countries in the provision of affordable high-speed broadband services. The decisions surrounding the development of the NBN have taken a long time and Australians have been patient, so it is now up to the industry to formalise and execute the plans that have been developed without delay.
Because Tasmanians will shortly enjoy the first benefits of an FttH connection with prices starting from as low as $29.95 a month, many Australians will want to have similar services and pressure will be on NBN Co to deliver.
Paul Budde
- Australia – National Broadband Network – Changing the media model
- Australia – National Broadband Network – Competition and Regulations
- Australia – National Broadband Network – Critical Considerations
- Australia – National Broadband Network – Deployment Strategies
- Australia – National Broadband Network – Early Projects
- Australia – National Broadband Network – Government’s Trans-Sector Conference
- Australia – National Broadband Network – Industry at crossroads
- Australia – National Broadband Network – NBN Co and Infrastructure
- Australia – National Broadband Network – Overview & Analysis
- Australia – National Broadband Network – Telstra
- Australia – National Broadband Network based on Trans-sector model
- Australia – National Broadband Network Trans-sector projects
Tagged in: Australia, National Broadband Network, NBN, NBN Co, Telstra
June 22nd, 2010 at 3:28 pm
You cannot argue that there is a business case for structural separation due to Telstra’s agreement to participate in a press release concerning a non-binding HoA. What you and the yea sayers fail to realise is just as a rational innocent man would confess and plead guilty to take a guaranteed lesser penalty, a rational company will choose a negative NPV option when faced against an uncertain outcome including a potentially worse outcome. But in neither case can it be argued to be a win-win or that the outcome is value creating compared to the status quo.
As far as the critics of structural separation go, and yes I am one, there is absolutely nothing in the press release that impacts on the efficacy of structural, functional, operational separation models inter se; or on the case for multiple competing wholesalers. You can check this because all the announcement said was that Telstra will be paid some money for doing some as yet undefined things within some generally defined context which it not yet actually agreed to do. There is also nothing in the announcement to contradict Telstra remaining the long term capability of being a vertically integrated wholesaler. That would likely come in as yet not agreed detail.
You further make the point that wholesale incentives will be volume discount based- however there is no basis for this in the press release and the statement is contradicted by recommendations from the Implementation Study, who regard VIDs as a means of disrupting the level playing field by larger ISPs [see page 258] – unless you are suggesting that Telstra provide for instance a VID based L3 wholesale product while incurring linear L2 costs from NBN Co which as the lads from Mythbusters say is technically plausible because there is a very thin sliver of non-linearity from which scale benefits can be extracted- eg from administrative overheads, reduced cost of capital etc.
I also disagree with your analysis of the importance of the ACCC – they will be relegated to an irrelevancy for the Telstra NBN deal and will probably all go on the same vacation they were on when Westpac was allowed to acquire St George.
I also disagree with your comments that competitors can compete on service, innovation and pricing. This is simply not true:
ISPs are price takers from the NBN Co, device manufacturers and content suppliers. They have no long term competitive advantage in becoming a bit pipe, due to the natural commoditisation of connectivity. And if Telstra wanted to, it could replicate (or bracket) any of its competitors price structures. But outside Telstra’s dealings with NBN Co, Telstra can use its size to extract scale benefits.
As far as service goes, [and you may have more up to date facts on this than me] poor service does result in increased churn away from a provider, but good service does not necessarily result in churn to a provider. Therefore Telstra fixing its own service will decrease its loss of share, but significant improvements in service from Telstra’s competitors will increase their gain in share.
Finally your almost ubiquitously promotion of e-health fundmentally overstates the importance of network connectivity viz application layer development and procedural changes within the Health department. The UK’s NHS IT Program was budgeted at A$10.4bn. This prices the Australian equivalent pro rata per capita at $3.7bn. However that price assumes it runs to budget- which iSOFT’s performance shows is a pretty large leap of faith. If it runs to T-Card form, it will likely cost more than the NBN itself.
In analysing e-health initiatives I agree with Richard Chirgwin who analysed hospital systems and their existing fibre connectivity to conclude: Firstly, that a large number of government buildings including schools and hospitals served by fibre today (and to the extent they are not, they are in the process of being “activated” under non-NBN fibre initiatives. Under Connected Classrooms eg, Telstra is rolling out fibre to the school in NSW). While there will likely be significant gaps in these ad-hoc programs, there are also a lot of cherries that have already been picked, reducing the marginal returns of the NBN enabling any e-government service.
Richard also made the second point (which I agree with) that software and the updating of procedural systems for the digital economy will deliver the substantial component of any e-health benefits. For these benefits (such as delivery of a fully integrated, Casemix funding compatible, ERP system) you do not really need the NBN.
The NBN is just the icing on the cake. The trouble with that is, extending the metaphor, that there are a lot of analysts who have just eaten the icing without regarding the (arguably half-baked- given there is no cost-benefit analysis and only 4 pages on why it will cost what it will cost) cake and are now suffering from the digital equivalent of hyperglycemic shock.
June 22nd, 2010 at 5:41 pm
Thanks Andrew for your comments and for your contribution to the discussion. You are bringing a healthy dose of scepticism to that discussion.
I fully agree that we lack details to make any serious indepth analysis of the implications. However, pressure or no pressure Telstra would not have signed the document if it didn’t believe that it would not provide them with a business case going forwards. We all know why this process happened as it happened and there is no use crying over spilled milk all parties agree that they want to move forwards and look backwards. Interestingly more and more investors are looking less sceptical to structural separation (I am just back from a trip along European investment houses).
Telstra’s competitors have mentioned that they are ready to compete on the basis of the documentation that is now in front of them. This will need to be firmed up in legislation and regulation and the details of the agreement should not undermine any of this, but that all being the case the competition is happy to take Telstra on and believe that they have enough advantages to be successful in that. But hey let the best one win, if on a levelled playing field Telstra offers the best customer services they will be a winner. If the telcos don’t perform the NBN is also open to others and they will equally compete and again good luck to them.
In the end, the changes in front of us will result in a transformation of the industry and new business models will evolve and companies will have to decide where they want to play as the vertical integration will open up the old structure of the industry. This brings with it threats, risks and opportunities both for existing players and new ones and nobody can predict how this all will pan out.
Regarding other sectors, namely healthcare, as I indicated we still have a long way to go. I think it is not technology that is the major stumbling block but the relative organisational unpreparedness to move into a more digital mass market direction. The silo structure and the infighting are far more serious than the technical problems, which I agree are equally challenging, but give that to our ICT engineers and they will be able to solve that. Re costs, what are the costs of healthcare not going digital there won’t be enough nurses, retirement villages and hospitals to develop healthcare in a linear way, do we have a choice?. This will take 5 to 10 years before any serious changes will happen in this sector, but you have to start somewhere and sometime and the NBN does provide at least a trigger for that, I fully agree it certainly is not the major element in the transformation of this sector. As in all trans-sector cases telecoms is not the saviour but without ICT none of the serious problems that we as a society are facing can be solved without it, it is a facilitator.
June 23rd, 2010 at 2:23 pm
I think Paul is correct saying: We have to start somewhere and sometime. NBN does provide at least a trigger for transformation of the health sector.
If we delay the building of the new network, it will surely cost more to build it in the future. Meanwhile the fact that Australia being behind of many other leading countries that already have FTTH stays the same. Changes to new business models may not happen for many businesses because of not having access to the new network. The new network will open up many opportunities in future.