Tuesday, November 11, 2014

Television rots your brain

When I was younger we were warned that television rots your brain.

Now Baroness Susan Greenfield tells us that digital technologies and social media do the same, as summarised in her book Mind Change: How digital technologies are changing our minds. As Susan (that's what she asked us to call her) was the guest on this week's QandA I rocked along - and even asked a question.

The question I wanted to ask Susan but didn't get chosen for was in her original field of study - degenerative brain disease. The question was, simply, in the light of the Government's proposed health research fund whether we spend too much researching cancer and coronary disease and avoiding death, and not enough on the degenerative diseases that affect people for a long time alive.

But that isn't the kind of hip topic they like on QandA.

As I have the luxury of this blog I thought I might explore the issue I raised at greater leisure. (At the time of writing the transcript hasn't been posted so I'm relying on my recall from last night and one reviewing.)

Firstly I had never really paid much attention to Susan before last night. I only bought the book on Kindle on my way in on the train and read bits of it (actually using the Kindle app on my iPad). And it was the fact that I'd read her comments on how multi-tasking and continuous input/output processing were putting pressure on the ability to think that I cared.

Unfortunately things all got a bit blurred on TV last night between two disparate strands on digital technologies. The first was at the level of sociology and psychology and the concern about how the technology changes social interaction - the chain that leads to the whole discussion about narcissism.

The second and more interesting is that digital technologies and social media actual change the way we think. In essence being more immediately reactive rather than reflective, and dare I say, cognitive.

As readers of my columns in iTnews and the AFR would know I am very concerned about the decline in STEM skills. That concern suggests a question "Are students finding maths and science harder than it used to be?"

That's why I'd highlighted in the book as I read Susan's comment that the "ability to make connections where they didn't exist before, to connect the dots, could account for talents in a number of academic areas, including philosophy, mathematics, science and music."

So to me it was a bit of a recursive exercise when Susan had talked about the impact of the tech on thinking to have a non-scientific answer.

Now, let me remind readers that though I am a great fan of science, I am not a great fan of the phrase "the science says" as I observed in the context of climate science. Science is "privileged knowledge" built by a repeated process of application of theory to observable events and adapting, or even abandoning, the theory id the results are anomolous.

Real world science is done by real people and so all the characteristics that Tom Kuhn identified as normal science abound, there is group think. The fact that a paper appears in a peer reviewed journal does not mean the paper's method, data and conclusions are correct - just that they are not totally wrong.

And quite frankly, despite the way I framed my question, one person's personal experience can be enough to destroy a well verified theory. If I see the first black swan it is my experience that confounds the the previous "law" that all swans are white.

But that wasn't what was happening last night. As I said part of the difficulty was that there were two simultaneous strands of discussion going on - one about the overtly social impacts and the other the neuroscientific.

And I wasn't expecting the lawyers and economists to argue science with the scientist. I was, however, expecting that they might acknowledge that it is science. It is the inability of the non-scientific to recognise science when they see it that is of concern.

I wasn't really trying to pick on Laura John, but I was critical of the lawyerly debating tricks. To respond to science with "Susan makes some good points..." and then disregard anything Susan actually said indicates Laura has a great career ahead of her.

James Patterson was as equally dodgy, but then again he is a disciple of the totally falsified (to use the Popperian term) theories of neo-classical economics. (And in fairness to my former boss Albo - he said he supports markets over a command economy, but he doesn't believe in the infallible self-creating market of neo-classical theory).

Finally I wasn't necessarily myself making a call on the science that Susan is referencing. But I do want to comment on the criticism made by Tony Jones on air and in the Facebook discussion that Greenfield has not done any peer reviewed research here and that if she believed the theory she should.

That is an incorrect understanding of the process and progress of science. It is the discussion of the outcomes of many pieces of research that creates new patterns, new theories. It is the kind of discussion Susan is leading that establishes research programs. (And to be fair to Susan - that is exactly what the blurb on the book says "What could this mean, and how can we harness, rather than be harnessed by, our new technological milieu to create better alternatives and more meaningful lives? Using the very latest research (up to the end of 2013), Mind Change is intended to incite debate as well as yield the way forward."

My very simple conclusion on limited evidence is that yes the higher use of digital technologies by young people mean their brains - at least their minds - are very different from those of my generation. To say they are different does not alone say they are better or worse. There are good reasons to think they are worse (the behavioural characteristics and thinking being two examples), but there are also reasons to think they are better (multitasking does get through voluminous quantities of stuff).

And if they are worse, the only solution isn't to say that social media needs to be used less. There are other options including that the processes by which ethics are learnt need to adapt (e.g. because you can't see the reaction you need to think harder about the golden rule of treating others as you would like to be treated), or utilising the increased I/O approach to increase thinking by algorithm rather than proof.

What isn't appropriate is to decide to do nothing simply because you don't like the conclusion - that's what climate change deniers do.

(Did TV rot my brain? Yes and no. My experience of the world is far more visual than was my parents - and that includes from Vietnam on seeing the horror of war directly. But the trade off has been he decline in descriptive language. And you can see that on the nightly news - what is defined to be "newsworthy" is something they have footage of. Completely inconsequential car accidents in the US are featured more highly than an earthquake in a developing country because that is where they have cameras.

But TV also created a world of drama not previously matched, especially comedy. I find the whole world a lot more amusing than I would have without these opportunities. Satirical writing and black ink cartoons are no match for Mad As Hell.

And finally when Albo used his analogy of the person at the concert watching their device record the event I was reminded of the Leunig cartoon of sunset.)

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Monday, November 10, 2014

Andrew Bolt - still demented and unhinged?

There is a special place in the Universe reserved for Andrew Bolt. It is a place in which conspiracy theories run deep, and things that were once black are now white, and those that were white are now black.

This isn't Orwellian speak of "blackwhite" - it is more Humpty Dumpty, but not that words mean exactly what he wants them to mean, but because events happen because of causes that only Bolt can divine.

Today in his column Bolt returns to one of his favourite themes, bagging the ABC. The column was mostly a repeat of his introduction to an interview with The Australian's Media Editor on his News Corp produced TV show.

I didn't watch past the start of Markson's opening statement - it was the most egregious example of interview subject being in violent agreement with interviewer that is usually so mercilessly (and correctly) mocked by Gerard Henderson in his more lucid critiques of some ABC presenters.

Apart from the usual diatribe about the ABC not having enough balance, no right wing voices and it is way too unfair on the right, Bolt ended with a classic.

Not for Bolt any acceptance that John Howard appointed a Chair and Board Members to curtail the ABC. No acknowledgement that the Howard Government appointment current MD Mark Scott, nor that his career began as a NSW Liberal Party staffer.

The resilience of the ABC is because it actually fulfils its charter.  Do the commercial media really want the ABC to compete with them for the majority audience? What would Fairfax Media or Macquarie Broadcasting to think if Radio National were to program 702 as a clone of 2UE or 2GB?

Gerard Henderson once criticised the replacement of one ABC presenter with another because the original presenter wasn't rating well enough "did not rate well enough in inner-suburban Leichhardt. Meaning, apparently, that she did not appeal to Green-voting-leftist-luvvies or to the Labor left and, horror-of-horrors, was just too middle class." 

But if that is the audience, is it not right to appeal to it? 

The one thing that is certain is that no Minister of any government has had any success (nor should they) in trying to direct the editorial approach of the ABC. 

That is, according to Mr Bolt, until now!

He ends his column:

How much longer will the Abbott Government endure the ABC’s insults and abuse of power? Why so meek in response? Is it because ambitious ministers of the Liberals’ Left know that defending the ABC guarantees them the ABC’s support in any leadership battle against Abbott or, say, a Scott Morrison?

If so, may I suggest Communications Minister Malcolm Turnbull be replaced by a minister more prepared to enforce the ABC’s own charter on an ABC now completely out of control?

There we have it - Malcolm Turnbull has entered into an implicit pact with ABC management to back him in a leadership context. This being the same Minister that Mark Scott has attacked in the last month over the ABC budget cuts.

But this is Bolt land - the land in which any dinner becomes a plot, the Bolt that Minister Turnbull wisely noted "borders on the demented" and "is quite unhinged."

Please spare us all from both this kind of right commentator just as I wish to be spared from sermonizing leftists commentators who will patronise every progressive cause.

The best commentators are those who can start with "Its complicated" and end with clarity. Ideological diatribes of either ilk are simply pointless - and Andrew Bolt is a master of the art.

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Wednesday, November 05, 2014

Politics and our future

The latest IPCC report says that the world will need to stop using fossil fuels by the end of this century. Even The Australian reported it!

Managing our climate future will require reducing reliance on fossil fuels by 80% by 2050. Managing the CO2 load will also require the use of bio-mass to take more of the gas out of the atmosphere.

The question is no longer if this will need to occur, but how it can.

And this, ultimately, is the great shame of the mismanagement of the politics of climate change in Australia. The book Power Failure makes a compelling case that the Rudd government wasted the opportunity to take action through a number of related elements. The first was to spend too long preparing a detailed policy in the background without continuing to bring Australians on he journey. The second was to fluff the originally drafted proposal so that what was first rejected could not be reintroduced in unmodified form. The third was to try to play politics on the issue and embarrass the Coalition rather than bring them on the journey.

The consequence was a policy that was rejected by the Senate on Greens votes, rather than one being passed using Coalition votes given that both major parties went to 2007 with an ETS as policy.

The initial failure was then compounded by Rudd's post Copenhagen funk, and then ultimately the deal brokered with the Greens being exactly the one that as easiest to attack.

But far bigger was the failure to paint the response to climate change in economic terms. Irrespective of whether Australia "took action" - played to by the whole we are such a small proportion crowd - the world IS going to take action by consuming less fossil fuels.

Neither Tony Abbott nor Christine Milne is right on coal. It is neither a friend of humanity nor an evil to be stopped immediately. It is somewhere in between, a historically important energy source with a significant role to play in our immediate future, but it is not a sustainable long term source.

As a major coal producer our interest is in utilising the resource for now, but preparing our economy for the point in the middle distance future where it needs to be replaced.

While the Gillard Government talked of a "clean energy future" it was never translated into the important part - making the investments today to replace

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Saturday, November 01, 2014

Australia leads the US

THE US Federal trade Commission is suing AT&T for speed throttling customers on its "unlimited" plans.

All you can say is that the ACCC has been there and done that!

Nevertheless the ACCC continues to need to prosecute providers.

I keep hearing telcos complaining about over-regulation and the need for regulation to be pitched at the "average" consumer yet issues like this keep occurring. Go figure!

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Monday, October 27, 2014

Let's not be whimps on constitutional reform

Tony Abbott over the weekend has framed the work of his Federation White Paper by proposing we fix the federal vertical fiscal imbalance by increasing the States revenue raising to match the functional responsibilities.

It is a significant change of stance by Mr Abbott, as he acknowledges. In his book Battlelines - written to make him seem credible - he stated that "as long as particular levels of government continue to exist, it's important to give them meaningful tasks to perform." From this he said that it should be possible to move responsibility for an area of activity from one level of government to another.

He went on to note that "it's almost an iron law of politics that voters will demand action from any level of government with a realistic prospect of making a difference." He went on to note "The states have legal responsibility for issues that only the national government has the political authority and financial muscle to resolve."

One is left to wonder what has changed since he published this in 2009 and today. The relevant extract from the weekend's speech is:

Now I remain a pragmatic nationalist – but the states exist, they have wide powers under the constitution and they can’t be abolished; so – rather than pursue giving the Commonwealth more authority over the states, as I proposed in my 2009 book, Battlelines – better harmonising revenue and spending responsibilities is well worth a another try.

Back then, my thinking was that the states should become subordinate legislatures to the Commonwealth: in a parallel to the way local councils are subordinate to the state governments.

But I now doubt that any such constitutional change could succeed; and, in any event, it’s a good principle to propose the smallest change that will actually tackle the problem – that’s why resolving the mismatch between what the states are supposed to deliver and what they can actually afford to pay for is worth another go.

It is seldom that Tony Abbott so brazenly declares himself to be a whimp. The mechanism he proposed in Battlelines was an amendment to section 51 to enable the Commonwealth powers under section 51 to be expanded by act of the Commonwealth alone.

His mechanism was by a law passing the House twice not less than six months apart. A more democratic version would be a law that was passed by successive Parliaments. That is, the people would get to vote on the proposed expansion of powers as part of the overall consideration of a Government's program.

It is worth recalling that Mr Abbott started talking about reform of the Federation in the year before his book in an address in the same town - Tenterfield - as his most recent contribution. In that he said:

I appeal to the distinguished academic political scientists and professional students ofgovernment here tonight: don’t assume that changing the constitutional position of the statesis mission impossible. What’s the point of political science faculties if they merely analysethe system rather than help to make it better?

What has changed in the six years between these two speeches? Did the academics let Mr Abbott down, is that why his Government hates Universities?

Maybe it is as Guy Rundle suggested that Mr Abbott is Australia's greatest sycophant. His sudden embrace of federalism can probably be traced to some business leader or lobby group. Much of the Prime Minister's program seems to be incorporated in the BCA's July 2013 paper on tax, fiscal policy and federation. Is it any wonder that the BCA's Jennifer Westacott has been included in the new "group" to advise on the Federation White Paper.

The BCA view is somewhat surprising, and I suspect that they use the federation argument as a means to argue for the GST increase and nothing more. But business that complains of "red tape" not ony are confronted by overlapping powers from Federal and State Governments. They also confront eight different state and territory administrations.

National co-ordination and uniformity is what they crave - both for their own costs and to facilitate labour mobility.

The national curriculum is an instructive policy area in this regard. Why was there a need for the Federal Government to get involved in curricula? To create an education system that made it was for parents of school age children to move interstate.

The history of "vertical fiscal imbalance" is also instructive. At Federation the Commonwealth Government only had excise and tariff revenue. The imbalance worked the other way - especially as the newly formed national Post Master General needed capital to extend the telegraph and telephony services.

The massive shift in the reverse occurred in the Second World War, and if there ever was a Government that had the opportunity to address the imbalance it was Menzies from 1949-1966.

He didn't. He used the Commonwealth;s financial power and section 96 grants to take over University funding and form the University Commission. He used the same powers to provide state aid to independent schools - notably the first "Building the Education Revolution" building science blocks and libraries.

Whitlam used the mechanisms Menzies had established to, under the Karmel scheme, increase and redistribute Federal school funding on a needs base. (In other words - Gonski isn't all new).

Fixing the fiscal imbalance only has meaning if the States get to set the rates at which their taxes are raised...in this case it would be differential GSTs. This is a nightmare for national businesses. And it creates the negative prospect of inefficient interstate competition on tax rates.

The Queensland Government - relatively wealthy on skewed commonwealth contributions and mining royalties, abolished death duties. This forced the other states to follow, despite not being able to fund their programs.

The only reason GST revenue is tied to the States is because it was the Federal compact to eliminate a raft of State taxes. The compromise with the Democrats reduced the GST take and hence not all taxes went away.

Let's hope Mr Abbott is sparking a genuine national debate on Federation and he doesn't get away from undertaking serious reform.

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Monday, October 13, 2014

Vanstone unloads on "the politics of envy"

Nothing is surer than that once a week someone, somewhere will berate Labor for either attempting to reignite "class warfare" or criticise Labor for "the politics of envy."

Today it was Amanda Vanstone's turn writing in The Age.

Vanstone starts by saying "All this stupid rich-versus-poor debate does is stir up the politics of envy."

She complains about the media coverage given to the rich and suggests the way to "get some perspective" is to look at tax contributions. Because the top 2 percent of individuals pay 25 percent of the tax we are told we should be "delighted these people have done so well economically."

This, of course, simply ignores the fact that were the distribution of income more equal, then so would be the distribution of tax.

Vanstone then runs the trope that old-style Labor reviled big business, then had a period of embracing it as the source of wealth. But, we are told, "old anti-rich and anti-big-business mantras have crept back into the Labor lexicon." Paul Kelly devotes almost the whole of Triumph and Demise to stating and restating this thesis.

Vanstone then runs the usual guff that the only hope for the poor is for the rich to keep making more money. This is really nothing more nor less than the Randian thesis espoused in Atlas Shrugged, a pernicious book that has had far more influence than it would ever have had if written as a one page economic theory than it has as hundred pages of fairly tortured prose.

This theory - that the rich create jobs - is of course simple rubbish. As the very excellent video below shows what creates jobs is consumers spending money.

Vanstone finishes by passing over the technical reality of increasing inequality and instead focussing on the degree of social mobility in Australia. The un-stated message is that it doesn't matter if you are poor today because you can be rich tomorrow. But as Andrew Leigh notes in his book Battlers and Billionaires research he conducted (with Dan Andrews) in 2009 found evidence that nations with more inequality in the mid-1970s were less socially mobile in the ensuing quarter-century.

That is, as inequality increases the social mobility offered as hope decreases. (Leigh cites other research to back this).

Unfortunately this guff about the politics of envy or class war really plays well with the audience it is intended for - the 'aspirational'. They are sold a proposition that their life can be better but it is the concern with inequality that is holding back their (and this is usually a very personal "their") chance for a better life.

Unfortunately the wider Left just reacts to this stuff with a degree of incredulity - "What you expect us to feel sorry for the rich?" It needs, however, to be more directly critiqued on the fundamentals.

The first is to focus on the fact that increasing inequality has a negative impact on growth. As the video says growth comes from cashed up consumers, not wealthier capitalists.

The second is to remind the rich what a poor underclass means for society, most notably the direct threat to the security of the well off.

These were the factors that motivated true Liberals - from Deakin to Menzies - to embrace the concept of the state as a deliverer of economic and social security, not just national and personal security. This is what differentiated the Australian Liberals from the historic concept. It is why the original Australian Liberals look more like what American conservatives decry as 'liberal' - what we would call social democrats.

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Friday, October 03, 2014

Burqa and niqab

Seldom has there been so much fury directed at an item of clothing. That is perhaps not since the bikini first arrived on Bondi beach.

While the sanctimonious amongst us lecture on the idea of freedom in clothing it is worth remembering the history of the requirements in Australia over appropriate bathing attire. The old "neck to knee" costume was mandatory, and Annette Kellerman's athletic version was banned in 1906.

As Waleed Aly points out in this morning's SMH, as with others, highlights the fact the public debate about the burqa is really about the niqab. The Wikipedia entry (though weak in parts) is a good start http://en.m.wikipedia.org/wiki/Niqāb. 

He goes further and explains this attack isn't just based on ignorance, it is also sexist. As he says "whatever the outrage, whatever the fear, and whatever the cause, it is women that must suffer first and foremost." 

Thursday, September 11, 2014

Can you pick the inconsistency?

Media concentration/diversity was big news in Australia last year. The ALP proposed a "media diversity test" (under the name public interest) be included in laws controlling mergers and acquisitions.

Its sternest critic was News Ltd (as it still was) headed by CEO Kim Williams.

The good gentleman was on QandA this week, He said two things about media that are worth noting.

On print media he said

And one of the things that I personally have difficulty with is that as media, particularly print journalism, which is still the major generator of news and news coverage in our media - all of the electronic media tend to be clients on the print media, in terms of story sources and investigations, with some notable exceptions, but I don't think even Tony would disagree with that...

On media diversity he said

I don't agree with Sam at all about there being fewer voices because there has never been such a proliferation of voices in relation to the vast array and empowered array of bloggers, of social discourse that occurs in all manner of things.

So the world according to Kim Williams has a proliferation of voices, but it is still print which is the major generator of news coverage in our media.

And he is absolutely correct. What he is saying is that the proliferation of outlets doesn't create diversity - it does the reverse. It generates even more voices to amplify the messages of the print media - despite their declining circulation.

I still stand by my analysis that the Murdoch media is not as influential as it claims.

However, out of his own mouth we have the admission that the Murdoch media is as dominant, if not more so, than it has ever been.

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Crisis in NBN land

The ACCC's decision not to take action against TPG's plans for fibre to the basement creates more of a crisis for NBN Co than might first appear.

The decision not to take action is based on the ACCC's interpretation of the law, in particular that TPG could avail itself of the level playing field exemption. This conclusion is that the existing assets were capable of providing superfast broadband and that the investments are only a less than one kilometre extension.

It is always somewhat unsatisfying to have to rely upon a regulator's interpretation of the law, rather than a court's. As a non lawyer I thought an argument could be made that none of these assets had ever been used before to provide VDSL to residential buildings so they weren't technically capable. TPG is doing something new - it is not just an extension of the capability.

Unfortunately the ACCC is also bound by the Model Litigant rules in Appendix B of the Legal Services Directions 2005.

I suspect this is the source of my long running concern that the ACCC is far more inclined to seek new powers than to test the powers it has in an actual court. It would seem to be far preferable to move to alternative solutions on the basis of a court determination rather than an ACCC interpretation that will have been necessarily conservative because of the model litigant rules.

That said, and since neither the Minister nor the ACMA who could also initiate action seems prepared to do so, we are back to the telco regulation merry-go-round. The simplest and most obvious remedy would be to amend the legislation to remove the per se exemption. To deal with genuine cases of simple network extensions it could be replaced by an authorisation regime for network extensions.

Instead there will be a two part process. Firstly, the VDSL service inside buildings will be subject to a declaration inquiry as outlined in the ACCC release. Such a process could take up to a year. Secondly, the Minister will commence consultation on a carrier licence condition that "would require owners of high-speed networks affected by the ACCC's declaration process to functionally separate their wholesale operations, and to provide access to competing service providers on the same terms as it is provided to their own retail operations."

This is much weaker than the obligation that would have applied to TPG if it was not exempt from the level playing field rules; they require structural separation. These rules also - in common with the level playing field rules - ignore the important questions about where an access seeker is required to interconnect with the  TPG network. If it is at somewhere other than the NBN Co Points of Interconnect this creates a potentially higher cost for access seekers than TPG.

The impact on NBN Co if this is proceeds is immense. If NBN Co chooses not to compete (by building FTTH) with TPG then it has a significant financial impact. TPG will see merit in pricing its services at the same price points as NBN Co's - that is the "market price." TPG will have a monopoly on the buildings for FTTB because two providers can't both use the copper for vectored VDSL. But TPG will only build where its costs are sufficiently low to make a profit.

So NBN Co will lose low cost premises but average revenues.

If NBN Co chooses to compete with TPG by building FTTH then NBN Co also loses relative to the MTM base case because it incurs higher costs (but it may get slightly higher revenues).

But the damage does not end there. While some like Stephen Bartholomeusz think that the functional separation requirement will deter Telstra and Optus, a lot will depend on the actual drafting of that instrument. It is hard to imagine that the functional separation requirement will extend beyond the operating business that provides the actual VDSL service.

Indeed, Telstra and or Optus could go one better to provide a structurally separated by wholly owned vehicle that invests in the VDSL boxes and the fibre to connect to pre-existing fibre assets. This wasn't an attractive business proposition when NBN Co was going to build FTTP.

To be clear - this is a problem entirely created by the decision to deploy FTTB rather than FTTH.

Worse, the instrument being proposed by the Minister could give Telstra the opportunity to rethink what role it plans to take on FTTN. Would functional separation of only the FTTN business satisfy the Minister. The costs of functional separation that Bartholomeusz quotes were the cost of a separation of the existing business, not a prospective separation of a new business.

We see yet again the wonderful intricacies of telco regulatory policy. How the establishment of independent regulators that aren't actually empowered to decide law creates a chimera of oversight, and how once you change one thing how repercussions are felt through the rest of policy.

(A good case study for my CommsDay presentation on 9 October)

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Funding of Terrorism

Excellent report on ABC News 24 just now on how ISIL has achieved its estimated funding of $2bill

Start was donations from Kuwait and Saudi Arabia, from private citizens, to causes in Syria. While some given for humanitarian uses diverted to military causes.

When it broke from Syria it gained other sources. $425 mill in good from bank in Mosul. Then theft from citizens. Next is extortion - otherwise called taxes - from areas colonised. Then black market trade in oil from wells captured. Lastly proceeds of ransoms from kidnapping. Claims the ransom demanded for US journalist was $75 million. US never pays but some Europeans do.

While security analysts spread fear of a caliph are stretching from Spain to Indonesia, the issue comes down to how sustainable that is. All such empires based only on force eventually fail, but it could be messy.

The core strategy has to be to get the Sunni States to identify IS as a threat rather than an ally. The vision of the caliphate needs to be converted as a threat to Saudi Arabia, Kuwait and the other Arab States. 

Tuesday, September 09, 2014

How not to do Corporate Affairs

The results of a trial of a new approach by NBN Co to deploying fibre to the premises show that the NBN Co Strategic Review has over-stated the cost of this option. NBN Co now faces a new set of data in determining the most cost-effective way to build the NBN.

The Age on Saturday reported on the trial in a Fibre Serving Access Module in Melton included the use of small diameter cable and small footprint multiports. They were among a number of initiatives that the Senate Select Committee on the National Broadband Network noted had been ignored in the preparation of the Strategic Review even though the management of NBN Co has used them for the development of the Corporate Plan 2013-16.

More on the implications of this later, but the initial response from NBN Co's Corporate Affairs head honcho Karine Keisler was to jump onto twitter to deny the existence of the trial.

@NickRossTech @theage Nic it's an inaccurate report. Note the absence of NBN commentary. No such pilot. MTM NBN is cheaper and sooner.

In a statement released on Monday NBN Co claimed that it was untrue that the technology in Melton would make a fibre roll-out cheaper than previously estimated. NBN Co said the efficiencies applied in Melton - such as smaller diameter cables and smaller multiports (or splitters) - are already being employed in the NBN build across Australia. 

This resulted in an hilarious article from Richard Chirgwin in The Register that began

NBN Co has issued a press statement assuring media that in spite of what looked like a favourable assessment of its fibre-to-the-premises rollout procedures, things really were dreadful until the new government commissioned the Strategic Review.

Or perhaps things weren't dreadful, but they're really, truly, definitely better now, trust us. Or something.

Fairfax Media then ran an online story in which NBN Co admitted the paper existed but that it was "written by a well-meaning member of staff and was misguided." The article quoted the NBN spokeswoman as saying the report hadn't been endorsed due to "shortfalls in the methodology and metrics." 

But it went on to note that the spokesperson "acknowledged some of its findings had merit and had already been adopted in parts of the network rollout where applicable.  This included the use of thinner cables and smaller footprint multiport equipment."

This is where life becomes really messy for NBN Co. On the one hand they are trying to defend their roll-out as being efficient and adapting changes that can reduce costs and time. However, they also need to defend their own Strategic Review.

The report of the Melton trial compared the deployment to the average of 20 FASAMs completed in the Ballarat area. Telstra remediation works for the trial commenced in January 2014, though many of the initiatives being trialled had been identified prior to September.

The FSAM was completed 70% faster than the comparable FSAMs and at a cost per premise of 50% less than for comparable completed FSAMs.

However the technology choices being trialled were only included by NBN Co in version 13 of its 2013-16 Corporate Plan. This version was presented to he September 2013 Board meeting at which the bulk of the directors retired.

In preparing the "Revised Outlook" for the Strategic Review NBN Co elected to use only the architecture and technology as used in the 2012-15 Corporate Plan. As the Senate Standing Committee on the National Broadband Network noted this substantially increased the costs over the expected costs under the previous management team. 

The Senate Committee recommended that the Strategic Review be redone comparing only a fibre to the premises roll-out using the revised architecture and the Multi-Technology Mix once real costs of copper and HFC were known.

The Government's official response rejected the recommendation, stating that the Strategic Review was prepared to "evaluate the position of NBN Co and to inform decisions on a revised Statement of Expectations." The response also advised that "more detailed view on the issues arising in respect of this recommendation" in the Government commentary posted to the Minister’s blog.

That commentary only questions whether the previous management could have achieved the lower costs, not whether lower costs could be achieved. It is a circular argument that says "my proof of the assertion that the previous management was incompotent is the strategic review, and the strategic review did not include improvements because the previous management were incompetent." 

The only other justification is that the improvements were not consistent with the Corporate Plan. 

NBN Co's best response to the story was to simply ignore the concerns raised about the Strategic Review - to defend it was to defend a document that has been tainted with politics. The only reason why the question of what the impact of the technology changes would be is that the Minister has used his $73 billion price tag claim ceaselessly. 

The Melton study simply shows that this is an artificial over statement of the cost of building FTTP.

NBN Co management needs to be as disciplined as the previous team was - that their task is to implement the objectives of the Government as communicated in the Statement of Expectations.

The next instrument that will come from NBN Co of relevance is the Corporate Plan 2014-17. At the annual results briefing NBN Co CEO Bill Morrow said the Corporate Plan had been submitted to the Government but indicated the company is still revising the outer years. Some of the recommendations from the still unreleased Volume 1 of the Vertigan expert panel apparently have implications for the plan. 

Morrow also advised that the targets to June 2014 are still based on an almost exclusively FTTP roll-out.

In finalising its Corporate Plan NBN Co must acknowledge two simple facts. 

Firstly, an FTTP network can be built faster and cheaper than assumed in the Strategic Review. 

Secondly, concluding the agreements necessary to implement the Multi Technology Mix is taking longer than planned.

Ultimately, the Plan needs to deal with the fact that replacing one technology (FTTP) with four (FTTP, FTTB, FTTN and HFC) is only making an already complex project more complex. That complexity will ultimately be resolved at the level of the business rules for technology choice. The Government’s Statement of Expectations issued in April states:

NBN Co will ensure the business rules it establishes to determine which technology is utilised in each locality are transparent to the community, and periodically updated to reflect technological and commercial developments
The Minister, NBN Co Board members and NBN Co management have all claimed the benefit of the current Government’s approach is that NBN “should be built in a cost effective way using the technology best matched to each area of Australia.”

The Melton trial is another valuable component in making these decisions. In his letter to Australians published on the day after last year’s election, the Prime Minister said:

We will deliver a new business plan for the NBN so that we can deliver faster broadband sooner and at less cost. I want our NBN rolled out within three years and Malcolm Turnbull is the right person to make this happen.

The Minister broke the promise to provide all Australians with 25 Mbps by 2016 when he released the Strategic Review. He claimed that NBN Co was in worse shape than he expected; even though his Strategic Review’s worst case was still $20 billion less than had been claimed by Mr Turnbull in April 2013.

NBN Co in its response to the report of the Melton trial, once it got beyond trying to deny its existence and conclusions, rightly noted that the Multi-Technology Mix allows the company the ability to make its own technology choices based on which is cost effective.

As the Minister said in April last year “We know that fibre to the premises is the best technological solution and if you can build it cost-effectively you should do so. If we're able to build more of it cost-effectively then we would do so." 

This is the promise the Minister  must not break; the promise to let NBN Co make its own technology choice to meet the Government’s objectives. 

And the NBN Co Corporate Affairs team needs to be focussed on promoting the company, not defending the politics. It doesn't need to trumpet that "MTM is cheaper and sooner" as appeared in the tweet - just that the Government has provided NBN Co with goals and flexibility of technology choice and NBN Co will do whatever it can to do that in the most efficient manner possible. 

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Wednesday, September 03, 2014

More on Kim Williams

I was somewhat scathing of Kim Williams' comments on the NBN that had been covered in an extract of his book. Today's Communications Day has alerted me to the fact that Williams has been at it again - that is again demonstrating a bias for prejudice over facts. But this time his attention is over an issue he should know more about - Pay TV in Australia.

Unfortunately Grahame Lynch's comment is only a report of what Williams says - not an analysis. Having already dealt with the detail of his claims about the NBN, let me now explain what he gets wrong about Pay TV. (Though I must thank Grahame for alerting me to the book's availability - my bookseller had advised 4 Sept as release date - but I bought it for Kindle just now).

Williams principal argument is that the excessive regulation of Pay TV resulted in the accumulation of significant losses. His conclusion is:

Some $10 billion was written off as a result of flawed policy and regulation. Bad policy is always hugely expensive in so many ways— not the least of which is, of course, investment confidence.

This is entirely a delusion. The bulk of that write off was a result of a failure to regulate, not the reverse.

At his book launch, according to Crikey, Williams noted that anyone who knew him also knew of his affection for the aphorisms of Mark Twain, in particular that "if you tell the truth, you don't have to remember anything."  Someone should have suggested to Williams that if he couldn't remember things he should look them up, not make them up. 

Williams starts his tale in the early 1990s saying:

Keating and I engaged in policy debate over the reform of the Broadcasting Services Act when he became prime minister (sic). At that stage I was at the ABC to set up its participation in the new subscription delivery regime, which was contemplated under the new 'renovated' Broadcasting Services Act...The reform of the act was a very messy affair with the worst example of the Bismark dictum on the making of laws. (Note: According to Wikiquote "dictum" is misattributed - its earliest known variant was "Laws, like sausages, cease to inspire respect in proportion as we know how they are made.")

It is a pity that Williams didn't start a little earlier with his policy analysis to reveal why in the re-write of the BSA there was any consideration regarding Pay (or subscription to use the industry's preferred descriptor) TV in the Act. For that the best source is Mark Westfield's The Gatekeepers (having been very close to much of this I can say the book is mostly accurate - except when it refers to Telstra's strategic partnership agreements as SPARs (p.237) - having been a co-designer of them I can promise you they were SPAs).

In 1980 then Minister Tony Staley commissioned the Australian Broadcasting Tribunal to report on Pay TV. It reported in 1982 with a recommendation that it be introduced quickly. Neither Staley, nor his successor Neil Brown (of ABC/SBS Board appointment fame) managed to act on the report. The incoming Labor Government was subject to intense lobbying, especially by the lobbyists for Packer, with (according to Westfield) particular effect on Victorian Ministers with the line"How would Victorians take it if they had to pay to see their football on television?"

The little movement that occurred was the advent of restricted distribution services to pubs and clubs - mostly distributing live sport, but especially racing.

This all changed on 2 October 1991 when Kim Beazley met with Richard Li (son of Li Ka-Shing controlling shareholder of Hutchison Whampoa) and and the MD of group Sion Murray. Beazley was on a mission to find potential bidders for the second telecommunications licence in Australia, which included the obligation to buy the Government owned satellite operator AUSSAT. Murray told Beazley "Unless you allow the satellite to be the exclusive carrier for pay television in Australia, we will not bid."

The rival bidder - Optus - had no interest in using the satellites for pay television - but without Hutchison (see note).  (the above is from Westfield Pp 23-25 & 57-60)

Economist Ross Jones provided a useful summary of the policy issues in the Summer 1991 issue of the CIS magazine Policy. Jones was concerned about the granting of a Pay TV monopoly of eight (to be expanded to ten) channels on the AUSSAT satellite platform. He did, however, observe:

The observation about the logic of the deployment of more than one cable system should be noted. The experience Jones talks about in the UK was eventually resolved by the merger of the satellite operators.

But to return to the point, the decision to open up the pay TV market at all was a consequence of another pro-competition decision, in telecommunications. And the monopoly proposed was only in the platform, not the providers.

The idea of satellite only Pay TV was already being challenged by the development of narrow-cast distribution systems using MDS (the 2.3 GHz spectrum now being used in regional areas by NBN Co and in metro by Optus for TD-LTE).

Williams refers in passing in his book to the ongoing policy discussions, the lobbying by television networks concerned that they would be closed out of pay and the lobbying by the ABC to have the two channel allocation made to them. Westfield covers this in detail - but suffice to say on Nine's Sunday program on 31 May 1992 PM Keating announced that there would be no platform restriction on subscription broadcasting licences.

This was the model that was legislated in the Broadcasting Services Act. Williams asserts that there was some "law of unintended consequences" and that once passed the Government was somehow surprised by the use of other technologies. It was not, it had realised the error of accepting Richard Li's proposal.

Williams asserts that the satellite services were used in "very light-touch, low levels of initial rollout." He attributes this to the decision to mandate a digital service. That wasn't the key driver - the key factor was marketing and the intersection of delivery platforms with the race for content.

However, the plans to auction the remaining MDS licences prior to the satellite services being launched was eventually de-railed - by the Prime Minister intervening again. In January 1993 the MDS auction was deferred. (Westfield Pp 131-137. This includes subsequent Australia Chairman Rod Price's infamous spray a Alan Fels about the latter's fate post the supposedly unwinnable - for Labor - election. This seems to be an unjustified assertion that subsequent ACCC decisions were payback).

When the digital satellite licences were allocated it was by auction - not the beauty parade that Jones complained of. It was, however, a very flawed auction process. The highest bidder was informed they had won and then given thirty days to decide whether they wanted it or not. A few players realised this and used the opportunity to place multiple bids.

One of the unsuccessful bidders was a consortium of Packer, Murdoch and Telstra (called PMT). The Telstra strategy in this venture was to utilise satellite as a market-finder; areas that had the highest take-up would be the first to get an HFC cable. Telstra had already deployed a test system in Paddington - a facility to which every media participant toured at some stage.

The (eventual) successful bidder for both was an entity called UCOM headed by Albert Hadid. Hadid on-sold the B licence to Australis and the A licence to a consortium headed by US pay operator Continental Century. The ABC licence - the C licence - was never taken up (I think - Williams directs us to Pamela Williams' Killing Fairfax for this story...see Note 2).

When the MDS licence auction got underway in 1994 Australis knew it needed to win the metropolitan licences, but wanted partners who would be franchises of the actual service (marketed as Galaxy) in regional areas. A UIH subsidiary the called CETV won most of the rest of the country and the Continental Century partnership bought trading as East Coast Television (whose MD Patrick Delaney now heads Fox Sports) held a pocket on the coast of NSW and Tasmania. CETV later changed its name to Austar (when I was working with them), and much later absorbed East Coast Television.

Ultimately the four channels that made up the A licence were provided by a group - XYZ - part owned by Austar. The other four channels that made up the B licence included Australis' biggest coup - a movie channel "Showtime" (of which more in a moment).

Apart from the delays that occurred in settling on the digital standard, the operators preference was to utilise their MDS licences first. The main reason was that the best sales channel was door-knocking, and it was easiest and most profitable to door-knock the areas where there was MDS reception.

It was at this point that the cable plays began. Optus' interest in HFC was entirely motivated by its telephony business - after all it was the firm that was going to make money from actual selling the satellite TV service. The telephony interest was a way to by-pass the very high rates Telstra was charging for what was then called "PSTN Ingress and Egress" (from which the PIE model used in regulatory proceedings got its name - this is now PSTNOA and PSTNTA). Telstra was charging an average of about 4.5 cents per minute.

Telstra ignored the threats. To make the threats real Optus partnered with Continental Cablevision to build Optus Vision. Despite the fact that Packer had been part of PMT and that Telstra and News each owned 15% of Seven, both Nine and Seven joined the Optus Vision consortium.

At this point Telstra's Frank Blount approached Optus offering to dramatically reduce the access prices - but Continental was here for cable TV and told Optus they couldn't negotiate. The launch of telephony didn't go smoothly for Optus, but once it was stable OptusVision still charged Optus the Telstra rate for access, claiming it was the market rate).

Telstra was now confronted with a scenario that was going to seriously erode value; but their own analysis determined that the loss was actually less if they also built an HFC network. Having done so they were confronted with the second issue of content. While some in Telstra favoured the pursuit of a deal with another US Pay TV operator, a small group in Telstra (including me) favoured a deal with News.

News was, however, also considering participating in OptusVision. The PMT venture was formally dissolved on 9 September 1994. At a meeting in LA over the weekend of 8-9 October 1994 Kerry Packer's CFO Nick Falloon (later Chair of TEN) met with Rupert Murdoch, Sam Chisholm and Bruce McWilliam (now at Seven). After the latter two left Falloon convinced Murdoch to join OptusVision - according to Westfield (P.277)  "he pressed the point that it was essential if the business was to be profitable that Australia have one dominant provider."

Murdoch's decision was relayed to Ken Cowley who relayed it to Telstra's Frank Blount. However a chance encounter that night and a bottle of red wine saw News and Telstra resurrect the deal. Once again according to Westfield (P.278) the two selling points for Murdoch was that in the JV with Telstra News would not need to provide any cash to build the cable network, and that PM Keating favoured the deal.

While News had prevaricated OptusVision and Australis between them had secured the rights to all the Hollywood movie content after frenetic and crazy competition. The Hollywood studios were confronted with two players each of whom claimed to be servicing the whole country. They had a very simple strategy for ensuring they weren't risking choosing a loser rather than a winner. The contracts stipulated a price per subscriber, but they also specified a minimum number of subscribers each year that translated into the forecast for the entire pay TV market in Australia.

Ultimately Foxtel acquired its movie content from Australis, but paying much more than Australis was paying. This movie content agreement was Australis biggest asset. On the flip side though, the franchise agreements Australis struck with CETV and East Coast Television in the end did not even cover the content cost Australis bore.

So now the stage was set. Australia and its franchisees settled into a partnership with Foxtel, and the OptusVision venture only had cable distribution (though it actually earned revenue from the Australis use of its satellites).

So a policy decision to introduce Pay TV to Australia, triggered by the opening up of the telecommunications market to competition, resulted in all three platforms of MDS, satellite and cable being used with essentially two competing content plays and two competing cables.

Despite latterly being a passionate advocate for competition, Williams in his book describes this as:

The law of unintended consequences, however, asserted itself with ferocious force, because the new approach separated the broadcast licences from delivery technologies and because those in the cosseted world of Canberra had not contemplated that other technologies and frequencies might be used for delivering subscription services. These, as an example, included cable -the intense fights conducted by Telstra and Optus have been written about extensively-and MDS...

Meanwhile the law of unintended consequences asserted itself with a vengeance (sic - this is only a few pages after the preceding text) after the new services were promoted across Australia....The result saw consumers being utterly confused and churn rates (the rate of subscriber rollover) between the various players in excess of 100 per cent per annum - again an attractive world first! It was real wild-west territory and horribly wasteful.

Williams tries to sheet the blame here entirely to the decision to mandate that the satellite service be digital. But the more rapid deployment of satellite would have had negligible effect on the cable competition. Satellite was inherently limited - especially if an analogue service was chosen - in the number of channels available.

But Williams is right - the real bloodbath was yet to come. This was the battle for sports rights. The "anti-siphoning" regime introduced with Pay TV was always an essential political element - the people who pay their taxes and vote had no interest in seeing the quantity of quality sport broadcast reduced. But it did not create the competition for sports rights.

Williams asserts:

Bad regulation demands creative responses so part of the solution was found in the financially destructive, in many ways, forced launch of the Super League. The Super Rugby also followed. Both were invented contests and therefore were able to be shown in their entirety because they were not on the anti-siphoning list. It was outrageous or predictable, depending on your perspective.

This is simple delusion. Seven and Nine as the free to air rights holders of the AFL and NRL respectively partnered with OptusVision to provide both sports on Pay TV. The AFL product was a particularly strong driver of subscriptions because it had a wider national appeal than its free to air coverage. It wasn't the anti-siphoning regime that was the issue, it was the relationship between the free to air stations and one cable operator.

Wile Super League was an invented competition, News did all it could to replicate Packer's 70s cricket coup of so bowdlerising the League that the alternative product was worthless. In this they failed. They had however sufficiently downgraded the product to the point where the NRL and Packer needed to achieve a reconciliation.

Williams concludes:

I was to clean up the leftover commercial consequences for Optus, Telstra and FOXTEL with a deal in 2002 that saw FOXTEL contracted to provideits services to Optus and FOXTEL become the main brand name synonymous with the subscription TV category in Australia. At that stage the accumulated cost between Foxte's and Optus TV's establishment costs and the separate overlapping cable networks that supported delivery of their services exceeded another $7 billion in write-downs.

Actually, at the point Williams was brought in Optus had simply been defeated. Westfield's book ends at the point where Autralis died - its assets were carved up between Foxtel, Optus and Austar. But more had happened by 2002. OptusVision had been blown apart by first an increase in Nine's stake which contravened the shareholders agreement, and then litigation by Seven over this. Optus cable business was primarily focussed on broadband and telephony.

When Foxtel (and Telstra) made the decision to digitise their service and greatly expand channel numbers Optus was confronted with the choice to do the same. History had shown that such destructive behaviour was possible again...and the trade-off was the content sharing deal.

Yes the Pay TV era was incredibly destructive - but was it caused by a layer of prescriptive regulation or the reverse, an excessive belief in the viability of infrastructure based competition? Were the firms investing irrational or is the tendency of all firms to over invest in times of change systemic? (The latter case is also supported by the free TV story as the three national networks created by Skase, Bond and Lowy failed).

I will not even gratify with a refutation Williams absurd proposition that Senator Conroy as Minister "never had any intention of delivering on his word" in relation to anti-siphoning. I can only assume that one of the reasons for Williams eventual dismissal by News was his inability to negotiate any outcomes in the regulatory space at all.

In Pay TV, as it does in telephony, Williams' book should not be relied upon by anyone seeking to understand Australian communications policy.

Note: Hutchison was part of the Kaloori consortium. When I worked at Hutchison in 1998/99 there was a copy of the Kaloori bid document in the photocopy room. Unfortunately I never looked at it. My recollection (and I couldn't find a source) was that in the end Kaloori did not bid.

Note 2: The ABC joint ventured with Fairfax and US based Cox Communications to utilise the two satellite channels. The company Australian Information Media was formed and headed by Kim Williams. AIM needed to get access to a subscriber system, and for the satellite that meant Galaxy. AIM also negotiated with Foxtel and OptusVision. After Williams suddenly left the ABC/AIM to head Rupert Murdoch's Fox Studio business (note this is the sequence as reported in the Pamela Williams book that Kim Williams refers us to - Kim W's Wikipedia entry has it that he joined Fox Studios only after the deal failed, Foxtel and the AIM partners reached an agreement for the news channel that was agreed by then Foxtel CEO Mark Booth and Sam Chisholm. News of the deal reached the AFRs Mark Furness who wrote the story...which was how Rupert Murdoch heard of it and he instructed it be killed. It was Richard Freudenstein, Foxtel's legal adviser and now CEO, who had to advise the other parties the deal was off. Mark Furness was appointed Director of Corporate Affairs at Foxtel in 1997.  Kim Williams joined him there as DEO in 2001.
{Williams dates his move to Fox Studios as April 1995, the Furness article was 28 July 1995}
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Friday, August 29, 2014

Demand for higher NBN speeds not restricted to early adopters

NBN Co revealed at its full year results presentation that take-up of NBN services in the first 15 FSAMs is 68%. These are the areas that have already reached the copper disconnection date and gives the best indication of long term demand.

NBN Co also revealed that the product mix in these FSAMs is mirroring that for the network as a whole, including more than one in five customers choosing the 100 Mbps service.

More detail has been provided today in answer to Questions in Notice in the Senate. The table below shows the number of premises passed and the number of connections active and orders pending for each FSAM.

This shows take-up as only 63% for the whole 15 FSAMs. However, it has been widely acknowledged that fibring ARM-02 and ARM-03 was a mistake, as these are rooms in University student residences at the University of New England which are serviced by the campus LAN.

Excluding these provides the 68% take-up, which passes 70% once the pending orders are included.

The next table shows the distribution of the speed-tiers in each of these FSAMs. This is based on the speed tiers of completed orders rather than current connections and so will double count any case where there has been an upgrade or a subsequent disconnection.

The table shows that 22% of customers are ordering the 100/40 Mbps service.

This raises more doubts about the demand forecast used in the Cost Benefit Analysis. The report suggested a number of reasons for the strong take up - including “selection bias”, saying:

“it would be expected that households and businesses with a preference for higher speeds would take up the NBN where available first and other households would move to the NBN when alternative services would not be available.”

Asked about the discrepancy today Communications Minister Malcolm Turnbull said:

“Well they’re two different things. People may buy a plan that has a top speed of 100 megabits per second, but then the question is, what do they actually need? What is the speed they need to do the stuff they want to do online?”

This might be a satisfactory argument for making a technical decision to limit the capability of the network, but the demand analysis for the CBA is meant to be measuring what people want - what they are prepared to pay for.

If the demand for higher speeds - what people want and will pay for - is understated then the benefits of FTTP are also understated compared to technologies that will be less able to provide these speeds.

It also appears that demand for any of the over 100 Mbps products available on FTTP has simply been ignored.

The good news for NBN Co is that end users really do want their higher speed services at the prices RSPs are charging for them. That has to give the Board and management confidence as they continue to invest in completing the network.

Monday, August 25, 2014

Telstra and all that (mythical) cash

There has been plenty of commentary recently about the original NBN/Telstra Definitive Agreements. Alan Kohler speculated on what Telstra should do with all its cash, the ACCC questioned whether the revenue earned by Telstra should be considered in determining fixed line access prices, and Vodafone (among others) has called the payments "outrageous."

Part of the problem here is that there really isn't a lot of detail here on what the payments actually are and what the $11 billion actually represents.  This can lead to the kinds of scary claims made in CommsDay that the actual payments to Telstra could amount to $98 billion by 2067. This was based on pre-tax cashflows at the time of the original agreement. Optus has even included this number in a submission to the Competition Review in a section claiming that the NBN reforms aren't sufficient to address Telstra's dominance.

Way back in March 2010 it was actually Alan Kohler who wrote "A 'significant gap' remains, thought to be $4 billion (the difference between $8 billion and $12 billion)." When the deal was announced in June 2010 it was reported that:

The two parties have signed a financial heads of agreement, announced Sunday, that will provide NBN Co with access to Telstra's passive infrastructure (pits, ducts and backhaul fibre) and eliminate Telstra as a fixed-line wholesale competitor to the Government-owned entity.

The assets to be transferred as part of the deal were valued at $9 billion, whilst Telstra values the financial gain from "public policy reforms" signed as part of the agreement at $2 billion.
The $9 billion will be paid progressively as Telstra's copper network service is decommissioned and cable broadband network service deactivated. NBN Co will pay Telstra a fee for every customer migrated from these networks onto NBN Co's fibre network (upon which the figure of $9 billion was assumed).

So to summarise Telstra was after $12 billion in Net Present Value after-tax, and settled for $11 billion, of which $9 billion comes from NBN Co and $2 billion comes from "public policy".

Telstra broke that down in its Explanatory Memorandum on the deal in the graphic below (taken from the CEO presentation).

 The fine print notes that the NPV is calculated at June 2010. This makes up the construction of the $11B. Elsewhere in the document it notes that the NPV used a discount rate of 10% (other than TUSMA payments which were 8%).

A quick calculation shows that talking about $11 billion today is wrong - because at that discount rate it would be $16 billion in June 2014 value.

However, that is also not an accurate reflection because the cashflow profile has changed as a consequence of both the delayed commencement (getting the ACCC to approve the separation plan) and the additional delay from the (Telstra caused) asbestos remediation suspension.

The Telstra explanatory statement

Let's see if we can reconcile this data with the Goldman Sachs report.  Goldman Sachs (according to CommsDay) says of the $98B:

The bulk of this—some $88 billion—would be for infrastructure leases covering ducts, dark fibre, rack space and conduits. As the NBN Co footprint expands to cover all of the Telstra copper footprint, these payments would rise: from A$400m annually this financial year, to $1 billion in FY2019 and to $1.6b a year by FY2042. By 2067, NBN Co would be paying Telstra some $2.9 billion a year in lease commitments.

From 2042 to 2067 there will be no additional ducts or fibres used, so that increase can be used to deduce the inflation rate (2.4%) used. The early years assume a rate of uptake from 2010 to 2021 which for simplicity we will assume to be linear. That set of assumed cashflows results in a sum of payments of $89.4B -so overstated a bit. The NPV at disciount rate of 10% is $9.58 billion. But that is pre-tax. Post tax (assuming 30%) it is $6.7B - so we are getting to the same ball-park as Telstra's $5B (which can be explained by the profile being wrong upfront and the overall overestimation).

The disconnection payments are about half the $9 billion in NPV that Telstra gets from NBN Co. They are however received over first decade. If they are re-profiled to the same as the duct payments the effective cash-flow is simply about the same as the cash-flow for ducts.  That means that the total effective compensation that Tesltra receives in 2021 is somewhere in the range of $2-$2.5 billion.

Let's now consider what these payments look like compared to what Telstra is surrendering. At June 30 2013 Telstra had 6,543 retail voice lines, 1,239 wholesale voice lines and 1,322 ULL lines in operation.  The wholesale price for a ULL is $16.21 per month, and for a Wholesale Line Rental is $22.84. Assuming that it is reasonable to allocate the WLR price as the retail revenue that should be allocated for line rental, these two items add up to $2.390 billion.

In brief, the cash payments Telstra is set to receive is consistent with the cash flow they are forgoing by switching off the copper network.

Now this is a very rough calculation, and hasn't foreshadowed what the copper network revenue losses to Telstra would have been had it chose to compete with NBN Co. But what it does demonstrate is that there is not now some huge additional cashflow coming to Telstra.

Finally a note on the ACCC access pricing question. As Telstra switches off an element of its network it receives disconnection payments and duct rentals, at the same time its asset base shrinks. If the ACCC were to conclude that the payment Telstra receives is higher than the return the ACCC regulatory framework "permits" for the asset, the ACCC may decide to discount the prices for copper access products to compensate. To see how this is the wrong outcome consider the following. Assume that the amount NBN Co receives is exactly twice what the ACCC thinks it is worth. Then the discounting approach would result in an access price of zero once Telstra had switched off half its network.

Put simply the only consideration for the ACCC should be the asset still in operation. To avoid continually re-jigging this depending upon whether it is dearer or cheaper parts of the network, the ACCC should simply draw a line under the current RAB and price determination and determine an appropriate future price path - a combination of increasing inflation and ongoing asset depreciation. Not particularly hard.

Note: Calculations used in this article can be found here.

Sunday, August 24, 2014

The Scales report

My opinion piece 'Lessons from the latest NBN reviews' appeared in Tuesday's AFR commenting on the Scales and KordaMentha governance reviews.

It is by no means everything I would like to say about those reviews - but space did not allow more. This is a more extensive and updated commentary on Scales (but does not repeat everything from the original).

The Scales report released by the Minister for Communications, Malcolm Turnbull, into the public policy process from April 2008 to May 2010 is of little more than historical interest to the community.

Despite the access Bill Scales had to individual and documents, the report provides virtually no new information on the development of Broadband policy. The reverse is sometimes the case, that Scales passes over or fails to consider significant issues.

Most importantly it found absolutely no evidence that there had been at any point a public announcement that was different to the private advice. This is most significant given the way Mr Turnbull continued to assert that there was some mischief in the policy process. 

For example, in answer to a question without notice on 20 November 2013 he tried to connect the calculation by Lazard's of a negative $31 billion NPV with the Corporate Plan detail of a 7% IRR saying "No wonder Australians lost faith in Labor. No wonder they are sick of their spin." 

Later on 11 December he finished an answer with "Tomorrow we will see the truth about the NBN. The Labor Party do not want to hear it. They do not want to know how many billions of dollars they have wasted. They do not want to know how many falsehoods they have told." None of the reviews conducted by Mr Turnbull has found any evidence of falsehoods.

However, its political and public policy purposes and conclusions should be noted by all because they will continue to be the core themes of policy over the next few years..

There are three important observations to make. The first is that all policy is bounded by the current reality, optimal solutions are constrained by sub-optimal starting points. The second is that the public service has been so gutted from 1996 on that it is unable to perform its essential roles. The third is that because public policy is determined by a political process, all statements are political.

The current Minister has regularly made much of the limitation he faces in implementing his NBN policy by the current state of NBN Co. The same was true of Senator Conroy as Minister who inherited two decades of policy failure. This started with the policy to pursue infrastructure based competition that so spectacularly failed in fixed line markets. It was compounded by the privatisation of Telstra.

The facts at the time Labor announced its 2007 policy was that Telstra had made a totally unacceptable policy proposal to Howard Government, and that Government had struggled to respond. In his report Scales claims “During 2007 the Howard Coalition Government was actively attempting to speed up the roll out of broadband in Australia.”  A core element of the “Australia Connected” package announced in June 2007 is stated as:

A plan to facilitate a new commercial fibre optic network build in cities and larger regional centres via a competitive bids process and subsequent enabling legislation. This process was to leverage the previously announced proposals to roll out a commercial fibre broadband network by Telstra and the G9 consortium (neither organisation was seeking funding). The aim of the competitive bids process was to evaluate the regulatory arrangements for the investment in an open and transparent manner. (P.16)

This was, in effect, a tender for regulatory arrangements. Telstra was seeking exemptions from aspects of the access regime while G9 required access to Telstra’s copper. The Departmental process for this exercise was the precursor to the NBN Mark I - with an Expert Panel chaired by the Secretary of the Department.

The final main component of the environment Senator Conroy inherited was a Telstra management team that had declared outright war on the Government. Bill Scales had his own disagreements with Donald McGauchie, the Telstra Chair who led the robust changes. The Chair’s insistence in hiring John Short to assist with the final privatisation was claimed to be the reason for Scales resignation.

That the conditions for policy implementation are far from ideal puts additional pressure on the public service. The Scales report, and indeed the National Audit Office review of NBN Mark I, found the public service at least missing in action in the outcomes. Scales in his report concludes:

It is clear to me that during the whole of the period of this Audit, public officials involved in the NBN policy development process, in both its manifestations, worked with remarkable dedication and commitment to attempt to make this policy work….

However, it is also clear from the evidence provided to this review and from the comments from those I interviewed from within the public service that they had difficulty in having their ‘voice’ heard on many of the most important public policy matters related to the Labor Government’s NBN policy.

Scales notes that in part this can be attributed to the chaotic processes of the Rudd Government. He is generous and attributes it to the specific circumstances of the early Global Financial Crisis period, but as history shows there was a serious issue with the management approach of the Prime Minister himself. The recommendation that the Australian Public Service examine its capability and impact is certainly worth adopting.

As I will explain later I think Scales is over-describing the supposed impact of the chaos and the impact in Government on the project. However, there are a number of very specific areas where the public service was deficient in executing the Labor 2007 policy. Two principal ones were the choice of a standard tender process and a lack of appreciation by Department officers of the centrality of industry structure reform to the Government.

The ANAO report on the NBN tender referred approvingly of the processes pursued by the Department to maximise competitive tension. This is usually a good thing, because it brings the price to Government down. But it was entirely the wrong outcome for the NBN. The two major expected respondents, Telstra and the G9, meant that the loser of the tender was going to become a customer of the winner.

While Telstra had, in the words of Phil Burgess, rejected the idea of holding hands and singing Kumbaya, the idea of a single approach with all RSPs participating was actually the best outcome for Government.

The evaluation criteria for the tender included the degree to which the response resulted in industry structural separation, but it was only one and none of these had been weighted. When the Regional Telecommunications Independent Review Committee chaired by Bill Glasson proposed to include in its recommendations an absolute requirement for structural separation under the NBN, Departmental officers expressed concern. On their reading this was not an absolute requirement. The Minister’s office had no such concern.

As the Mark I tender came to a conclusion this became the defining issue for Telstra. It was the Government’s refusal to undertake not to seek structural separation that resulted in Telstra not submitting its full bid. (It is also worth noting that Scales concludes the exclusion of Telstra was entirely appropriate). Telstra could only be taking this position so late in the process because the centrality of the issue was not clear in the tender.

Senator Conroy has made no secret of the frustration he found with the Department Secretary he inherited and her reappointment. He has always been clear that structural separation was a core element of the policy, and has been clear that a simple purchasing tender process was always the wrong approach.

I do know that when the Secretary was writing the strategic imperatives for the Department she had implementing the Government’s policy as the primary objective. As I was briefly in the Department at the time, I suggested that the actual first priority was to advise the Minister on the economic, social and technological changes occurring that might require a policy response. The Secretary rejected that.

The position of the Department Secretary reflected two changes that had occurred under the Howard Government. The first was the unequivocal position that policy would be made by Ministers and communicated to the Public Service for implementation. The second was that expert advice was no longer provided by the bureaucracy but outsourced.

So to the extent the Public Service failed in the implementation of the NBN policy it was primarily a consequence of Howard Government reforms.

On this subject there is clearly much progress to be made. The Government also released last week a perfunctory response to the Interim Report of the Senate Select Committee on the NBN. In a number of places it states that a more detailed view of the issues arising can be found in a document (Response to the Senate Select Committee) which was posted on the Minister’s blog. The metadata of that document reveals it was authored by a member of the Minister’s staff.

Finally, the Scales Review provides deep insights into how public policy is always inherently political.

The first evidence is in the management of the report itself which has been released in a way designed to maximise the reporting of a simple message. It was tabled out of session in the Senate and posted on the APH website just before 5pm. Journalists from The Australian were asking questions of Opposition members as early as 5:15pm (or as late, given deadlines). Only The Australian and Communications Day seemed to be aware of it. The Australian predictably splashed the story under the headline “Labor’s NBN ‘rushed, chaotic’." Yet the fact is that Scales didn't say the NBn process was rushed and chaotic, he said that Government as a whole rushed and chaotic at the time the report was considered.

Minister Turnbull then ran with his rehearsed lines about Labor’s NBN being a most wasteful exercise. However, Minister Turnbull did not reflect on the substance of the Scales report, in particular recommendations that all projects over $1 billion be subject to cost benefit analysis by the Productivity Commission or Infrastructure Australia. That is perhaps because Mr Turnbull eschewed these august bodies for his own CBA, and secondly because his CBA is two months overdue.


My published comments noted:

Reports also focused on the criticism of the ACCC’s advice on the cost of FTTP versus the cost of FTTN followed by an upgrade. The two Professors on the Expert Panel are, however, have previously stated that it was a conclusion reached independently of the ACCC advice.

In fact it is far worse than this. Professor Tucker this week came out to record that Scales was wrong on his assertions about the ACCC advice writing:

He also argues the panel of experts (of which I was a member) assisting the Rudd government did not properly test advice from the Australian Competition and Consumer Commission (ACCC) about the upgradeability of a Fibre-to-the-Node (FTTN) network to a Fibre-to-the-Premises (FTTP) network, and that the panel inappropriately relied heavily on this advice in making recommendations to the government about the development of the NBN.

Professor Coutts made his in a letter to Communications Day so I will repeat them here:

Re ‘Rod Tucker claims Scales ignored advice on ACCC role’ in yesterday’s CommsDay. As a member of the expert panel with Rod Tucker on the 2008/09 version of the NBN formulation I can only strongly echo Rod’s comments that we thoroughly considered the options for the NBN particularly FTTN and the possible scenarios to transition to a FTTP solution which is accepted worldwide as the ‘final solution’ as [Telstra chief scientist] Dr Hugh Bradlow has said publicly several times! Our conclusion in 2008 that FTTN could not be assumed as a transition to FTTP (unless done by Telstra!) was reached before the ‘unsolicited’ report by the ACCC was received literally at the 11th hour of the process and certainly did not influence our conclusion. Mr Scales mentions only one (Analysis-Mason) of three detailed reports comparing the costs of FTTP versus FTTN which we considered, all of which are in the public domain!
Rod, I and Tony Shaw each individually told Bill Scales that the ACCC ‘bombshell’ as it has been termed was NOT a major influence (let alone a ‘bombshell)’ on our conclusion re FTTN transition to FTTP. Tony Mitchell who was unable to meet Mr Scales also shares this recollection. I cannot usefully speculate on what John Wiley and Patricia Scott would recall as influencing their decision to concur with the conclusion made by the panel. Hopefully the history of NBN will be written from objective analysis of the evidence (both written and oral) and after reflection of outcomes for Australia!