Monday, November 23, 2009

Broad and broadband

Much is being made over some recent comments by the CEO of AAPT Paul Broad that criticise Government policy making with respect to the National Broadband Network (the NBN). These comments are really part of a long running critique by Broad, and also reflect yet another strategic error by Telecom New Zealand with its AAPT asset.

I've found three Broad comments on the NBN to reference. The first was at the time of the bids for NBn 1.0 closing where Broad questioned the need for the additional speed. More significantly he indicated that the need for more broadband could be simply solved as;

There's willingness from all industry participants in this debate to pull a chair up to the table and ensure the access rules we play by prevent any one player obtaining an advantage.

This rather naive view was followed by an immediate criticism once the NBN morphed into NBN 2.0 (the FTTP) where he appeared on Lateline Business and criticised the economics of the proposal. At core however was his comment;

Getting speed into parts of the economy, where it hasn't got speed: right thing to do. But, please, don't duplicate what's already out there. Recognise that we've actually grown speed in this market considerably in the last two or three years, leveraged what we've done, incrementally changed the investment profiles that all of us have made. And we as a nation'll be better off.

His most recent comments appeared in the Oz where he claimed there was no need for the NBN and that it really was just a ploy to separate Telstra, saying;

The NBN is absolute rubbish. It is a political ploy to separate Telstra. It is a political tool to beat Telstra up with because (former Labor government communications minister Kim) Beazley got it wrong all these years ago when they formed Telstra. This is a way of trying to correct it.

Apart from the fact that the real decision not to separate was made by the Howard government (at privatisation) this statement is big on the claim that the NBN is only about industry structure.

The reality is that since its inception the NBN has been a plan with TWO goals. The first is to create the national broadband infrastructure needed for the 21st Century, the second has been to correct the market structure issues in the industry (that lay at the heart of Broad's first set of criticisms). The need for intervention to achieve the infrastructure outcome has been clear ever since Telstra announced in 2005 that it wanted to speed up the CAN, but do so in a way that denied their existing wholesale customers access or did so without regulation. The need for intervention was further revealed by the policy cock-up of the Howard Government in proposing to conduct a tender for policy outcomes (the plan of the original expert panel).

The structural issue is one where the ALP had looked before under Lindsay Tanner as shadow minister and recognised the practical difficulties of achieving a separation. Instead they turned their minds to the concept of a prospective separation, that is achieving separation at the time of the construction of new network.

Neither the need for speed nor the structural conundrum alone is the motivation for the NBN policy, it is both.

The really interesting question is why the CEO of AAPT has become the leader of the anti-NBN cheer squad. The answer can be found in the long stream of strategic errors made by TCNZ with AAPT.

The first of these was to acquire only 80% and leave the remaining 20% that was largely in the hands of management, this set up some interesting debates about conflict. The second was to buy a company that had come into play through a placement of 15% new equity to fund capital programs, and then not really be prepared to further invest. The third was to immediately fragment the business with two "Trans-Tasman" business units in mobile and internet created. These businesses, especially the internet one, proceeded to make a series of decisions that stalled AAPT's entry in its own name into the residential broadband market. The mobiles business ditched its original CDMA vendor Samsung to go with the vendor in NZ Lucent, a decision that failed to recognise that the Australian network requirement was more like the network Samsung built for Hutchison (Orange) than Lucent was building for Telecom.

These errors saw AAPT abandon its "CLEC" strategy that had required the capital funding. The next five years saw a dedicated focus to implementing an "infrastructure light" telco model. This included the decision to invest in a new customer service platform in Hyperbaric. A key feature of that platform was its ability to provide service in an infrastructure light model.

AAPT did very well in this cycle, growing both revenue and profit as the big lumps of underperforming investments and abandoned projects worked through the system, including the CDMA cost and the LMDS cost.

It did not, however, do well enough to justify the original price paid by TCNZ at the top of the telco boom. Part of its success was its developing relationship with Telstra as a wholesale customer. A focus on clearing disputes and positioning AAPT as an effective channel worked well. The failure in the strategy was to keep asking for too much, to seek new input prices on the promise of finalling getting to inking a longer term strategic relationship. This left AAPT exposed. When sentiment at Telstra changed against wholesale, AAPT had no medium term protection, and, indeed, some contacts at Telstra who had grown sick of the AAPT negotiating stance.

At this point AAPT was faced by a choice. Work harder on rebuilding the relationship, or make the call on buying infrastructure. At this time a third option was presented to TCNZ - sell the AAPT entity. This strategy was pursued but resulted in the party who had first approached TCNZ to acquire not even formally bidding at the end. TCNZ found no satisfactory buyer, but decided to instead buy one of its suitors, PowerTel, and make the decision that it was getting into the infrastructure business.

One of the key reasons AAPT stayed infrastructure light was that AAPT recognised that broadband over ULL was at best an interim technology and that a move to FTTN was almost certain. This was clear from the industry fights in 1999 and 2000 over the migration of loops from exchanges to pillars. This took some time to be realised - but from 2005 it was clear that something would happen.

Indeed through the period that TCNZ first tried to sell AAPT and then buy PowerTel there was not only the Telstra proposal, but the counter proposal from what was the G9 but became Terria. It appears that though PowerTel and AAPT were both part of this consortium, it was the belief of some that the combined entity did not need the partnership and (in TCNZ) a belief that nothing would happen.

They were wrong on both counts. Paul Broad's pronouncements on the NBN should be interpretted for what they are - the commentary of a CEO who has backed the wrong strategy.


Anonymous said...


This is very interesting like all of your comments. Although it may not be central to your line of thought, what sort of strategy should a telcom like AAPT be pursuing right now?

Jim Holmes

Grahame L said...

David I understand your logic here in a broad sense but given that AAPT still has a fairly limited exposure to infrastructure how would it see the NBN as disadvantageous for it over other competitors? It surely isn't in a worse position than say Optus or TPG or Internode in that regard and they are generally NBN supportive? If what Quigley says is correct then there will still be a need for third party networks and the Poweretel backhaul might do well from that. I do see your point generally but I'm not sure it accounts for the vehement view of Broad himself.