The separation of Telstra

Renai le May writing for itWire has reported on Posum’s excellent expose of the cant inherent in calls for a cost benefit analysis of the NBN.

However, his suggestion that the solution to the problem could have been simply found in the separation of Telstra ignores the complexity of that issue. The single biggest difficulty with an externally imposed separation of Telstra was always that the there is no really simple dividing line in the existing business – systems are vertically integrated, the voice switches at the edge of the network are inherently part of the trunk switching, and even the way DSL is offered as a line sharing service differs technically in the way Telstra supplies to itself and others.

At a seminar organized by the Competitive Carriers Coalition and AAPT in 2005 on the need to improve broadband access in Australia it was identified that the time to achieve separation was when a new access network was built, not separating the old network. The staff of Shadow Minister Stephen Conroy were eager listeners.

We also need to remember that the national conversation about the need for a new access network was started by the owner of the copper network, Telstra. They did this in their FTTN proposal to the Howard Government in mid 2005. In their initial proposal the wholesale service was going to be of a lower standard than the one they supplied to themselves. Over the ensuing year it was not regulatory “certainty” they sought so much as simply a higher access price.

The ALP’s NBN Mark 1 plan was always as much about securing the restructuring of the industry as it was about Government funding of the network. It was the ALP’s expectation that an offer of a Government injection of $4.5B to build a new access network that needed to be structurally separate would create sufficient incentive for Telstra to voluntarily do so. The difficulty with this strategy was that it didn’t count on the brinkmanship that the then Telstra Board and Management were prepared to play. As the deadline for bids grew closer Telstra demanded that the separation requirement be removed. How they erred into believing this was at all possible is one of the imponderables of life – I have my own theories but they are only that.

When they put in their short form bid as part of this stand-off Telstra made a fatal error of not meeting technical bidding requirements (despite employing at least three legal firms on the bid, none of them reviewed the final letter), the Government had no alternative but to exclude them.

In the intervening four years since FTTN had been proposed by Telstra the FTTN technology had moved on apace. No one disputes that eventually we will want to take fibre all the way to the home, the question has only been when. (As an aside a major fault with the Henry Ergas CBA is that he never allows for the fact that using alternative technologies only results in the need to defer the FTTN build not can it completely). The expert panel concluded that over an eight year build cycle it was more cost effective to start building FTTN now and not do a two stage build.

This decision then completely changed the relationship between an NBN build and Telstra. No longer was Telstra critical as the copper loop was not part of the build. The deal that NBN Co has done with Telstra does however reduce NBN Co’s biuild cost and de-risks the revenue line, but it did not need the deal more than Telstra did.

Finally can we all remember that in Australia’s metropolitan areas there are many people not able to receive any fixed broadband, either because the copper runs are too long, or because there is fibre or an active line sharing device on the path.