Wednesday, 12 September 2012

NBN: Coalition support for Free Markets vs Monopolies

Mr Turnbull wrote a recent commentary on a speech by the Chairman of NBN Co, entitled "Policy Choices in Project NBN".

[Long. 2850 words total, 2000 words of mine]

I made this comment on his blog:
You keep on top of the debate and are continually moving it forward. Excellent work as both a Shadow Minister and prospective Minister.

I’m impressed with your criticisms of the NBN Co rollout. Informed and useful.

Here is not the place to nitpick the Coalition policy. You have one, have made promises that can be evaluated and have publicly committed to continuing a National Broadband Network.

Thanks for being so active in this debate and not allowing the incumbents to be complacent or go unchallenged. Well done.

steve jenkin
Here are my criticisms of his blogpost.

We support all Australians having access to very fast broadband, but would prefer it be delivered by the private sector in a competitive environment as far as practicable, instead of by a government owned monopoly provider. [italics added]
To characterise NBN Co as a monopoly provider may be correct in a limited sense, but is more histrionics than insight.
Fibre to the home is now a regulated service, overseen by the ACCC. Enterprises like TransACT who are already building their own FTTH have sought and been granted exemptions. A prospective entrant with a good story might be able to convince the ACCC to allow them to compete with NBN Co, but I'd expect with the proviso of "equal access".

The only "monopoly" NBN Co is in the provision of wholesale, not retail, services. The intention is to guarantee a level playing-field for retail ISP's and allow competition and choice for end-users. The ACCC also regulates what NBN Co can charge, this is not a free-for-all.
However (with the NBN Co already established and having committed to significant contractual arrangements) we have to deal with the facts on the ground.
Therefore our criticism of the NBN is focused on the vast expense of its solution and the decade or more that it will take for the NBN to be provided in all parts of Australia
That cost and delay is in large measure due to the decision to deploy FTTP to 93 per cent of premises, although it also increasingly appears to reflect NBN Co’s sheer incompetence and inability to deliver such a huge project in a timely manner.
Before they've even started rolling out in earnest, it's not possible to make that claim. They are only just through the planning, pilot-test and contract negotiation phase.

I also find this statement disingenuous. A decade to wire up 7-10M dwellings seems pretty fair to me.
As another commenter pointed out, The Opera House and Snowy Mountains Scheme ran widely over schedule and budget. The NBN Co plan seems a lot more believable, solely because they are deploying well know technologies. There will be surprises, there will be changes.
One consequence is that thousands of Australians are waiting far too long for broadband upgrades.
As opposed to the multi-year waits for basic phone lines for rural customers?
Or the years that Telstra denied subscribers ADSL2 services when the hardware was capable?
Or the decades I'll have to wait under his VDSL-FTTN plan to get even 50Mbps over the dodgy copper here?
This is rhetoric and noise. A criticism without consequences or creating a measurable commitment for himself.
Even worse, other Australians in greenfield housing estates have no wireline telecommunications at all – as I saw in Queensland and Western Australia last week. Telstra no longer has an obligation to provide wireline connections in estates of more than 100 lots. And as for the NBN Co – well all too often they just haven’t turned up yet and don’t look like doing so any time soon.
This is a real and pertinent criticism: Since the Structural Separation Undertaking (SSU), getting a new connection can be problematic.

But who's The Bad Guy here?

I see this is just yet more poor behaviour from Telstra.
They are playing the "Nothing to do with me" game, pushing all the responsibility and resultant opprobrium onto NBN Co and the incumbent Government.

If Telstra were truly committed to delivering great service and fulfilling customer need, they would've found a way with the ACCC to fill this gap - exactly as TransACT is doing in Gungahlin.
Mr Young argues that telecommunications is a natural monopoly which he defines like this:
“[a natural monopoly] is when one supplier can serve the entire market at a lower total cost than two or more suppliers can. Having multiple suppliers of natural monopoly services is socially wasteful. They make inefficient use of an economy’s resources.
This is why you don’t build two bridges next to each other, expecting that competition will force them to charge lower tolls. With equivalent costs and only a portion of total traffic, each of them will need to charge higher tolls than a single bridge-owner would require.”
The problem with this thesis is that it basically denies the dynamic, creative forces which only competition can deliver. A monopoly is always likely to be complacent – there is nothing to stir it to innovate, to improve its efficiency.
Mr Turnbull has a point here.
There is an inherent tension between having a Monopoly Utility provider and "keeping the bastards honest". Competition in large marketplaces produces the best price and quality outcomes for consumers and makes successful vendors efficient and seeking constant improvement. Government bureaucracies that don't have to worry about any competition, nor have close inspection regimes become very complacent, inefficient and completely insensitive to consumer problems. In Australia, we had a very long history of this in government provided services, like railways and more.

Much like Telstra prior to 1997.
The implication being raised here is "we'll return to the Bad Old Days" because of the single-provider status.

The problem for Australia is we're not nearly densely populated enough to support unregulated supply of Telecoms distribution. It is significantly cheaper and more efficient to have a single customer distribution network here.

The dual Optus-Telstra HFC cable rollout showed that both large Telcos don't care about efficiency and viable investments. They'd rather actively prevent others making initiatives than do anything themselves.

People forget there was 3 Telcos in Australia before 1992: Telstra, O.T.C. and AusSat.
I worked for O.T.C. and they were far more efficient and customer focussed than most of the public companies I worked for. There was a culture of innovation, excellence and customer-concern. This lasted for the nearly 50 years that O.T.C. existed. It wasn't accidental, nor transient.

It is not a given that all Government Business Enterprises especially natural monopolies will descend into the bureaucratic, self-absorbed and inefficient operations we became used to.

Mr Turnbull has raised a very good point: What mechanisms will be put in place to keep them on their toes? To prevent a decline into the cesspit of arrogance and poor customer concern and service.
If Mr Young’s defence of monopolies was taken seriously then there would be only one sub-sea cable connecting Australia to the rest of the world, or at least only one company providing those services. And where would prices be then? Well we know, actually, the introduction of competition in any telecoms network, sub-sea, or terrestrial brings prices down.
This is a "straw-man" argument, it is incorrect.

O.T.C. was a monopoly and for decades had the cheapest, or close to, international calling prices. Even to the USA: people who needed to talk could always decide which end made the call. Our "balance of payments" of call minutes was universally in our favour: many more international calls originated in Australia than were made into here.

Single provider Utilities are not necessarily inefficient, overpriced monopolies. Only one counter-example is needed to destroy that myth.
And that is why, no doubt, that in every other comparable country a central telecoms policy objective is to promote facilities based competition where this is possible (typically built-up areas). I am not aware of one other country where the policy is to actively stamp it out.
Again, more verbal entertainment, not enlightenment...

The Elephant in the Room is: that left to their own devices, Telcos in competitive markets haven't installed Full Fibre distribution networks, though they fully converted their long-distance and internal networks a decade or more ago.

Why is this??
If the Free Market and maximum competition is so good and so efficient:

  • Why didn't Telstra start deploying fibre to homes by 1995?
    • If they didn't deploy the fibre, why not an incremental upgrade program of installing empty conduit into which fibre could be inexpensively installed later?
    • An incremental upgrade program, like Y2K, would've had an almost zero marginal cost spread over the last 20 years.
  • Why have so few Telecos overseas deployed residential fibre, versus business services and CBD?
The question for Mr Turnbull to ask is why, in the most competitive and hence "efficient" marketplaces, have Telcos not converted to full fibre distribution networks?
Why have sections of Korea, Japan and I'm guessing Singapore done so when they usually have State owned Telcos?

I think the answer is simple economics:
When all your competitors are using the same technology as you, you all have around the same cost structures, similar margins, similar cost of finance.

Because of the high cost-of-entry and guaranteed low-initial consumer take-up rate due to contracts and conversion delays, no single Telco will ever see an attractive Rate of Return on such expensive investments. After all, it took a century or more to arrive at our current network in an incremental fashion.

Even for dominant or sole-supplier Telcos, they have no economic incentive to change technologies.
Each year they can change-out just a little of their degraded copper, raise prices just a little to cover increased maintenance and continue "Business As Usual".
Replacing the full distribution network with a new technology (fibre) doesn't buy them more customers, lower input costs by 10-fold or increase revenue dramatically: but it comes with an unacceptable price-tag: a huge, single-shot investment that pushes up input costs radically.

This is exactly the same upgrade/conversion problem that organisations face with large I.T. Infrastructure investments like mainframes and storage arrays. The costs of conversion are so high and the impact so pervasive that the incumbent vendors can always pitch an upgrade just a little bit cheaper than a technology swap... The frog-in-boiling-water syndrome: slow, incremental changes are tolerated, leading to quite untenable and undesirable outcomes.

Mr Young goes on to criticise ‘fibre to the node’ on the basis that it would not result in the structural separation of Telstra from its retail business which is a key policy objective of the NBN (and one we broadly agree with).
A Coalition policy point.
However if, as he notes, the last mile of copper is acquired (or leased) by NBN Co then it is part of an NBN wholesale network – separate and distinct from Telstra’s retail business. This does not undermine the structural separation objective anymore than does the NBN leasing Telstra’s ducts.
On FTTN, it should be noted that our approach is not FTTN – good; FTTP – bad. Rather we believe a network upgrade like this should be effected in a manner which delivers the objective as quickly and as cost effectively as possible. So one should be technology agnostic – and use FTTN, FTTB, FTTP were each makes the most sense both in terms of time and dollars.
This is evasive and just a "motherhood statement", not an informed financial or technical one.

"We'll just do it cheaper because we'll consider more options."... Tells us nothing, makes no testable guarantees, gives us nothing to check and model.
He justifies the NBN Co paying Telstra and Optus not to use their HFC networks on the basis that he says the HFC networks serve the most affluent communities and that if NBN Co did not build into those areas it would lose valuable revenue opportunities. In addition, if the HFC were allowed to compete, its owners could “cherry pick” – charge lower prices in the most attractive HFC areas and undermine the NBN Co’s ability to charge a uniform national price regardless of the cost of serving particular areas.
I was pretty convinced by Mr Young's arguments, both technical and economic. I don't see anything here that makes a good case otherwise.

HFC (Hybrid-Fibre-Coax) is an obsolete technology and being a shared medium, like the abandoned Opel wireless network, suffers congestion problems when not used to deliver common data (Cable TV) but independent data streams (Internet). It's your last choice for anything but sparsely populated areas.

There's a reason that Korea and Japan didn't deploy HFC, but direct fibre. It's not a good deal.
That's the same reason that both Optus and Telstra didn't upgrade their HFC to blindingly-fast Internet, especially when it was deployed in exactly those areas that were interested in "fast" broadband, and could afford to pay premium prices.

If upgrading the existing HFC cable-plant to "fast" broadband was a great idea, it would already have been done. Twice: once by each Telco.

Mr Turnbull might be confusing Australian Cable-TV with the network providers in the US moving into the broadband market. They had deployed their cable much longer than us, had significant market penetration and the Cable-TV companies figured they could out compete Telcos in specific niches. It's why we don't see the rural and regional areas there being served by HFC-based broadband: it has very limited technical and economic viability.
In conclusion he (Mr Young) writes:
“If the national broadband network – even if entirely owned and operated by NBN Co – is a patchwork of fibre-to-the-premise, fibre-to-the-node and upgraded HFC, with different end-users getting different levels of service, avoiding cherry-picking could become much harder. This in turn could drive NBN Co to pricing its services with more reference to the cost to serve particular geographies. That would represent a major policy change which could make it impossible to serve the most expensive geographies on a price-equivalent basis without making the subsidies explicit and transparent.”
The key words here are “without making the subsidies explicit and transparent.” And therein lies a very big difference in philosophy. Not only do we prefer competition to government monopoly, but we believe that subsidies should be explicit and transparent. We are thoroughly committed to providing access to broadband to regional and remote Australia at city prices – so there is no discrimination by reason of geography – but the cost of doing so should be transparent. And there is plenty of precedent for that. What, after all, is the USO?
Telco competition has failed us in Australia spectacularly for the last 20 years, why are they still wedded to it?

Australia for Telcos is a few very concentrated and profitable puddles surrounded by mostly empty desert dotted with far too many unprofitable and annoying little puddles.

You would not choose to serve 90% of the Australian Population with fixed-line services if you didn't have to.

Left to their own devices, any Telco who rolled out "fast broadband" of whatever flavour, would make the same decision.

Australia is a democracy and we value "A Fair Go" - which includes equitable access to communications everywhere.

Governments need to enforce a Universal Service Obligation on all Telcos, or it wouldn't happen.

"we believe that subsidies should be explicit and transparent" - I can't fault this logic or ideological position, but it does imply that "someone" (the Government) would reimburse regional, rural and remote subscribers for "excess charges".

I can't see how that would continue working equitably: it might start off being fair compensation, but overtime these things have a habit or becoming under- or over-compensated.

But explicitly breaking out the subsidies: yes, we as taxpayers need to see those.
Mr Young ends his speech with a discussion of what the NBN Co should do when it earns mega-profits – pay higher dividends, or cut its prices? Since he acknowledges this particular conundrum is “perhaps far-fetched” I will refrain from commenting other than to say, the challenge of how to deal with NBN Co’s massive cashflow surpluses is one that is not causing me to lose any sleep.
I find that a cheap shot and would've expected a lot better from someone of the calibre and experience of Mr Turnbull. He's successfully implied the contradictory: "it's a massive boondoggle" and "it won't be profitable".

NBN Co has yet to contend with profits, let alone large ones, as Turnbull notes.
Mr Young was being candid and honest by presaging an important question:
Your projections for high-speed service take-up have already been significantly exceeded. If this goes on, won't you be making more money and what will you do if you face that problem? [my words, not Mr Turnbull]
Yes, they will: and they'll use it to avoid raising debt, speeding up the deployment and paying more back to the taxpayer.

That sounds reasonable to me and good, prudential management. Worthy of an accolade, not a brickbat.

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