Telco pricing and market 'price elasticity'

There's a counter-intuitive effect with marginal cost of Production Factors, like energy (and Teleco services) - using the factor more efficiently, consumes more of the resource. Because you make more profit, lower prices, produce more and demand for the resource increases. The Khazzoom-Brookes Postulate/Jevons Paradox:

"energy efficiency improvements that, on the broadest considerations, are economically justified at the microlevel, lead to higher levels of energy consumption at the macrolevel."

The structural reason is simple: the market is highly price elastic, so decreasing prices a little lifts total sales considerably. In economics, this is a well solved problem for non-monopoly markets, "Profit Maximisation" occurs when MR = MR (Marginal Revenue equals Marginal Costs). [For monopolies, MR = 2*MC, IIRC.]


In the 70's & 80's at O.T.C., we made record profits each and every year - by exceptional marketing and sales strategy, which included dropping prices every year. [The TV adverts series, like the 'Memories' campaign, won many awards.]

This was driven by the technology: Moore's Law drove the per unit cost of services in both cable and satellite down exponentially.

Profits margins increased because full cost reductions weren't passed on. By the mid-80's it was cheaper from the East Coast to call London or New York than use Telstra to call Perth ($1/min).

This is a lesson Telstra Management never learnt and was obviously lost when O.T.C. was subsumed into 'the Borg' in 1992: passing on part of the Moore's Law savings, Revenue and Profits both increase.

Economic theory is very clear on this point:

Traditional (Premium) Telco Pricing isn't just 'bastardry', it kills your profits which will eventually kill your company.

People love to talk/communicate, it is one of the defining characteristics of Homo Sapien.
This underpins the profitability and constantly growing demand for Telco services... This, the consumer demand, is the real 'crown jewels' (or 'birth-right') of Telco's, not their networks and technology.

Nobody has yet plumbed the limits of the price elasticity curve for human communications.
Setting the marginal cost of phone calls to zero doesn't kill your profits as shown by the US 'free call' areas.
It does lead to changed behaviours - more calls, many shorter.

Conclusion:
The incumbent Australian phone companies, Telstra, Optus & friends, don't understand the fundamentals of their business:

• Moore's Law has been driving down their input costs exponentially for 4-5 decades, yet they haven't passed on those savings. The differential is now 100-10,000 (guesstimate).
• The demand for human communication is close to infinite.
• The Comms market has close to infinite price elasticity.
• Profit Maximisation is simple and 'Premium Pricing' (what-the-market-will-bear) is exactly wrong.

The challenge for the Telcos now, especially Telstra, is unwinding from their 'Premium Pricing' to a rational 'Profit Maximisation' model. How do they explain price reduction of 10-100 times?

The consumer backlash, if not managed, will be savage and punitative. The original 1990's duopoly Telco's, Telstra and Optus, will suffer greatly - to the point of being endangered.

"You can fool some of the people all of the time" - but woe betide you when those you've fooled understand they've been gouged/conned and have alternatives.

Aus High Speed Broadband: Barriers and Challenges

A response to the "Public Sphere" run by Senator Lundy on "High Bandwidth for Australia".
Previous comments on the National Broadband Network - about excess costs, poor design and addressing lost strategic opportunities.

Future posts will be linked from here.

Roger Clarke finished his presentation with a comment something like "the upside is obvious, the downside needs to talked about".


Without bringing down the tone, optimism and vision of the event, enumerating the Barriers and Challenges associated with roll-out and adoption of 'universal' High Speed Broadband (HSB) in Australia allows for generating better designs/options, avoiding 'surprises' and anticipating routes around and out-of "bear pits", "Forewarned is forearmed". Who knows, new insights may emerge from this viewpoint.

Alan Kay in his 2003 Turning Award speech identified the central importance of ICT:

"our field is a field that's the next great 500-year idea after the printing press"

Getting the transition into High-Speed right enough is important:
• There is no way back.

Setting user expectations is very important:
• Servers, not the network, will become the new bottleneck.

The central technical challenges are:
• Usability, Performance, Security, Reliability/Robustness.
Scaling-up and scaling-out current solutions won't be easy, obvious or simple. Probably not cheap or quick either.

The "drop-dead" challenges are non-technical:
• Social, Legal/Political, Regulatory, Cost.

User acceptance:
• Social, Legal/Political, Regulatory, Cost.

Australia has a history of slow take-up of new technologies. It took until 1975 for Colour TV to arrive in Australia. This is counter-intuitive because Australians are well known innovators, inventors and scientists. Individually we embrace change, collectively reject it.

Some of the central problems & differences with The Net are:

• universal & global access
• Uncertain Identities - "nobody knows you're a dog"
• non-physical, untraceable digital goods
• The Permanent Digital Record

Topics:

• Libraries
• Copyright, copying digital docs (c.f. photocopies & royalties).
• Content: DRM, Protection, Enforcement, "free for domestic use", "Free for Mash-Ups"?
• Creative Commons & shared content/resources
• e-Commerce and Monetising Content:
  
  • Royalties: Registration, Recognition, Collection, Distribution
  • Definition, Usage Rights, Nr Plays, Time-shifting, Time-to-live & View-Time
  • 'Sharing'
• Costs
  
  • $: up-front/install, on-going & operations, upgrade/variation, usage (Volume/Time/access), 'surprise' charges: excess-data, reverse-charging, malware induced
  • Damage and OH&S issues: e.g. RSI, eye-strain, ...
  • Availability: Regional, Speed, Filtering
  • User Time: Amplifying User Effectiveness, time cost of {Admin, Tools, machines}, Training, PC maintenance/modification/upgrade, Home Network {design, install, maint, upgrade}
  • Server Access: Free local on-net access, free home servers, Caching {Cost, access, copyright}
  • Security & Privacy: Admin, monitoring, repair
  • Time Shift Streaming:
• "Acceptable Use Policies", Netiquette, defining & enforcing "Rules of Conduct" {email, IM/twitter, blogs, web pages}
• Digital Divide: Socio-economic, Cultural, Geographic, Age, Disability
  • Digital Natives vs Gen X vs Baby Boomers vs Pre-boomers
  • Electoral Disenfranchisement through link/computer speed, proprietary file formats/browsers/utilities and codecs
• Smart Networks vs "Too smart by half" - limiting and inflexible implementations/options
• Power (Electricity), Mobility, Screen Sizes (iPhone, Kindle, netbook, laptop, desktop, Video)
• "All About the Data": Guaranteed Open Standards and Open Access to Public Content. {Audit, enforcement, appeal}
• Unintended Consequences: Recognition, Identification, Redress, Enforce/Change, Legal suits
• Privacy and malicious content: Erasing 'leaks' and the untrue/misleading from The Permanent Digital Record.
• High Performance networking: Video, Adult Content and Gambling.
• SPAM, phising, malware, etc:
  • Cyberspace is a unique and different Legal Jurisdiction. Global approaches, like "The Law of the Sea", Intellectual Property and 'Post and Telegraph' are needed. A critical enabler is physical identification and tracking of maldoers and universal extradition: "nowhere to hide" has to be both a mantra and a reality.
    Bringing recalcitrant regimes into line shouldn't be hard: disconnect or rate-limit Internet to their country.
  • Digital Organised Crime and Digital Conspiracy are serious, global offences which are in dire need of addressing. Underpinning legal and properly funded policing frameworks are needed. Unlike the US "War on Drugs" and "on Terror", th
  • Identity Theft is a major crime & needs one international policing body, with an associated court and realistic penalties.
  • Falsified E-mail Identity, the basis of SPAM, is as illegal and serious as Mail Fraud. It needs to be treated so, with efficient detection and rapid response.
  • Theft of resources: bandwidth, CPU or storage, is as much theft as stealing Fax paper. There was a landmark case in the UK where adverts using unsolicited Faxes was successfully prosecuted. Internationally, the same precedent is urgently needed to control 'botnets' and other malware.
  • Stealing bank login details and so money is exactly Digital Bank Robbery. This is crime, pure and simple, already recognised by every jurisdiction. Why there seems to be no Political will to identify and rapidly bring-to-book these criminals I find astounding and indefensible. The mischief and damage possible through Digital Robbery is enormous - if ever fully realised, 'shock and awe' will be appropriate.
• Government
  • The Net is a Distance and Time shifter: it changes the nature and style of public interactions with their elected representatives. Importantly, it changes representative accountability.
  • A single/integrated approach for all levels of Government (Local, State, Federal) is required for best results.
  • Public access to appropriate Bureaucrats requires both a role/positional Directory and 'ticket handling' systems like Helpdesks. The public have a reasonable expectation to prompt, efficient resolution of requests, complaint etc with Open and Transparent reporting of performances.
  • On-line anonymous venues are the perfect mechanism for whistle-blowers and other public-interest disclosures. Handling problems like the Rockhampton "Dr. Death" allegations or the "Butcher of Bega" sexual attacks, while avoiding false or malicious rumour is the key test.
• Addressing Human Limits on Input & Output
  • John Mashey, creator of the MIPS chip, observed the disparate bit-rates for Human Input & Output. Typing is incredibly slow (30-40bps) speaking & listening relatively fast (10-32kbps), but we excel at inputting vision (10-100Mbps).
  • 
    
• more...
  
  
  

The issue of seeding and supporting early adopters and leveraging their experience/skills into the general populace is central to the wide-spread adoption and use of the new technologies. "Who you gonna call?" when you need to know how to do setup/do something is a critical support mechanism.

Alan Kay has some insight in this problem as applied to Education, with additional comments on applying to adoption of new Computing paradigms. A feasible approach would seem small, focused communities of interest who support & reinforce one-another and who 'spread the word'. Something like the CRC program for Research.

Why are we doing this?

"Augmentation", an important concept, was mentioned by a later speaker. (James Delow?)

Doug Englebart, one of the early giants in Computing, ran SRI's Augmentation Research Centre.
In 1968 he and his group gave an extraordinary demonstration for the ACM - it included hypertext, interactive video and teleconferencing. Implementing this same demo forty years on would still be a challenge.

In 1945 Vannevar Bush, the inventor of Hypertext, designed a system, "The Memex", to augment/amplify a researchers ability.
Key to its use and value was the ability to share 'Associative trails'. It allowed "researchers" to identify and exchange exact lines of research - all the material in one place.

Do our current regimes of copyright and DRM support or hinder the widespread use of technologies like this?

Homo sapien has a need for freedom and meaning.
What marks us as unique is our thirst for knowledge, the need to 'understand' and to communicate. "Solitary Confinement" is an especial punishment.

We cherish stories and story-telling. Maslow even identified "self actualisation" as our highest need. We don't just learn, we record History and identify its Lessons - what works, what doesn't. We advance because we "stand on the shoulders of Giants".

High Speed Broadband is about Humans limitless need to Learn and Communicate.
It is the lastest, but not the last, technological means to facilitate our many needs.
Not the least, our daily work, trade and commerce.

Which segues to our individual and collective 'darkside'.
Creating a new tool/mechanism means creating effective non-draconian ways to keep it safe.
Taking the stance this brave new frontier should be Free and Unfettered is amazingly naive and self-serving. If it were this simple, there'd be no SPAM or malware. Much worse is waiting out there.

Alongside the technical and organisational challenges, we have to consider the Regulatory and Legal environment of what is acceptable behaviour and 'words'. Then figure out how to police and enforce those limits, without destroying the very thing we are trying to foster.

Universal access high-speed broadband isn't "just faster", it's a game changer in exactly the same way that motor vehicles redefined our societies. Megatropolis's are not possible without high efficient, high performance transport networks. Our advanced technologies aren't possible without those large conurbations, either.

"More of the same" thinking isn't adequate for this new technology.

A useful beginning is to ask the questions:

• What do we need to do MORE of and
• LESS of?
• What do we need to STOP doing,
• START doing, or
• CHANGE/MODIFY what we are doing?

It's a Brave New World. We can try to get it off to a good start.

Broadband Lost Opportunities: Gas and Broadband

1999/2000 saw the laying of the "Eastern Gas Pipeline" (EGP) - 795km from Longford in Victoria to Horsley Park in Sydney, at around $450M. It carries natural gas from Gippsland Basin (and Bass Strait?) and provides additional supply security to NSW.

The mainline route is:

close to the towns of Bairnsdale, Orbost and the Cann River, before turning north past Bombala and Cooma. From the eastside of the Snowy Mountain region, it travels northeast to the coast through Nowra, Port Kembla, Wilton and on to Horsley Park to its termination point on the outskirts of Sydney.

Country Energy Gas is the NSW regional retailer. The Energy Networks Australia State Summary say this about the NSW country towns connected to Natural Gas:

There are 24 210 km of reticulation mains serving 901 000 customers in the State’s major urban areas, and its large and small regional centres.

Wagga Wagga, Tumut, Adelong, Cooma, Bombala and Gundagai, Albury
Nowra, Bomaderry and Queanbeyan.

Some of NSW's gas pipeline "Laterals" are listed in this NCC PDF file:

• the Mainline from Moomba to Wilton;
• the Dalton to Canberra lateral;
• the lateral pipeline from Young to Cootamundra and Wagga Wagga;
• lateral pipelines from Young to Bathurst, Orange, Lithgow and Oberon; and
• the lateral pipeline from Burnt Creek to Junee, Griffith, Leeton and Narrandera;

The Sydney Hydraulic Power Company (now part of KONE Elelvators) pipe network was shutdown in 1975 after nearly a century of operation. The buried high-pressure water pipe through the CBD remained a valuable asset. In the last 1990's it was purportedly acquired for Telecommunications use (no references found).


Utility companies have been mindful, since the deregulation of Telecommunications in Australia, of their unique access to households/businesses and the commercial possibilities flowing from it. PowerTel, formed in 1998, was 31% owned by the "Downtown Utilities" consortium, EnergyAustralia, Citipower and Energex. They provided the local loop right-of-way to a potential 2.5M of their customers.

Transact, in 1999/2000, also leveraged this access from powerlines to roll-out its network.

Rail corridors have also been used (extensively?) to lay optical fibre cheaply. A very brief sample:

• In 2001, Leighton Holdings announced the 1800km Queensland "Reef Network" costing A$85M installed in the QR corridor. ($45/m)
• QR Networks is currently selling spare capacity, dark fibre and site/corridor access.
• VicTrack also has a Telecommunications arm.

Reef Networks' $45/m cost is well under the NBN's estimated ducting only costs of $60-$150/m.

The various Gas Networks should've been aware of the these options and had the opportunity to leverage their extensive pipe network upgrades and additions into both long-distance and local-loop Telecommunications networks. Only in one town, Cooma, did a third party partner with them to lay empty conduit/pipe when the reticulation network was constructed. The marginal cost of laying another pipe in the same trench was minor.

This oversight has massive implications now with the (A$43Bn) NBN roll-out.
Not only would those utilities have an additional on-going revenue renting duct access, it would've made the NBN roll-out much cheaper, easier and faster. Nobody wants their street dug up one more time.

The shareholders can't be happy with their boards either. The real loss was in National strategic and commercial competitiveness. A lack of vision and execution by the responsible regulators has cost the country dearly.

Phone Companies vs Broadband

Traditional Telcos, "phone companies", are exactly the wrong people to own and operate consumer Broadband networks, and their close relative, Cable TV.

There is an inherent conflict:

• Telco Engineering is very different to Computer Data Network Engineering. You cannot be good at both or build networks that are good at both.
  The network & equipment designs and tradeoffs are antithetical and antagonistic.
• Telcos make money from phone services, which are relatively low bit-rate. It is against their commercial interests to sell high-quality, high-speed data networks at affordable prices.
  To expect them to cannibalise their most profitable line of business is asking for incompetent & irresponsible management, which puts them in jeopardy from corporate regulators and malpractice suits from shareholders.

There has always been a fundamental conflict of interest in any Telco rolling out Internet broadband services: cost-per-bit charging either makes telephony effectively free or streaming TV monumentally expensive.

In Australia after Telco deregulation, the initial duopoly (Telstra & Optus) were allowed to roll-out both Broadband and Cable TV. The early 1990's Cable TV debacle with 80+% duplication showed both the inherent commercial conflict and that both Telcos were aware of it and would act, aggressively, to maintain their commercial interest.

The current parlous state of play with National broadband service underlines the argument.
The design of the new NBN by Telcos is similarly flawed. They need to make it expensive and complex to protect their phone networks for as long as possible.

That our legislators and regulators have failed to understand this inherent conflict, to see the massive market distortions/failures is an amazing oversight. There are either blind to it or accepting of it and in the thrall of the large Telcos. Is it ignorance, incompetence, arrogance, apathy or something worse?

The solution is clear and demonstrably effective:

• Issue separate licences for telephony and data networking, with the same cross-ownership restrictions/regulations already applied to the Media.
  Papers, radio and TV need to compete with one another.
  Regulations prohibit a single marketplace being dominated by a sole player.

Explaining why Australian consumers aren't served by a protective communications regime is becoming increasingly hard...

Telco Engineering vs Network Engineering

For many years I had the uneasy feeling that the Telco Engineers I worked with/for over most of a decade at O.T.C. did not actually understand Computer Data Networks.

Here I attempt to formalise and explain that thought.
The implications/ramifications won't be examined in this piece.

History

Telephone/Telco Engineering dates back to between ~1880 with the formation of the first phone companies and 1915 with the first US transcontinental (long-distance) calls. Dial phones were introduced in the US circa 1919, but automatic exchanges had been invented well before. The profession of Telco Enginering has around 125 years of tradition and practice.

As a profession, they have been very good at doing what they do - creating reliable point-to-point voice communication. They have extended into high-availability point-to-point digital services.

Modern Computer Data Network Engineering dates from around 1982 with cheap mini-computers and the IEEE 802.3 standard for Ethernet. Cheap PC's, affordable Interface cards and UTP (10Base-T), standardised in 1990, set the stage for current LAN's - desktop and server. This gives the modern discipline around a 25-year history.

The Universal Network Glue, IP (Internet Protocol(s)), dates from 1969 with the interconnection of the first two systems. Early Telco Data Networks go back to Telegraph (morse code) and Telex and ended with X.25.

For completeness, the World Wide Web, created by Tim Berners-Lee and Robert Cailliau at CERN, and now popularly referred to as 'The Internet', leveraged in 1989 PC's, ethernet and TCP/IP.

1996, the birth of the Modern widespread Internet, was marked by Microsoft abandoning it's proprietory MSN network & protocols and adopting Internet Everywhere.

Differences in Networks and Approach.

Telco networks started with patent wars, bleeding-edge technology and on-going & increasing requirements for large capital investments. That 'sunk cost' became huge as phone access was rolled out almost universally, at least in the 'First' and 'Second' world, providing a considerable barrier-to-entry for new players. After some decades, incumbents could easily kill new competitors by under-pricing them - they had paid for their networks and with great Free Cash Flow, could upgrade & extend their cable plant out solely from operating revenues.

To compete in the Telco world required huge investments in cable plant and switching equipment, and extensive, preferably full, network coverage. "Metcalfe's Law" states the value of a network increases with the square of the number of connections. A provider with a slightly better coverage in an area, all else being equal, quickly gained an economic advantage. Achieving better cash flow & profits either through higher charges or more subscribers. This could pay for faster expansion of the network, increasing their advantage. A virtuous circle.

Subscribers could not, even if they wanted, install & run their own cable plant & subscriber equipment. Initially, it was too expensive and patent-protected, then precluded by technical compliance requirements, then by legislation and regulation.

Telco operating principles became:

• effective monopolies per region
• hub-and-spoke design
• extensive overbuild to cater for projected demand
• high-availability, high-cost central equipment and interconnects
• simple subscriber equipment and complex exchanges and transmission systems
• 'Premium Pricing' model ("what the market will bear", vs "cost plus")

Telco networks are a classic Cost Accounting study: almost all costs are Fixed and Indirect, often dominated by Financing costs. There are almost no Direct or Variable costs.

E.g. the only marginal cost for any phone call is the cost of electricity: ~1 watt per phone. Around 20 milli-cents per hour. Capturing & processing billing data is 100-1000 times more expensive.

Telephony and Data Networks differ in almost all details, "Let me count the ways":

Factor	Telco	Data
connection	Circuit	Packets
speed	fixed	variable
Noise	ignored	error-correction
echoes	cancellation	n/a
multiplexing	external systems	inherent
Model	Central Switching	Distributed switching
Topology	Hub-and-Spoke	Buses, self-healing loops distributed equipment
High-Availability	component redundancy	whole switch duplication
congestion	no circuit, call fails	slower transfers
lost data	noise & dropouts	retransmit
switch design	non-blocking, continuous connection	queues, dropped packets, retransmit
lost data	noise & dropouts	retransmit
variable delay, jitter	highly sensitive	tolerant, retransmit
multiple connections	more links	increase link speed
Encryption	External, expensive	Embedded, Extensible
Intelligiblity and 'Quality of Service'	good, guaranteed	variable, no general QoS
Local loop Scalability	Rebuild, reinstall	In-place link upgrade
Upgrade	Long-range forecasting, Initial overbuild	In-place upgrade, incorp Technology advances
Equipment source	Specialised, expensive	generic, commodity
Financing	Large CapEx hidden in monthly rental	Prepaid install and Customer owned
Billing	Post-paid, unlimited Credit, Itemised bills	Prepaid with limits
Capacity	megabit range	HD video capable, tens of gigabits
Multicast	Only single-cast	multicast capable

What must be made clear:
there are some services that IP Data Networks do not currently deliver as well as the Telco networks. Those requiring low-latency, low-jitter, and low-noise. I.e. a guaranteed (high) Quality of Service. Even the traditional consumers of these services, radio and TV, are changed their work practices and moving to in-house IP networks or general Internet delivery.

Until 1999/2000 overseas telephony dominated those trunks. Since then, direct internet traffic has kept growing (exponentially - what doubling period?) and now swamps all other service demands.

As an example of the capacity differences: the ~10M landline services (at 32kbps) and 21M mobile services (at 9.6kpbs) represent a maximum of ~500Gbps demand, possible in a single, albeit large, router. The usual demand is around 2-5% of the maximum (10Gbps) - now well within the capability of low-cost routers.

Telco Engineering applied to Public Data Networks.

Large modern corporate Data Networks are "Pure Internet" networks. Networks such as the Department of Defence, cover most parts of Australia and extends overseas. It provides for 100,000+ desktops, a larger telephone networks, audio & video broadcast and secure services. They compete in size, service range and complexity with normal "common carrier" (Telco) networks.

If 'traditional' Telco Engineering approaches were more cost-effective or provided better availability & reliability, then they would be in use. The usual arguments for not delivering "Pure Internet" (commodity links/equipment, symmetrical upload/download) to households is population density. Defence faces the same distribution problems across its many, large campuses - and still run "Pure Internet". When cabling/trenching costs dominate, it still makes sense to run small copper or optical fibre cables with switching systems distributed through the network.

The costs of running individual copper or optical fibre from a central exchange to households increase dramatically over a commodity Ethernet/Internet solution:

• total physical copper or fibre required is 10-100 fold more.
• large cables (eg 200-pair) are expensive to buy, install, join and repair/maintain
• many joints, each a failure point, are required to each customer premises, versus a single clear run to a local access point
• duct sizes near the centre get very large, compounding the costs, complexity and maintenance/upgrade problems
• with copper, cross-talk & interference problems compound with increasing circuits
• generic, commodity equipment cannot be used in either the Central Office or subscriber
• link speeds are fixed unless a major equipment upgrade is performed.

The Transact and the HFC Cable TV networks utilised this 'network embedded switching equipment' approach, resulting in per-house-passed costs of under $2,000 vs the $5,500 of the proposed NBN.

Perhaps the most convincing argument is what the Telcos now use for their backbone networks: Pure Internet. Many of their new services offerings are managed services derived from this internal IP network.

Or ask what companies are best positioned to offer "Triple Play" (TV, Data/Internet, Phone).
People with high-bandwidth backbones and upgradeable local-loops.

NBN - Powerplay or 'for real'?

During the week I had a fault on my phone line and got to talk to the Telstra tech afterwards.

His view was naturally Telstra-centric, but contained wisdom & insight.
It would make sense to have just one local access loop with just one maintenance organisation to which all Telco's have equal access. And it couldn't be owned by any one or two commercial players, that distorts the market.


He described an asymmetry: how new Telco entrants can build their own infrastructure and deny access to all others, but Telstra was obliged to provide access to 'their' copper network to everyone. He sited the sad case of a pensioner needing a phone and waiting for quite sometime (and paying a big fee) while Telstra dug in a cable that the developer should've installed... All the time there was physical cable to the premises owned by another Telco, but inaccessible.

The 1994/5 HFC cable TV rollout by Optus & Telstra (80-90% duplication) shows the insanity of Telecomms commercial arrangements and regulation in Australia. Behaviour that you wouldn't tolerate in school children.

That it was never a commercial decision is shown by the subsequent huge write-offs by both players. If they'd be ordered to "play nice" and construct a single infrastructure with bilateral access, the face of Australian Telecomms would be fundamentally different today. Cable TV would be a real force - possibly covering 80% of houses and making real profits.

The Telco regulators have allowed the same pattern to be repeated with mobile phone operators. In the USA & Europe, operators allow competitors access to their networks and make good income from it. It's called "roaming" and is supported by all the standards, hardware and handsets...

Everyone benefits, it's a positive-sum game. It doesn't stop operators extending their networks when they know they'll make more money by building their own infrastructure. [They have hard data on their customer call patterns.] It also means new entrants are 'born global' and have time to build-out their network and manage their cash-flow and CapEx. It encourages and enables real competition, which again benefits everyone.

Only it doesn't happen in Australia. There are 4 or more independent networks, everywhere, and no roaming agreements. It's not about commerce or service, but sheer bloody mindedness. All these Telco's have roaming arrangements with overseas operators. They have both the technical and commercial knowledge to do local roaming. [There is some for mobile wireless internet.] Everybody loses - it's a negative-sum game.

Regulators should not allow "Coverage" to be a marketing differentiator.
Failure to cross-connect/access should lead to heavy fines and eventual revocation of a Telco license. Telso Licenses, like Banking, are granted so commercial entities to primarily provide a public service. In return, a limited monopoly is granted.

It's all about providing public services, not about the profits of licensees.

Back to the NBN.

What's the long-term impact on Telstra if Kevin Rudd & Co forcefully construct "The One True Local Access Network"? If I were Rudd and was forced down this path, I'd deny Telstra access for forcing the issue in the first place.

Everybody loses, comms prices are high, services are limited and national economic competitiveness declines.

There is a 'critical point' of market share at which Telstra cannot continue to maintain and operate a parallel, full-coverage network - even with more limited services. As their market share declines, their profits reduce, putting pressure on maintenance, operations and customer service. This leads to more limited offerings, poorer service and unhappy customers, leading to yet smaller market share, decreasing profits and an inevitable "death spiral" that can only be broken by massive capital injection or embracing the NBN.

Telstra embracing the enemy seems very unlikely. Over several decades, the Telsra Board and Management have demonstrated they will not work with others, sometimes even after ACCC action and court directions. The have proven to be obstinate and recalcitrant.

There is also the competitive services problem: if the NBN provides desirable services that Telstra cannot deliver, then an increasing number of people leave Telstra, leading to the 'death spiral' by another route. Telstra can buy market share by dropping prices, but at the price of longevity - they destroy their profits and the ability to fund growth & new services.

The Federal Government and its regulators must know these things.

Are they taking Telstra on head-on with the intention of putting it out of business? (It can only be a 'take no prisoners' struggle to be won by the deepest pockets or a change of political direction.) The last thing Australia needs is the NBN being privatised before it is the dominant player. Without unlimited financial backing, Telstra would win, even if mortally wounded itself.

Or is it just a Power Play to force the Telstra Board and Management to wise up and 'play nice'?

We'll only know in hindsight.
Australia shouldn't have to bear either the massive cost of duplicating the local access loop or of Telstra failing.

---

Update 1. Sunday May 3, 2009. Senator Kate Lundy points to this piece by Richard Alston (Minister for Communications etc 1996-2003). Alston notes that Telstra aggressively duplicated the Optus Cable TV roll-out. He doesn't say that as the responsible Minister that he could've acted to prevent or change that.

---

Update 2. Tuesday May 12, 2009. The Australian reports :

The federal Government will offer Telstra the chance to buy up to 49 per cent of its national broadband network, if it agrees to voluntarily hive off its wholesale arm.

Telstra undertakes "structural separation" - into Wholesale & Retail arms. In return for its current Fibre Network, gets 20% of NBC (National Broadband c/o).

With both a new CEO and a new Chair (now Donald McGauchie is gone), Telstra may be able to resile from its "never, ever separate" position.

That values Telstra's 'Fibre Network' at $8.6Bn and allows them another $12.5Bn investment.
After the original $4.7Bn for NBN 1.0, the Govt. needs an additional $12.4Bn - half public, half private.

Guesstimates for NBN components:

• Domestic subs, 9M @ 100Mbps ($1,500/house): $13.5Bn
• Exchanges, 1,000 @ ($500/sub + routers/uplink): $5-8Bn
• Backhaul/Interstate upgrades (10+Tbps scale): $5Bn
• International cables - 10Tbps (1Mbps/household): $5-$10Bn
• Peering & ISP interconnects (20-100): $2Bn
• Rural/Remote radio/Satellite, 1M @ 12Mbps: $5-10Bn
• Content provider feed network: $2Bn
• High bandwidth subs: Business, Schools, Hospitals, Govt: $5Bn
• Network Operations, Maintenance & Test spares/depots/equip, Training: $5Bn
• Billing, Call record & traffic analysis, Line management & other IT systems: $2Bn

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Update 3. Friday May 15, 2009. Stephen Bartholomeusz in "Business Spectator" reports:

Lindsay Tanner has confirmed what was suspected. In arriving at its estimate that the cost of the revised national fibre-to-the-premises broadband network would cost $43 billion, the Rudd government essentially dreamed up a big number and then added to it. ....

The evaluation that should have preceded the commitment will now occur, with the government commissioning an "implementation study", which one assumes will consider the complex economic issues involved and come to a conclusion whether the NBN is a viable commercial proposition.

If Telstra agrees to "structural separation" & buys in, the economics change.
If not, there's enough money in the bucket to do this thing "right".

High-Speed Broadband: Excess Costs and Opportunity Losses

The National Broadband Network, NBN, is a chance to correct regulatory deficiencies, address broadband network design problems & high costs and ameliorate past strategic mis-steps.

• Gas network providers not leveraging their investment in 'holes in the ground' and high consumer connectivity was a huge strategic blunder.
• Allowing the 80% duplication of cable TV network was a massive failure of Government oversight. It would've been obvious within 2-3 months and should've resulted in quick, decisive action. As was not forcing 'roaming' between mobile service providers.
• The NBN design reflects that Telco Engineers don't do Data Networks well... Exactly the same way you don't build a water, electricity or gas network as if its a phone network (hub-and-spoke).
• The technology choices & network design seem wrong-headed to me. They are not using off-the-shelf commodity hardware, but very expensive 'Carrier grade' offerings with limited scope for upgrade & expansion.

What seems missing in the designs I've seen is redundancy and self-healing...

Optical Fibre is very good for running in 'loops', and the simplest arrangement being 'counter rotating rings'. If one segment is broken, traffic can still reach the other side by going the other way around the ring/loop.

The NBN install will be the main broadband infrastructure and "local-loop" for the next 30-50 years. It's an opportunity that can't be let slip. And one that the public deserves good value for its $43Bn.

Costs of NBN - National Broadband Network, Fibre-to-the-Home

Connecting Australia with broadband/fibre systems is closer to implementing Cable TV than a new Phone network. The $43B estimate is 3-5 times too high based on Cable TV rollouts.

That difference completely changes the economics of the project.


The $43B NBN estimate is for 90% houses connected, or ~$5,500 per house passed.

Stewart Fist estimated in an article, 'Pipe Dreams', in 1996, that it would cost $10Bn to roll-out cable TV to 66% of houses. That's not the 90% of the NBN, but indicates a factor of three difference in price.

Queensland Government in Project Vista ($550M) was looking at around $3,000/house, as was ConnectSEQ ($300M for '3 million people' - for perhaps 1M houses)

The Victorian Governments "Project Aurora" was estimating $1500/lot in a new subdivision, confirming the QLD ~$3000/house.

The Bis Shrapnel report to the ACCC in 2001 on "Telecommunications Infrastructure in Australia" cites:

• TransActs' costs for fibre (phone & TV) and DSL services to 100,000 homes in Canberra as $80M - under $1,000 per house passed.
• Optus HFC cable rollout (95-97) at $3,000M for 2.25M houses passed, and
• Telstra's cable (94-97) $4,000M for 2.5M houses passed (underground cabling)

Circa 1995, costs were under $2,000/house for either aerial (Optus) or underground (Telstra).

In the Telstra/Optus roll-out, there's an 80% duplication factor. Optus, who started second, used a duplication factor of 10-15% in their Business Case. The inference I draw is they did not cause the massive, irrational and uneconomic duplication.

Elsewhere, a government report notes that years later Telstra wrote-down its cable network by ~$960M and Optus by $1.4B. There was also considerable litigation by Optus is gaining access to Foxtel content on its network. (Telstra had originally gained an exclusive distribution agreement.)

Moore's Law, mass manufacture and advances in lasers & optical fibre/jointing/laying since 1995 should've brought down the equipment & install costs 2-5 times in real terms.
Widespread use & availability of horizontal boring should've decreased underground laying costs by a large margin. In 1994, it was considered a novel technique in Australia.

Neighbourhood Cable offers cable TV and 50Mbps in Mildura, Ballarat and Geelong. One article claims it cost $65M for 32,000 homes in Ballarat: $2,000/house.

Wikipedia lists a number of existing fibre-to-the-home deployments in Australia.

Summary:
The economics have to work if there are already companies providing FTTH services.

Historical costs of large scale cable rollouts are seriously at odds (by factor of 3-4) with the estimated $43Bn.

Something is wrong, but nobody is saying why the NBN estimates are so high.
What is being bought for the additional $25-$30B apparent overspend??

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Canberra Region initiatives.

Around 2000, Adrian Blake ran an ISP in Cooma (2,600 houses, 300 businesses). He paid AGL to include 80km of plastic pipe in the trenches when gas was laid. (Fibre was to be later pulled in.) Promised funding failed to materialise when the 'dot boom' turned into the 'dot bust' and the ISP went into liquidation. The empty pipe asset was finally purchased by Telstra but not used to deliver domestic services.

TransACT rolled out a Fibre-to-the-node cable TV, broadband and telephone network over the aerial Electricity poles owned by its parent company, ACTEW (later merged with AGL). The key point of difference was 50Mbps VDSL over the short copper tails to support streaming TV and broadband.
In 1998, TransACT started a trial in the suburb of Aranda and was to fully deploy its network around 2000. It too was caught up by funding problems related to the 'dot bust'. It seems the rollout stopped in 2003.
Robin Eckermann was the original TransACT Chief Architect

In 1995, Telstra announced it would spend $20-30M laying 'fibre-to-the-kerb' in the new town of Gungahlin. Anthony Goonan, General Manager for Strategic Marketing for Telstra in Canberra, was interviewed by the ABC about the project at the time. The initiative seems to have sunk without trace after the announcement...

The ACT Government in 2004 ran a major project upgrading its internal network to 200 sites around the Territory over a private fibre network. Later upgrades included moving its 12,000 telephones from Telstra to VoIP running on this backbone.

ICON (Intra Government Communications Network) provides point-to-point dark fibre between Australian Government agencies around Canberra. ICON started in the mid-90's by DFAT (Foreign Affairs and Trade) and Defence for links between their systems. Management has moved from DFAT to Dept. Finance and Administration.