Friday, 14 September 2012

NBN: Coalition supports Free Markets not Monopolies

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

Mr Turnbull engages in the usual political rhetoric, specious comments and gratuitous insult, summarised at the end, but does raise two points that need addressing:
  • Monopolies, and
  • Provision of new services during the transition from Telstra to NBN Co., "greenfield" installs.
In a single paragraph, reformatted here, Mr Turnbull makes what I see as a substantial, multi-layered policy statement.
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.
(precedent) What, after all, is the USO?

Monopolies vs Monopoly Behaviour

We have an NBN because Telstra didn't invest in a new distribution network over the last 20 years when it would've cost under 1%pa and wouldn't co-operate with Rudd/Conroy in building an FTTN network in 2008.

We now have the Coalition embracing NBN Co and a National Broadband Network because Gillard/Conroy managed to get Telstra to agree to Structural Separation with the "SSU" in April.

Both sides of politics have created the mess in Telecomms we have now over six decades, but the Howard/Costello government created the monster that is fully privatised Telstra. The "T3" public offering in 2006 was the time to structurally separate the business. Without being answerable to the government as a majority shareholder, Telstra was going to move from being combative, recalcitrant and uncooperative to completely uncontrollable.

The 1995-1997 HFC rollout by Telstra and Optus, which only passed ~2.5M homes, twice, for $7B happened under both Keating and Howard governments.

Both Telstra and Optus wrote-off multi-billion dollar investments to the detriment of their owners/shareholders and instead of getting a viable Cable-TV business in Australia, we got a crippled, woefully inadequate network that didn't support viable content providers.

This is perhaps the ultimate response to Mr Turnbull's rhetoric on "we don't support Monopolies":
Oh yes you do! In Telecomms and on multiple occasions.
There are two threads to unpick here:
  • During the duopoly, Telstra wasn't technically a monopoly, but it behaved as one, attacking and extinguishing competing businesses.
  • There was a massive Governance and Oversight failure by both Political parties in allowing Telstra to sabotage the Optus Cable rollout.
    • Why wasn't the ACCC granted powers to order a "cease and desist" action against Telstra?
    • By defending their "birthright" of the copper distribution network against competition and cannibalisation, at all costs, Telstra pushed themselves into an unprofitable, irrelevant technology backwater.
This action by Telstra as the dominant market player, and still has an almost entire monopoly in the copper distribution network, (TransAct, Internode/Agile, Cable-TV in rural VIC), was deliberate and planned. They are large enough to behave as an effective Monopoly, without technically being one.

In response to Mr Turnbull assertion that "all Telecomms monopolies are Bad" he uses the example of International cables, which is a really, really bad example to choose.

People seem to forget O.T.C. and George Maltby, sacked as head of "the most profitable public utility" by Bob Hawke at Christmas 1988 for granting staff pay rises.

From the 60's introduction of "undersea coax", then satellites, then optical fibre, to their incorporation into Telstra in 1992, O.T.C. was the complete antithesis of Telstra. It cared about Customer Service and Technical Excellence, continually introduced innovative services ("herograms" to Olympic athletes in 1984) and for years won excellence in marketing and advertising awards.

They were amazingly profitable, because they understood three things that Telstra, and it seems Mr Turnbull, do not:
  • People love to talk, the cheaper it is, the more in total they'll spend. Economic Demand-Elasticity.
  • You don't have to act like a traditional Telco Monopoly to be more profitable.
  • If you seek a "local maxima" in profits by "monopoly pricing" and "protecting your birthright", you'll prevent the business getting into new lines of business and achieving profits beyond your wildest dreams.
    • This is the "secret sauce" that has pushed Apple to be the world's most valuable company and left Microsoft stagnating over the last decade. It's what killed Kodak, once the most innovative, high-growth company on the planet.
O.T.C. embraced a marketing driven, customer-centric culture and passed on some of the technology cost savings: every year the cost of phone calls decreased, enough that in 1988 it was cheaper to call New York from Sydney than Perth.

Telstra management have since 1992 actively sought to prevent competition in every area they could. We know from the HFC debacle, what they would've done if anyone attempted to build a Full Fibre network: they would've overbuilt them and undercut their pricing. Exactly what they will do with HFC against NBN Co if they are not restrained.

TransACT invested between $160-$280MM in FTTN and HFC networks in Canberra and regional VIC, and was sold last year for $60MM. Partly, I suspect, because of their own "irrational exuberance" and marketing/managerial approach, like AusSat in the 80's, but mostly because Telstra destroyed their business model: their ADSL pricing was cheaper and had a broader reach.

In answer to Mr Turnbull, we know what can happen when there is a single organisation owning all international cables, we have 45+ years of O.T.C.'s financial results:
  • It's not about Competition vs Monopolies,
  • it's all about Customer-centric business and Good Management.
Which leads into my second point, "Greenfields" installations.

Greenfields: Who's The Bad Guy

Mr Turnbull validly observes that Telstra isn't installing services to new homes and NBN Co and Fujitsu aren't installing fibre - leaving home buyers in many Greenfield developments without any fixed-line service.

But who here is "The Bad Guy"?
My contention is that if Telstra actually cared for customers, it would seek exemptions from the ACCC to install copper services until the NBN Co process is up and running smoothly. While doing so, it could install empty conduit for fibre, and then could even ask NBN Co to pay a premium for those installs.

But they don't. They are deliberately and consciously leaving customers out in the cold.

How can that utter disregard for customers for one of the modern world's most basic utility services be considered acceptable, let alone tolerated by customers and regulatory authorities??

Mr Turnbull's comments

An overview of Mr Turnbull's arguments (slightly reordered).
  • For being a monopoly, which the Coalition don't support in principle.
    • "... 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."
    • (on monopolies) "... 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."
  • Denigrates without reason or evidence "(their) sheer incompetence and inability to deliver such a huge project in a timely manner."
  • States without targets or historical reference that "thousands of Australians are waiting far too long for broadband upgrades."
  • Raises an important change-over issue that "Australians in greenfield housing estates have no wireline telecommunications at all" (QLD, WA)
  • Criticises the logic of "‘fibre to the node’ ... 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)."
  • Describes the Coalition plan as "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..."
  • Disputes that delivering broadband over HFC networks would undercut other NBN pricing and their owners would “cherry pick” service areas and undercut pricing when they could.
Mr Turnbull also dismisses a serious attempt to address how "super profits" might be dealt with. He addresses it as: not going to happen, won't discuss, because they are incompetent... So why mention?

Longer piece at

I made this comment on his blog:
Malcolm, 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

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