The death of NBN Co: OZ Telecoms permanently screwed.

Alan Kohler today gives Ziggy advice on accepting the  "hospital pass" which is the NBN Co CEO/Chair role. He's forgetting that Ziggy presided for 5 years over the meltdown of Telstra's PSTN business and ran a strong under-investment strategy for the Howard Government. We know this because Sol Trujilo  penned these words just 6 weeks after assuming control in 2005.

An aside on Kohler: I'm starting to think he's "a fool or knave, or both".

He has never asked the most important, and obvious business questions of Turnbull, perhaps because he now works for News/Murdoch, perhaps because he's a dyed-in-the-wool Conservative:

• What's the on-budget cost, the interest on loans, over the full life of your Plan?

• What's the pay-back period and Rate of Return (IRR) of the Turnbull NBN Plan?
• Which should've led to "where's your full spreadsheet/model to 2040, not just 2014-2019?"

That Kohler let himself be distracted and misdirected by Turnbull's technical B/S means he was in-league with Turnbull and the Conservatives or simply doesn't understand business. Given he made many millions from selling out to Rupert, he just might be a competent businessman.

Ziggy does what he's told and is happy to do so, I've written about the differences between him and real Oz Telco CEO's with backbone: George Maltby, Sol Trujilo and Mike Quigley.

Somehow under the Turnbull Plan, all the cheap/easy work will be done privately (and NBN won't 'overbuild' because that's not 'cost-effective' when an area is already 'fully serviced') while NBN Co becomes "supplier of last resort" and gets ALL the most expensive and least profitable installs.

It is NOT possible for NBN Co to make a profit under these conditions, but Ziggy has already presided over the foreseeable and preventable meltdown of one Oz Telco, Telstra, and we know both what's coming and why he's been chosen.

My prediction for the "free competition" and "cost-effective" policies of Turnbull:

• Telstra will move quickly and offer a residential FTTN network in the cheap and profitable areas, with other players taking the MDU market (30% of services at just 4% of street addresses. Neatly clustered.)

• TPG, OpenNetworks and a very few other "well-connected" businesses will dominate the large apartment complex market, with a few smaller players taking a share of the mid-sized apartment market.
• This is because "management agents" used by Body Corporates are the gatekeepers to almost all apartment blocks.
• Telcos need only sign one management agent to control huge portions of the MDU market.
• In return for a sweet commission, the Telco's will get exclusive long-term access to the private wiring inside the building.
• The trouble for other Telcos is that access within the complex is privately owned. It is ONLY equal access to the network interconnection point.

• NBN Co will be left with the most expensive, least profitable crumbs, making it impossible for them to provide a single, low wholesale price or cross-subsidise the expensive services and service their debt.

To me the resignation of the NBN Board says they won't be the fall guys for when NBN Co goes broke, as it must and as Turnbull has always known that it must, under his Plan.

Think about the 3 networks NBN Co is building and why they're building them - if the Operational rules are changed, NBN Co won't make a profit, no profit = can't pay bills = liquidation = "Told you so, worst Govt ever".

Which is really cynical, vindictive and an appallingly deliberate waste of taxpayer money, not to mention destroying the future productivity and competitiveness of the nation. What do they care, so long as their masters' agenda is met?

Costs of the 3 networks:

• 93% FTTP. - upper-limit set by cost of next technology, $300 - $2,400/premises (+$1,100 leadin)
• 3% Fixed Wireless - roughly constant price per premises ~$3,500/premises
• 4% Satellite. constant price for system + cost for dish, ground station and install. >$3,500

The single price is only possible because of cross-subsidies.
Allowing "competition" kills the economics of the 93%, which kills the cross-subsidies.

This is why LNP will push for different pricing "in the bush" and has promised to give out explicit (taxpayer funded) subsidies to them.

It's a really, really bad model:

• there's nothing to protect rural/remote subscribers from lowering/withdrawal of the subsidy.

• it's economically inefficient to give savings to one group, collect taxes from them, then redistribute the taxes to a small group.

The cross-subsidy is efficient and effective because it happens at source within the cashflows of one commercial entity, but doesn't put money in the hands of Mal's Mates, so cannot be allowed.

History might show this one decision to be the worst economically, socially and politically that has ever been made in Australia. There is NO coming back from an eviscerated NBN Co. Once they are prevented from executing a universal roll-out of Fibre, it can never happen again. Like Banks and Insurance companies, the majority of customers never change Telcos, especially for fixed-line, it's just too hard for customers.

A rational, national wholesale network can never happen after the market is fragmented into a zillion pieces. Nobody will ever again be able to get sufficient coverage and market share to rollout a single network. Not even Telstra.

The Balkanisation of Telco access to premises, with areas controlled by just one provider, will create the worst possible commercial outcome with the highest possible prices for retail customers. Turnbull's "Competition" model is the exact opposite, it's a set of permanent monopolies handed to the favoured few.

The Liberals are the "party of business", but have an almost complete disregard for small, even medium business. They are the political wing of the IPA and the Sydney & Melbourne clubs: Abbott and Co are executing the wishes of their corporate masters, not providing the best outcomes for the populace.

Why Turnbull is so incensed over "Free NBN Connections" - Anathema to his industry mates.

In 750 words, the Canberra Times eloquently reminds us what Telstra does and how life in the Copper Gulag under "Broadband Fuhrer Turnbull" and his Good Mates, Telstra, or are they his Gestapo?


Read "Telstra in dispute with customer over costly landline installation" for yet another small business that Telstra is monstering over 3 hours of work: a lump sum of $5900 + $299 connection fee, reduced to $2639 + $299.

The PMG pit, pictured in the article, is at the front door of the premises. Reported as a 30 cm distance.

This is the reality at the heart of the Coalition offer to provide "Fibre on Demand": many thousands of dollars for the simplest task, and probably a hefty extra monthly fee on top of the usual rental, just like BT. Just like BT, Turnbull will declare both outrageous charges to be "Cost Effective".

Turnbull doesn't want anyone to think that NBN connections could be free as they actually are. Telstra charges an account setup fee, iiNet (cited by Turnbull) do not.


Turnbull sold Telstra as a failing business with distressed assets: T2 was $7.40 in 1999, T3 was $3.60 in 2006 and the shares kept falling after that to $2.55 in early 2011. The Coalition knew that in 2001 the telephone business based on the copper network had peaked and the decline would be rapid and irreversible. In 2005, 6 weeks after becoming CEO, Sol Trujillo was telling Howard and his senior Ministers exactly this and they needed to take action, quickly. The solution in 2005 was clear and overdue: build an NBN. So in-line with their decade long inaction, the Coalition did nothing.

We know that Howard, Abbott and Turnbull collectively decided to take the money and run, abandoning taxpayers/subscribers dependent on Telstra as their only option for fixed-line communications. They've coldly & deliberately thrown ordinary retail and small business subscribers to the wolves once, they will do this again.

That is the Coalition's grand Copper NBN plan: upgrade and refurbish an asset they've already sold, preserving somebody else's asset, just so they can rent it back from them at premium prices. It's not business, it defies even politician logic. Telstra will still own the copper and access. They'll be regularly charging suckers like you and me these outrageous "lump sums" for their monopoly services.

Telstra shares rebounded to $5.10 following their NBN agreements. The same ones that Turnbull now wants to extend and get 215,000 km of copper and access for nothing from Telstra. Without a shareholder vote, either.

You will remember the Good Old Days, when connections cost "just a few thousand".

Abbott and Turnbull don't just want to take us back to 1925 technically, they want to correct a few business mistakes along the way and screw over the taxpayer seven ways until Sunday.

They've already said on record to me that "the NBN stands to be greatly modified under whoever wins": they haven't begun to reveal the full extent of their "Cost Effective" exploitation and extortion.

NBN: "Need Broadband Now" in Coffs.

The Coffs Harbour local paper has a piece on their problems with the NBN rollout. As they should.
The paper is part of the APN media group.

Below is the history behind the good people in Coffs now being forced to wait for Broadband. I encourage you to read this small selection.


The facts are:

• In the early days of Telstra, 1992/3, there was a plan started, for the copper Customer Access Network to be replaced entirely with Fibre by 2010. This would've been funded out of normal operations. This was abandoned sometime under the Howard Government.

• There was a crisis within Telstra in 2001 that was known and discussed by the Howard Government - the Telephone business, the PSTN, was in "meltdown".
• In 2005, the incoming CEO, Sol Trujillo made a very strong case to address exactly this problem and form a FTTN National Broadband Network.
• Despite Telstra being a distressed asset, the full sale went ahead in late 2006, without Telstra being structurally separated.
• Although the Howard Government from 2000 onwards ran many enquiries into Broadband or Internet in the Country, nothing effective and long-lasting was put in place.

• The 1996/7 HFC Cable TV rollout disaster with Optus and Telstra wasting around $5 billion "overbuilding" & producing an non-viable commercial product showed everyone that the Australian Telecomms market had already failed and that Telstra could not be privatised as a single vertically-integrated entity.
• The Howard government deliberately created "a monster" in the words of Liberal MP, Paul Fletcher.

• Malcolm Turnbull himself, around the time of the T2 sale, advocated that Telstra be structurally separated and as was later shown, this would considerably boost the share-price.
• Turnbull was part of the Howard Ministry that allowed the full sale of Telstra as a single entity.
• The share-price predictably crashed, and ordinary, first-time investors lost billions as a result.
• Telstra has only recovered financially because of the NBN, and agreements on "Structural Separation" with the ACCC and NBN Co.
• Turnbull now says, "we wouldn't have started from there".
• Only he was directly involved with creating the mess that first had to be unwound.

• If any of the multiple warnings since 1997 and especially since 2001 and 2005 had been heeded, the people of Coffs would've had good Broadband a very long time ago.

Turnbull not only has a very selective memory, he played a role in the series of disastrous decisions with Telstra and Australian Broadband made by the Howard Government. The Coffs Harbour paper does not raise that inconvenient truth.

A very selective History of Telecommunications in Australia.

• 1901. PMG formed to cover entire Commonwealth
• 1946. Overseas Telecommunications Commission (OTC(A)) formed.
• 1975. PMG split into Australia Post and Telecom Australia.
• 1981. Aussat formed as 3rd Australian Telco.
• 1982. Davidson Enquiry recommends Deregulation of Telecommunications.
• 1989. Telecom Australia briefly reformed into another entity.
• 1992. OTC merged into Telecom Australia.

• 1993. Telecom Australia renamed Telstra.
• Frank Blount, CEO, forms a plan to replace the entire copper Customer Access Network with Fibre by 2010.
• Telstra deploys the first RIM's, Fibre-to-the-Curb (now called FTTN), were deployed handling telephones. The Gungahlin Experiment starts.
• 1994. Aussat, with debts of $400M, sold to Optus consortium.
• Optus granted duopoly protection in return.
• 1995 - 1997. Optus and Telstra roll out HFC Cable TV networks.
• 80% "overbuild" by both Telcos
• 2.5M premises passed
• $6 billion estimated spent together
• Over $4 billion written off by 2000.

• Feb 1996. John Howard elected. Paul Keating defeated.
• Jul 1997. Australian Telecomms market fully deregulated

• Nov 1997. 33.3% of Telstra sold in T1 for $3.30/share.
• Sep 1999. 16.6% of Telstra sold in T2 for $7.40/share.

• pre-2000. Turnbull advices Howard government to structurally separate Telstra.
• Both entities, wholesale and retail operations, would be valued higher. Seen as having growth prospects.

• Jul 2001. Telstra telephone (PSTN) services & profits have peaked and go into decline.
• Challenge to PSTN is twofold
• Mobile phones
• Internet services:
• VoIP, Skype, email, instant messaging, social media, ...

• 2004. Malcolm Turnbull elected to Parliament. Appointed as Minister for Environment and Water Resources on 30 January 2007.

• Aug 2005. After 6 weeks in job, new CEO Sol Trujillo meets with senior Howard ministry.
• Advises record profit is not sustainable,
• PSTN has been in "meltdown" since 2001 peak.
• Proposes National Broadband Network, NBN.
• ADSL2, 1500m, 20,000 nodes to 4M of 5.2M premises in "5 major metro areas"
• Asked for $4.7 billion contribution. (3 amounts given for different options)

• Nov 2006. Final 50.1% of Telstra sold, or transferred to "Future Fund" in T3 for $3.60/share.

• Sep 2007. Kevin Rudd elected. John Howard defeated.
• During the Howard government, multiple enquires into and schemes to provide "Broadband to the Country" were funded. These barely addressed needs at the time and were not found adequate for later demand.
• The last project, OPEL, was launched in late 2007, was cancelled by the Rudd government.

• Aug 2008. GFC hits with failure of Lehman Brothers and US "sub prime" mortgage market.
• Rudd government responds with three tiered approach, avoiding technical recession and mass unemployment  as in USA, UK and most of Europe.
• tier 1: direct cash handouts. very short term
• tier 2: mid-term projects. 'Schools' program. Home Insulation.
• tier 3: long-term infrastructure projects. Including NBN.
• Rudd government draws on reserves provided by the utterly stupid sale of Telstra by the incompetent Howard government.
• Borrowing only possible due to strong balance sheet left by Howard government.

• Nov 2008. Tenders returned for Fibre-to-the-Node (FTTN) NBN with up to $4.7 billion Govt investment
• Telstra bid disqualified as "non-compliant", did not address mandatory section for Australian content.
• Jan 2009. FTTN-NBN Expert Committee reports:
• no bids were viable.
• Spending money upgrading other peoples' assets was a waste of money.
• The "National Broadband Network" announced, no FTTN, entirely Government funded and owned.
• 93% of premises to get Fibre.
• 7% to get Satellite or Fixed Wireless (point to point 4G mobile phone technology)

• Jul 2009. Sol Trujillo leaves Telstra at end of 4 year contract. ADIOS, Rudd.

• Mar 2011.Telstra share price reaches record low, $2.60, pre-NBN agreements
• Apr 2012. Telstra signs "Structural Separation Agreement" (SSU) and agrees to rent or sell assets to NBN Co.
• Telstra shareprice took off, as predicted by Turnbull in 1999.
• Currently about $5.10 with $0.28 dividend.

NBN: Pride in your work, Politics and Telstra

There's a personal dimension to my interest in Telstra and the NBN: my father worked his entire life for them, then invested in their shares only to lose a bunch of money.


My dad started work delivering telegrams. During WWII, age 21, he served in an elite, secret unit, Central Bureau, highly prized by the Allied Commander in the Pacific, whom said he "would not move without them". After the war, my dad worked for the PMG (& ABC) until retiring from Telstra. He went to war from a sense of Duty and to protect his nation from aggressors. He kept his war service secret for forty years because of his moral code. He'd put his life on the line for his country, and was prepared to do, to the utmost of his ability, what was asked of him. That same dedication and committment was transferred to the PMG.

He was proud of his war service, proud of his country and proud of the PMG/Telstra he'd helped create. The men who came back from the War were competent, focussed and knew what was important, and how to get things done. My dad's sense of duty, work ethic and pride in, and loyalty to, his country and employer were commonplace and this mindset helped created a world-class Network and Organisation.

These were capable, motivated men who didn't just follow orders nor take kindly to bureaucratic machinations and waste. The PMG was an exceptional organisation with a culture of high-quality and high-performance. My dad was very proud of Telstra and the part he'd played in it. It was natural for him to buy Telstra shares when they were offered. He would've been horrified to learn in 2001 that Telstra's business was starting to unravel and the owners knew it.

We all know that, as Richo said, "Politicians Lie".

We know politicians are people first and do make mistakes, do have to change their minds and will, at times, make "promises" they know they can't keep. That's the nature of the game of Politics.

This was how it was until John Howard came along with his "non core promises": We learnt that nothing "Honest John" said, especially in an election campaign, could be taken at face value.

It turns out that "Honest John" and his mates knew that Telstra was in trouble in 2001, had been advised by their own experts to structurally separate Telstra and that it would allow the business, as a listed company, to perform much better.

Later, in 2005, when a competent CEO came along, he presented Howard and his senior ministers with both a very clear picture of the problems with Telstra's business and what to do.

In 2005, it was still possible to separate Telstra into two business, wholesale and retail, just like Turnbull tells us New Zealand have done with "Telecom New Zealand" and "Chorus". Under this arrangement, Telstra in 2005 would've been able to deploy a 12Mbps Fibre to the Node Network without getting blocked by the ACCC.

My thesis is that Howard knowingly and against advice, both destroyed Shareholder value (T2: $7.40, T3: $3.60, just $0.30 more than T1, 9 years earlier, crashing to a low of $2.60 in early 2011) and created a "monster", in the words of Paul Fletcher, Liberal member for Bradfield.

Howard also created a Telecommunications market that failed, none of the commercial players were willing or able to create the necessary 21st Century infrastructure foreshadowed by Sol Trujillo in 2005, a National Broadband Network.

Instead of selling two vibrant businesses, both with high growth potential, in 2006 or 2007, Howard obstinately destroyed billions of dollars of "Mom & Pop" shareholder value. That included my fathers' superannuation investment.

Turnbull notes that only in Australia has the Government been obliged to step in itself and correct a complete failure of the Telecoms market in supplying universal Broadband.

Instead of acknowledging the Liberals own part in creating this almighty mess and applauding efforts to address the problems, Turnbull has put up an unbelievable plan that can only make a humungous loss and attacks anyone who dares not applaud him.

Think there's not more to come? A senior Turnbull staffer willingly acknowledges that they'll "greatly modify" their NBN plan after the election.

This is far beyond mere hard-line ideology. Something much deeper and destructive is going on that is not just taxpayer money being squandered, but investors are blind-sided and treated with callous disregard and indifference.

But this Political Party, even exactly these same politicians, have done exactly this before, not just burning investors with T2/T3 in an foreseeable and avoidable financial disaster.

Remember the "IT Outsourcing" of 1997 that was going to fix the Federal Budget? It was another massive Financial Disaster and every working person affected rues the day it was introduced.

John Fahey oversaw that monumental piece of idiocy. Just who benefited and by how much has never been put on public record. One thing is very clear, when the independent Auditor General came to review the programme, they could find no cost savings and noted it was very badly executed. News stories from the time (7:30, AM) tell a damming tale.

This demonstrated injudicious, profligate waste of Public Money, lack of all Financial Management skills and inability to "execute" by the Liberals, is ironically what they accuse their opponents of.

These are the same people that elevated Political Lying to the Art-form it currently is, with "That's a non-core promise".

We know "Politicians Lie", but the Liberals under Abbott take this to a whole new level past "Honest John" having embraced double-speak, when what's spoken means its opposite.

The Liberals would have us believe they are sound, competent Financial Managers, when nothing could be farther from the truth.

They'd like us to believe they have our interests at heart, when they've demonstrated exactly the opposite with supremely cynical acts like the Telstra T3 sale without structural separation.

They'd like us to believe they have an implementable NBN Plan, when it's an unmitigated Financial Disaster, it's designed to first make massive losses, then to be thrown away.

The Liberals, including their NBN Plan architect, Turnbull, intend to directly destroy around $21 Billion (75% of the Fibre Budget) and ultimately $30 - $40 billion invested in NBN Co when accumulated losses force it into bankruptcy.

NBN Co's largest creditor will be Telstra, who'll get the company for zero payment. This won't be a 'sale', the ACCC may have no power to prevent it.

There are two things we know about the Turnbull Node Plan:

• Whatever they've written in their NBN Plan is pure fantasy and that won't be what they actually do, and
• The Liberals still intend to "Destroy the NBN".

Who knows why Politicians do anything. The reasons behind this may one day come out, but I doubt it. In the meantime, the election looms and voters need to decide.

NBN: Kohler v Turnbull Questions - Top Ten.

Alan Kohler will be debating Malcolm Turnbull on the future of Australian Telecommunications. These are questions I'd like asked. Getting straight answers would be another matter.


1. There's a very specific figure for FTTN (Copper) Fixed Line rollout of 8.968M premises.

• How did you arrive at that figure?
• Is that all the Metropolitan areas?

2. There's a lot in your Policy about reusing existing assets, mostly owned by Telstra and Optus, and changing the rules to allow Cherry Picking, while the current rules allow any wholesaler to provide Layer 2 services at Points of Interconnect.

• Do you expect Telstra to take advantage of your new arrangements and roll-out new broadband services across all Metropolitan areas?
• Would the Coalition consider contributing to such a rollout, either directly or through NBN Co?
• If Telstra took on the FTTN, maybe with HFC Cable too, would you direct NBN Co to not compete with Fibre in those areas?

3. Your Broadband Plan is really only half a Plan, it says nothing about it's most important second part: the replacement of FTTN/Copper network with a full FTTP network, mentioned a number of times.

• Who's going to do that second phase?
• Who's going to pay for the eventual rollout of FTTP?
• If your eventual aim is an FTTP, do you save enough with Telstra's Copper to make this cheaper?

4. Your Plan includes "Total Funding", while your modelling must have also given you the other 3 standard numbers: Project Lifetime, Return on Investment, Time to Break-even.

• Can you tell us what those numbers from your model are?
• Was there a reason you didn't include them in your Plan?

5. Your Plan, and stress-tests of the current NBN Co Plan, specifically limits NBN Co to real revenue increases of 3.5%.

• Will that be a direction to NBN Co?
• Is there some policy reason for this?
• If NBN Co does reduce its charges accordingly, then what does your modelling suggest happens to their ROI and profitability?
• Isn't this a gift to the private sector Retailers who have no obligation to pass on any of those savings?

6. In early April, NBN Co released updated, detailed figures on their costs and rollout. You didn't update the figures published in your Plan from your modelling.

• Do you accept the NBN Co figures as credible? If not, why would you doubt a competent, independent, professional organisation?
• Did you rerun your modelling with the latest NBN Co data, especially your estimate of $3600 per service for Fibre?
• If the results were different, is there a reason you didn't update the figures in your Plan?

7. You've been critical of the Labor government's ability to "execute" for the NBN and many other projects. Given that you will have to use exactly the same prime contractors and sub-contractors, and that you've said that current problems stem from NBN Co forcing the prime contractor to bid too low, then:

• Will you be paying those prime contractors more?
• If so, how will you bring in your project on-time, on-budget and to spec?
• What will you do differently than the current Government, given that NBN Co is actually running the project and signing contracts?

8. We all know that the outcomes in any Business Plan depend on the assumptions you make and the data you use in your model. In your model:

• What Copper Fixed Line Access Charges (AVC) did you model?
• What traffic growth model did you use to arrive at a "reasonable" 3.5% real growth in revenue?
• What traffic distribution model did you use to explore the impact of substitution by 4G wireless competitors?
• Did you model the effects of price undercutting by Copper services, an area identified as High Risk in the NBN Co 2010 plan?

9. Those lucky enough to get Fibre have an NTD provided with 4 data-ports and 2 voice-ports, while your "No Disruption" promise for your FTTN/Copper solution provides the user nothing, the same as current ADSL services.

• If a customer requests a VSDL2 NTD, will you provide them one? Will that cost them anything?
• Are there extra customer costs for a typical FTTN/Copper service over and above a standard Fibre service? Such as a central splitter and VDSL2 modem?
• For your FTTN/Copper service, will you be charging different amounts for ADSL2, VDSL2 and VDSL2 with vectoring?

10. Your Plan relies a lot on terms like "Cost Effective", "commercially viable", "commercially feasible" and "commercial factors (or reasons)". Customers need certainty, Retailers need clarity to form marketing plans and discuss them with clients, and NBN Co planners and designers need precise, detailed definitions of what is above or below the cut-off.

• Do you intend to publish a full or partial contents of your "Commercial viability" rules?
• How will you know if NBN Co is following your rules, if the final FTTN design comes out somewhat different to your modelling, which as we all know, has to make assumptions and estimates?

NBN: Is the Turnbull Node Plan "Telstra RIMs+HFC in Metro Areas" leaving NBN Co the scraps?

This chance comment caused me to revisit a burning question: Just how will Turnbull make good on his Node Plan? It's a Financial Disaster of the highest order as written.

This massive digital divide is going to be perpetuated if Telstra’s eight-year-old 2005 FTTN plan gets government funding, as rejected by John Howard then and proposed by Malcolm Turnbull in April.

It dovetails well with an analysis by Malcolm Moore, a Telecomms Engineer who "intricately involved with Backhaul Network and Customer Access Network design, construction and performance standards" in Telstra for quite some time, creating an innovative design and first-cut estimates for a Metro Broadband Network using Telstra HFC Cable Network and extending RIMs:

"Inexpensive Metropolitan Broadband Infrastructure" - about 6,000,000 premises would be inexpensively connected with Fast Broadband Internet and could  have Download speeds well exceeding 16 Mb/s.  

Mr Moore explains the 6M premises could be covered by HFC Cable and suggests that Metro areas account for roughly 80% of Australian premises, a good match to the 71% Coalition figure.

Telstra already has 8,500 RIM/CMUX's deployed, making it the largest & most-experienced "Node" operator in the country. It is also perfectly placed to redesign its Copper Customer Access Network to satisfy the Turnbull Node Plan and VDSL2 coverage. It already has its "Top Hat" project with DSLAM upgrades to RIM/CMUX's.

This explains many issues:

• Why Turnbull refuses to go further than "They Will" when asked why Telstra would co-operate.
• Why the Node Plan never addresses the complex issues surrounding renting or buying the Telstra Copper CAN.
• Why reversing legislation and contracts on Cherry-Picking, over-building the HFC network, changing the ACCC wholesale price to a "maximum" and maximising reuse of existing infrastructure is at the fore of the Coalition statements.
• Why the aggressive timetable for rollout.
• Why the very strange and peculiarly specific number of FTTN premises covered: 8,968,000.

I suspect that the amount of enabling legislation & regulation changes would be small. Mainly removing the requirement for new services to only use Fibre and unwinding the Telstra HFC agreement. As proven by the failure of the Australian Cable TV market, there is only room for a single HFC Network in any one region. Either Optus will co-operate or continue with its HFC retirement contract.

From my first reading of the NBN legislation, I understood that any operator that was prepared to offer their wholesale services at NBN PoI's and conforming to the Layer 2 Data interface was allowed to operate - but would only be paid the ACCC wholesale rate. Relaxing that rule means Telstra can charge what it likes in any local area and isn't obliged to offer a service it feels is "not commercially viable".

The ACCC would also need to be directed on allowing undercutting of NBN Co AVC charges and that any operator, including Telstra, could Cherry-pick services in any region and not have to offer a uniform pricing scheme or national coverage.

Where does this leave the Telstra Structural Separation Agreement? Probably untouched.

Will it need another Shareholder Meeting and Vote? No, the existing Agreement will be in force and may even be taken up in 10-15 years time. A double win for Telstra.

Is it a good idea for the Nation and the Telecommunications industry reinstating a Telstra near-monopoly? A lot of people may not think so.

Two important questions remain:

• Will Turnbull be forced to sweeten the deal with Telstra and pay them to roll-out al of part of their new 2005 NBN?
• Will NBN Co be able to survive commercially having to service all "non-viable" premises? The inherent cross-subsidies was a major part of the business case.

If this is indeed the Coalition Plan, or close to it, when will they admit it and how long after an electoral victory would they sign the necessary agreements and legal changes?

NBN: Cost of Turnbull's Fibre _from_ the Node Upgrade

The Turnbull Node Plan frequently asserts, as if self-evident, that it is more "cost-effective" ("cheaper") to reuse as much existing infrastructure as possible. The Turnbull Plan then allows "On-Demand" fibre upgrades and recognises that NBN Co will upgrade to full Fibre some time in the future.

There is a very high penalty incurred in "bespoke" connection of Fibre From The Node versus the efficiencies of scale from a "production line" roll-out. On-Demand is the most expensive approach possible, with the highest possible downsides. Here I estimate that it is 8-10 times more expensive per service than the mass Fibre roll-out already scheduled. The real cost advantage, per service, of copper is around $150, and nullified if "On-Demand" take-up is above 5% over the whole life of the Nodes.

Plus, because of the haphazard and random nature of "On-Demand" upgrades, a later mass rollout of Fibre must either remove or relay all the "On-Demand" cables or deal with the congestion and confusion in the pits, pipes and ducts. This is on top of removing all the nodes and transferring all services to direct Fibre.

But as a Customer, I'd like to know why I have to pay extra for what others get for free, or almost so.

Mass Rollout

NBN Co has released final fibre build costs of $1100-$1400. [in sources]

I believe this is in 4 parts:

• upstream from local loop (fibre is laid in a continuous loop around a suburb). Transit etc.
• loop past many premises.
• tap + lead-in & PCD (external) install on premise
• internal install + NTD/FWO/PSU. [85% take-up expected... Affects costs per-premise, averaged.] 
• NTD = Network Termination Device. The white box you plug into.
• FWO = Fibre Wall Outlet. Like a wall power outlet, but for Fibre to the NTD.
• PSU = Power Supply Unit for the NTD. It may, if ordered, contain batteries.
• PCD = Premises Connection Device. The white box on the outside of your house where the Fibre lead-in is terminated.

Which of those costs will be the same, which will vary?

I expect that the local loop and tap+lead-in are the big variables.

My estimate for mass-rollout would be $30-50,000/km to install loop (including trenching) and at 12.5m per premise, around $400.

Another $200 for lead-in + PCD [2 man-hours + lead-in].

Around 50% in those two parts: approx $750, possibly as low as $500.

On-Demand Install

For one-off upgrades, what pre-built infrastructure do you assume and what local challenges?
For example, congested or collapsed ducts.

Do we assume the average distance of 560m for an install. [For 800m maximum, half-area is 560m radius]

Remember we have to allow for three truck-rolls, versus two of a mass rollout.

• site + route inspection [2-4 man-hours @ $150/hr: $500]
• run local loop + lead in + Node Fibre card + network config. @ $50/m = $3,000 + lead-in ($300?) + Node ($150 + card ~$100) 
• $550 min + $3,000 avg in fibre.
• Allow 1.5 or 2.0 "fudge factor" for congestion problems...
• internal install. [one-off, add $150 to mass-rollout figure, so ~$500]

I estimate $500 pre-install, $500 internal install, $500 node/lead-in + $3,000 +/- 50% for loop.
Or $1,500 Minimum and $5-6,000 Average, easily up to $7,500.

Comparing Mass Rollout to On-Demand

It's $500-$750 in a mass roll-out for comparable parts: fibre pass premise, run lead-in + PCD and internal install of equipment.

For a "bespoke" On-Demand install, given the ducts are not full and contractors can be found in a reasonable timeframe, the average (560m) cost could be up to $7,500, with the maximum around $10,000 and minimum $1,500.

It's justifiable to say that On-Demand Fibre upgrades will cost between 8-10 times more per service than a scheduled "production line" rollout.
They cannot cost less than 2-3 times and are unlikely to cost more than 20 times.

On NBN Co Formal Expectations: Final Network Upgrade to full Fibre

The Turnbull Node Plan directs NBN Co to make the network upgradeable to Fibre.

Does that mean NBN Co must lay the full 208,000km in the optimal GPON layout they've designed?
Or just the 160,000 km needed for nodes, with enough fibres in the uplink to convert to GPON (using a 32:1 or 64:1 multiplexing).

Do we assume worst-case install for single-service upgrades, "Fibre From The Node"?
If they haven't run the GPON loop, the ducts will become congested with many short-runs of low-count fibre to individual premises.

The per-user upgrade cost in ONLY ONE HALF of the problem.

The other half is the "final solution": full Fibre upgrade. The Coalition has always planned to throw-away its FTTN.

In "10 or 20 years", everyone has to be upgraded to Fibre CAN and the Copper CAN removed... [CAN = Customer Access Network]

For the final Fibre upgrade we have two types of customers:

• those who've paid themselves for the Fibre upgrade, and
• those who've stayed with copper, even 15%-25% without DSL, or maybe no Fixed Line at all.

Who will have to pay for what? Those who paid $1,500-$10,000 for an "On-Demand" service will, rightly, demand zero-cost conversion.

Will 1%, 5% or 10% of customers go for the "optional" fibre upgrade? Will they cheat and share the 4-port NTD with neighbours (Not illegal in my reading. Not a resale.) Meaning they'll displace DSL connections. A fully-converted network may look like 20% of fibre installs and zero use of copper.

Does the "Final Fibre Upgrade" provide GPON (Fibre) to every premise in the Fibre footprint, just like the current plan?

If so, at what cost?
Plus there's a real cost of removing nodes and copper local loops, and then a ~$1,000 (Coalition estimate is $1,500) payment to Telstra under the current contract, the "Definitive Agreement".

Who will bear these extra costs? In the end, it's always the customer.

Reusing the last 800m of Copper saves $450, of which at most half will be "reused", while forcing "On-Demand" connection costs up 5-10 times and transferring them onto subscribers, adding Node removal costs and extra cost/complexity to the already planned upgrade to a full FTTP network.

At best, the Coalition saves $225 per service and increases final costs. (Increase of not less than $50, possibly $500.)
An "on-demand" rate of only 10% of subscribers, over a 10-20 year life of the Nodes, makes the whole deal a financial disaster.

At $1,500 minimum, and an average of $2,500 "on-demand" upgrade fee and a modest $75/service increase in final upgrade cost (a $150 real saving for Copper):

at 5% take-up rate over the whole life of the Nodes, Copper is the more expensive choice.

Sources:

Telstra 2011 Definitive Agreement:
 10% Discount Rate applied to sale of Lead-ins and Phone Service disconnection.

$1100 - $1400 final build cost per Fibre service. NBN Co, April.

Pg 6 of Coalition Background doc: $1,500

NBN Co has separately signed contracts that involve payments over forty years to Telstra with a face value exceeding $50 billion if paid in full. These include a ‘PSAA’ payment of about $1500 each time NBN Co takes over a premise previously connected to Telstra’s networks.

Pg 14 of Coalition Background doc. Implicit recognition of removal of FTTN and upgrade to FTTP

IS IT REALLY CHEAPER TO BUILD FIBRE TO THE PREMISES NOW THAN LATER?
Discount Rate  8%
Capex Reused 50%

Pg 5 of Coalition Broadband Plan.

Networks should be upgraded in the most cost-effective way using the best-matched technology. This will vary from place to place. existing infrastructure almost always has a vital role to play.

Pg 10 of Coalition Broadband Plan.

Where the NBN is rolled out using FTTN, existing communications services at a given node will cut over to NBN Co control on the same date.

Pg 11 of Coalition Broadband Plan.

Fibre on demand, co-funded fibre and future fibre upgradesThe Coalition acknowledges that some users may want higher speeds than can be provided over FTTN before any evidence of such needs in the broader market. likewise, FTTP in some circumstances may be seen by other tiers of government, infrastructure operators or private investors as economically attractive or commercially attractive. finally, market needs will clearly evolve over time and eventually may require further upgrade of the network where fibre has not been extended to user premises.
Reflecting these three possibilities, the Coalition policy provides for: individuals to obtain fibre on a user- pays basis where feasible; external public or private investors to propose and co-fund FTTP rollouts if they are willing to put forward 50 per cent of the needed funding; and an explicit future upgrade path to be incorporated into all non-FTTP NBN Co fixed line construction.

Pg 12 of Coalition Broadband Plan.

Future upgrade pathWhere NBN Co extends fibre beyond an exchange but not to user premises (i.e. deploys FTTN) it will be required to plan and build in readiness for future upgrades that take fibre further into the field. all FTTN designs must be upgradeable. 

NBN: Telstra payments for the Turnbull Node Plan

Turnbull is very coy about payments to Telstra. This is besides his tight-lipped response ("they will") to any questions related to his primary Project Risk: securing Telstra's co-operation.

While the VDSL2 service and Nodes may be 5%-10% cheaper overall than the current full Fibre Plan, Telstra copper-loop rental payments must be met out of FTTN revenues.

Estimates of what NBN Co will need to pay Telstra to use their copper local loops:

• Lowest: $30/yr/service (3% of $1,000, only for active services) as Interest on a single payment.
• Highest: $180/yr/service (10% of $1,500, with 20%  inactive connections) as indefinite on-going payments to Telstra.
• Sting-in-the-tail: After renting the copper for 10 or 20 years, NBN Co will still have to honour the current contract and pay Telstra around $1,000 per service to buy the lead-ins.
  

For the current direct Fibre Network, my per-service estimate of Telstra payments for the copper local loop was $1,000, Turnbull's figure is $1,500.

Telstra cannot agree to lower payments because the current deal is what their Shareholders agreed to. For Telstra to agree to another, less lucrative, arrangement they would need to run another Shareholder vote. This is expensive and time-consuming process with an uncertain outcome.

There's a significant difference between the current direct Fibre agreement and the Turnbull Node Plan:

Under the Turnbull Node Plan, all Telstra lines are cut at the Pillar and moved to a Node. All Telstra lines must be paid for, at a rate Telstra sets, as an on-going rental fee. Only active services migrated to Fibre are paid for under the current agreement. My estimate is that at least 20% of copper loops connected to Nodes will be inactive: they must be rented from Telstra but will generate no customer revenue.

On top of this, the Turnbull Node Plan is designed to be thrown away ["all FTTN designs must be upgradeable"]. Even if half the cost of FTTN goes towards a full FTTP, Telstra has never sold the copper local loop, only rented it. The raises a fundamental question:

When the Turnbull Nodes are upgraded to direct Fibre, will the existing Phone Service disconnection fee still be payable? Customers, via NBN Co, get to pay Telstra twice for the copper service. That's seems incredibly Bad Business.

At the moment, NBN Co only makes a payment to Telstra when they take-over an active Phone Service. This one-off payment is a Capital Expenditure, but the dollar amount, with indexing, is not public. Reverse calculating the public figure, "$4 billion, after-tax NPV at 10% discount rate", led to my estimate of $850 per passed premise, or $1,000 per active service.

Calculations:

Same cost as current direct Fibre:
One-off payment, only for active services: $1,000 CapEx
Interest: 3% [Government borrowing]
Yearly charge: 3% of $1,000 = $30/yr per active service

Using the higher Coalition figure of $1,500 CapEx would yield $45/yr.

Rental from Telstra:
The Coalition calculates the 'PSAA' figure as $1,500, Telstra cannot accept a lower valuation.
Telstra demands a 10% Return (Discount Rate) on these assets.
Rental: $1,500 * 10% = $150/yr per service.

But, as control of all copper services, not just active (revenue generating) lines, is passed to NBN Co, the cost per active service is higher.
Assuming 20% inactive lines: $150 * 1.2 = $180/yr per active service


Sources:

Telstra 2011 Definitive Agreement:
 10% Discount Rate applied to sale of Lead-ins and Phone Service disconnection.

$1100 - $1400 final build cost per Fibre service. NBN Co, April.

Pg 6 of Coalition Background doc: $1,500

NBN Co has separately signed contracts that involve payments over forty years to Telstra with a face value exceeding $50 billion if paid in full. These include a ‘PSAA’ payment of about $1500 each time NBN Co takes over a premise previously connected to Telstra’s networks.

Pg 14 of Coalition Background doc:

IS IT REALLY CHEAPER TO BUILD FIBRE TO THE PREMISES NOW THAN LATER?
Discount Rate  8%
Capex Reused 50%

Pg 10 of Coalition Broadband Plan.

Where the NBN is rolled out using FTTN, existing communications services at a given node will cut over to NBN Co control on the same date.

Pg 12 of Coalition Broadband Plan.

Future upgrade pathWhere NBN Co extends fibre beyond an exchange but not to user premises (i.e. deploys FTTN) it will be required to plan and build in readiness for future upgrades that take fibre further into the field. all FTTN designs must be upgradeable. 

Also on Pg 12:

NBN Co and TelstraWe may seek to negotiate variations to commitments to provide efficiencies, allow the nBn to be more quickly deployed or otherwise create benefit.
NBN Co will seek permanent access to Telstra’s copper between premises and concentration points such as pillars, cabinets or exchanges. Telstra has publicly stated the copper has minimal economic value, leading us to anticipate cost-effective access will be attainable. 

NBN: Telstra wins, no matter what.

This question arrived in my inbox. I thought it might be worth sharing:

The impact of the NBN/election on the TLS (Telstra) share price..
Alan Kohler is fairly positive in this article in May, are you aware of discussion on this angle?

Thanks for the link. Yes, I saw that article, even if I don't agree.
Kohler got convinced of the "better than the nothing we were offering in 2005, 2007, 2010" point of view.

This is the Coalition pitch, don't be fooled it's otherwise:

For 10% less in build savings and more than that  in-out-of-pocket expenses to subscibers for only a temporary network (yes they'll throw away 75% of the fixed-lines in 10-15 years and we will have to pay for all the work avoided now, but with more degraded and poorer Telstra pits, pipes and ducts, in need of full replacement):

• the Coalition Plan is to break the "universal access, guaranteed speeds" part of "broadband"
• AND destroy NBN Co profitability
• by preventing planned growth in ARPU (Average Revenue Per User) from access rate creep and revenue dominated by high-end download volumes
• WHILE giving us 40 to 80-fold access rates with massive congestion and unusable latency...
• we know this from the Gunghalin Experiment and the non-performance of  RIMs.

Telstra share-price didn't change when Turnbull released the Coalition plan, neither has it fallen back or slowed its rise. This is information on the collective view of 'The Market'.

Telstra has somewhat locked in contracts, but is racing ahead with NBN Co work to crystallise  as much of the contract, as quickly as possible, because the contract pays them when they declare a pit 'OK to go'.

Telstra are very good at optimising their cash-flow and returns.

Telstra win in every scenario, which is why I think the market is supporting them:

• All Fibre NBN:
• Telstra have largest backhaul, lowest cost structure & dump deadweight of copper CAN maint, leverage high free cash-flow from NBN Co payments. Concentrates on 4G mobile & dominating that space.

• DSL NBN:
• Telstra might yet own all the nodes (with NBN Co leasing access), still dump deadweight of copper CAN, make more money leasing copper. Concentrates on 4G mobile & taking customers off DSL. Paid for by NBN Co contracts.

• NBN Co fails because of DSL/FTTN:
• TLS Concentrates on 4G mobile & sends NBN Co broke.
• As largest creditor, can purchase them for what its owed. Then has monopoly on CAN (Customer Access Network) again.
• Can charge what it likes and is able to defeat ACCC demands: doesn't have to build an inch of new network, can only rollout "cost-effective" fibre. I.e. most profitable and force everyone else onto their 4G network, then decommission DSL + copper phone as "unprofitable" or force ACCC to allow massive price hikes, making their 4G cheapest, most viable solution.

NBN: Another 100 years in Copper. Yes, but only for phones.

Mark Gregory made an excellent reply to David Thodey, Telstra CEO, statement last week:

“copper has been going for 100 years. I think it will be going for another 100.”

In what world will that happen?


Is Thodey just playing semantics?
Does he mean "copper will be used somewhere in consumer devices and LAN's", or did he really mean what it seems "Telstra services will still be delivered over existing copper in 100 years".

It seems he's repealed the Law of Physics and Chemistry within his network:

Thodey's special copper doesn't corrode, joints degrade or the insulation ever break-down, under any and all circumstances.

I'd like that sort of power and confidence. Or he really was just having fun and spinning a line to get news coverage.

I can conceive of one, and only one, scenario where Telstra will be running copper elements within its Customer Access Network 100 years from now:

Some telephony, control, alarm or traffic light/SCADA circuits are deemed "essential" and must be kept working at any cost.

And it will be at any cost. A few thousand services running copper - that will be really high cost.

The thing I found most interesting with the article was the comments.
The blow-you-I'm-OK self-centered attitude, ignorance, bias and prejudice shown by many of the commenters on technical, economic and financial is still quite amazing.

Abel Adamski makes his usual good contributions, with many links/sources. He really is a source of hope and rational discussion in a argument full of sound-bits and dogma - look for his comments (and Mark Gregory's). Worth the effort and my thanks to him for doing this work.

NBN: (Dis)Economies of simplistic charging

The central problem for Telcos since the convergence of communications into All Digital is charging.

How do they differentiate products and charge different rates for identical bits on the same pipe?

In 1988, I first wrote/talked about the problem which in 1991 I phrased to a journalist as "an embarrassment of riches". With huge, cheap pipes available, how could a Telco construct a rate-card for both 32-64Kbps voice and 4Mbps video which didn't either make low-rate services "nearly free" or high-rate services unaffordable?


An artificially constructed rate-table, like expensive long-distance phone calls, will force consumers to find substitutes: users will spend money to access services with costs closer to the underlying cost-of-supply. In the 1990's, Australia became CISCO's global testing ground for Voice-over-IP because of Telstra's monopoly pricing of long-distance calls.

Telcos haven't appreciated this problem, nor found good solutions. The current NBN Co model offers 3 variations:

• Traffic Class, (TC) or prioritisation and set Quality of Service (QoS).
• Telephony traffic is high-priority "TC-1" while data is "best-efforts" TC-4, the default.
• The other classes, TC-2 & TC-3

• Differential pricing for (Fibre) Access speeds.
• Users don't want 'speed' in itself, but they can signal their desire for, and the utility of, the service to them by paying more to have the spigot opened wider. NBN Co could just give everyone the highest available access rate, but then it loses product differentiation.

• Volume charging via wholesale CVC (Connectivity Virtual Circuit) access rate.
• This is the real revenue raiser and allows wholesalers to use a fraction of the raw access speed of a link at a Point of Interconnect.

• There are a fourth & fifth variant that could be used for differentiation: multicast and IPv6.
• It's uncertain what NBN Co will do with these.

The thing about these 3 variables is they are artificial, but of perceived value to customers. Customers get to choose what they pay: they signal with their wallets what's important to them. 

On top of this, NBN Co have modelled a conservative download growth rate (30%pa, not 50%-63%) and will only increase total charges by 5%/year (by dropping $$/GB by 19%). This per-unit price reduction applies to all traffic and will stimulate usage/demand through Price Elasticity of Demand. NBN Co don't have to be very smart to maximise profits and revenue (Total Revenue Test), something that neither Telstra nor the Coalition do or talk about.

Any producer that can charge many prices for the same product (Price Discrimination) will maximise its revenue because it minimises consumer surplus, when what a product costs a consumer is less than they are willing to pay. Additional price-points reduces the Deadweight Loss of the product, benefiting everyone.

This works at both ends of the market: at the high-end, there are a small number of consumers who will pay a lot for the service, at the low end, you can attract a large number of users at "budget" prices, whom you'll never get at the mid-point prices.

Why this works so well in Telecomms is because almost all the Average Total Cost (Fixed Costs + Variable Costs) are Fixed Costs: it costs milli-cents per hour for a telephone call, it's all but zero variable cost.

Think of current Telstra charges and the proposed Coalition VDSL/FTTN charging: a single price only. They are deliberately foregoing both the upper end (consumer surplus) and foregoing all the low-end consumers.

Not only does a highly differentiated charging model, like NBN Co's FTTP,  increase total revenue, and hence profitability, significantly, a side-effect is raising the ARPU (Avg. Revenue Per User), it allows very cheap entry-level services.

As every supermarket will tell you, "loss leaders" and discounts bring customers into your store and you increase total revenue. That's the same for Telcos: there is a strong positive correlation between per-customer revenue and time-on-service. People get "hooked" on the new services and become habituated to them and increase their willingness to pay.

Telstra and the Coalition's VDSL/FTTN proposal ignore economic fundamentals, behaving like old-school inefficient Monopolies leaving huge amounts "on the table" and not fostering and growing demand.

NBN: Why Telstra shareholders would be silly to accept a "rent not buy" deal

This is a more technical treatment of why I think Telstra shareholders would be unwise to accept any deal to rent the last-mile copper, not accept a variation of the same one-off payment deal they have now.

The Coalition NBN plan is based on significantly lower CapEx, they need to rent the copper, not buy it.

The minimum commercially viable service period for a DSL-node network is far too uncertain.

Because the GPON Fibre Networks starts with a 28% share of the market, is a more desirable product and its inherent Operational and Maintenance costs are lower, it is far too easy for the 12% change in market share needed to hit a "tipping point" of 40%of the market will be met, and met quickly.

The network assets, nodes and copper, have around a 20-year depreciation schedule. A reasonable line-rental agreement would be expected to be around that.

Think back to 1997, around 20 years ago, and compare the Internet then and now. By the time the Coalition deal is returning money, we can guarantee devices, content, speeds, services and operator margins will be completely different. Any reasonable forecast of Internet changes over 10-20 years must include significant change. "The Internet Changes Everything, including itself."

Not just even in an economic downturn scenario, but especially then, because everyone will be looking for cheaper ways to do everything: the Internet is the ultimate product-substitute and market disruptor. An economic downturn will radically increase demand for Internet services, just as sales of cosmetics boom in downturns, at the expense of the usual luxury goods.

Fibre starts off as a more desirable consumer service because it's faster, more reliable and upgradeable.
It is intrinsically cheaper to maintain and GPON can be upgraded in-field, possibly even by the client. Want a 10Gbps service? "I'll just mail that new card to you... That'll be $100. Charge or Credit?"

Even when a huge price barrier of $3-$5,000 for conversion is artificially introduced by the Coalition plan, consumer desire will be very strong. With current consumer technologies, it's mindlessly simple and under $200/premise to share a single expensive connection. One household pays for the Fibre upgrade and 2 or more piggyback off their connection. A 10m cat-6 cable is really cheap, a WiFi router, well you might already have one of those on a shelf collecting dust.

We know from experiences like "chipping" games consoles and "all region" conversions of DVD players that consumers will blow-past artificial restrictions for desirable goods and services, especially those they find are high-utility.

The effective price barrier is closer to $1,000, maybe as low as $350, if specialist businesses form around "sharing Fibre".

At $3,000 to convert a premise to Fibre, a DSL-NBN may take 10 years to reach the tipping point.
At $1,000 to access a shared Fibre, a DSL-NBN doesn't have a 5 year life.
At $350 to access shared Fibre there is no price barrier to leaving DSL-NBN.

Remember the fall of the Berlin Wall and the subsequent collapse of the USSR: when a "tipping point" is reached, the rest of the change happens with blinding and, to some, startling speed.

That's the question for Telstra shareholders to consider:

Can DSL-NBN maintain sufficient market share for even 5 years to make "rent not buy" at least as good as their current deal?

That same question should be keeping the Coalition NBN team up at nights.

NBN: Why the Coalition won't answer the "rent or buy" copper from Telstra

The Coalition seems to have achieved its "$17 billion cheaper up-front" by proposing to rent, not buy, the copper D-side from Telstra.

If I ran Telstra, its not the deal I'd want [including sources and calculations].

This swaps $8 billion in Capital Expenditure by 2021 for $1.7-$3.0 billion/year for 20-25 years, a $34-$75 billion commitment, which on the surface seems bizarre.

It's "pay now, or pay and pay and pay and pay", just like Hire Purchase, but you never get to own it.


What we don't know is:

• What rate per line Telstra is willing to accept and over what minimum period.
• The current regulated price of $16/mth for an Unconditioned Local Loop Service (ULLS) won't return as much as the current SSU agreement.
• Optimistic (30% margin) modelling suggests a minimum of 25 years.

• The number of lines that will be charged.
• Will all 8.9M lines "passed" and presumably connected to DSL nodes need to be leased, or
• just the lines actually in service, a much lower figure requiring considerably higher payments.

• The EBITDA margin Telstra wants to achieve for that last-mile:
• it's average 40-44% or
• the 18-25% it gets now for ULLS.

• What happens when a customer stumps up $3-$5,000 to convert their copper service to Fibre?
• Telstra will need to be paid out the minimum lease payment.
• Who bears that cost?

• Will the Regulator, the ACCC, agree to any of this?
• Will the Telstra shareholders agree to Turnbull's "slight" variation?

NBN: Why Telstra should want to sell, not lease, its copper to NBN Co.

The Coalition acknowledges it has to strike a deal with Telstra and leave their 1.4M retail shareholders "no worse off", or even with "a mild positive".  We know from the 2011 Explanatory Memoranda to shareholders that the disconnection fee was worth $4 billion to Telstra in Post-Tax 2010 Net Present Value terms and that last Friday NBN Co put a 2021 figure of $11.3 billion on "FTTP Access", presumably mostly the Telstra disconnection fees + lead-ins.

The Coalition has to meet or beat this figure and tell us if it is CapEx, a one-time payment per line, or an OpEx, small payments spread over many years costing a lot more in total.

What the Coalition hasn't said clearly is how they intend to execute the deal, presumably meaning its Not Good News for their plan:

All CapEx, all OpEx or a combination?

Why this matters:

• Telstra won't settle for a worse deal, they are known for driving hard bargains, and
• the $20.5 billion of the Coalition Plan doesn't appear to allow for $8-$11 billion in CapEx to buy Telstra's copper.
• Or there's at least an additional $1.7 billion in OpEx, more than half the current $3.1 billion in the Coalition Plan.

The Coalition, as Abbot, Turnbull and others, have implied it's a CapEx deal by saying 'Telstra get their money sooner, that's a benefit to them', but that's not clear policy.

The FTTN proposal is for 72% copper services with 28% FTTP covered under the original Structural Separation Agreement. A new agreement must beat a hurdle of 72% of $4 billion NPV or $2880M.

The crunch is:

What happens when a copper service that's been leased by NBN Co gets replaced with a Fibre service. Does the existing disconnection payment kick-in, in full or pro-rata'd up until a minimum lease period?

An optimistic (30% EBITDA margin) calculation of 8.9M lines leased under the ACCC approved Unconditioned Local Loop Service (ULLS) at $16/mth, has a 10-year NPV of $2.3 billion and $2.85 billion at 15 years, with $3.1 billion at 20 years, or 2032, suggesting that the minimum lease period is 20 years.

What's unknown is Telstra's EBITDA margin for ULLS. Trujillo in 2005 (pg 13) gave a figure of 27% for all new services. The 2012 Telstra Annual Report (pg 36) gives EBITDA margins of 60% for retail PSTN and 37% for retail fixed broadband and 40.5% for the whole company, in-line with Trujillo's 44%.

The Telstra EBITDA margin for wholesale ULLS might well be 18-25%,  not the 30% used, making the deal unacceptable to them.

The Coalition could instruct NBN Co to offer Telstra a higher rate than the ULLS $16/line/month, but the ACCC would have to agree, which would burn time and cause grief.

The beauty for Telstra of a sale, as in transfer of ownership or sole rights to use of the copper asset, is twofold:

• remediation and maintenance are no longer their problem, and
• they get all their cash by 2019
• much better than having ULLS payments dribble in over 20-25 years with uncertainty from Policy changes or wrangling over conversions to Fibre.

Because the Coalition has deliberately obfuscated this issue, their proposal must be weak in this area.

My interpretation is they've traded $8 billion in CapEx for $30-$50 billion in OpEx to make their plan more appealing at $20.5 billion, not $28.5 billion at least.

---

Quotes and Sources

Coalition Policy Document

NBN Co and Telstra
We may seek to negotiate variations to commitments to provide efficiencies, allow the NBN to be more quickly deployed or otherwise create benefit.

NBN Co will seek permanent access to Telstra’s copper between premises and concentration points such as pillars, cabinets or exchanges. Telstra has publicly stated the copper has minimal economic value, leading us to anticipate cost-effective access will be attainable.

ABC Inside Business. Turnbull doesn't clarify the "rent or buy" question when its asked.

ALAN KOHLER: So the other thing that strikes me about your scheme is that you need access to the copper, right? You need to either own it or rent it or something from Telstra. Now you announced the policy; you'll go to the election with that policy, but without having done a deal with Telstra. So you're a bit hanging out to dry, aren't you? I mean, they've got you over a barrel.

MALCOLM TURNBULL: Well I've done a lot of deals with Telstra over the years and they know me very well; I know them very well.

ALAN KOHLER: Well you'd know how hard they can play it.

MALCOLM TURNBULL: I do. I do. And I know that it is in their best interest to support the approach we're taking. You can see that the market has welcomed the approach we're taking. They've treated it - as I've said for some time, our approach is somewhere between neutral and a mild positive for Telstra shareholders. Uncertainty, disagreement, tension with government has never been good for Telstra shareholders.

I am very confident that we'll achieve speedily the slight rearrangement to the agreements that we're talking about.

AFR reporting on ratings agency Fitch warning of a downgrade to Telstra shares:

due to a technicality that could threaten billions of dollars in disconnection payments.

AFR reporting Telstra "keeps NBN Cash". Abbot is specific "start to get some money" sooner. Goes either way, but leans to "rent".

Mr Abbott said: “Telstra only gets paid under the government’s scheme when the NBN connection becomes live and there are very few live NBN connections right now. Under us, the thing will become operational vastly more quickly, so Telstra will start to get some money.”

An AFR opinion, not source, says Telstra shareholders will benefit:

Having the network rolled out faster is important because it means the payments to Telstra for the switchover of customers from the old copper wire network to the NBN will be paid quicker.

An ABC interview with Turnbull. Does the singular "payment", not "payments", imply "buy"?

JON FAINE:
There’s an assumption that you make that you can get at no charge access to Telstra’s copper connection to the home. It took years for the Labor Party to negotiate access to that under their plan. Why do you assume and isn’t it a fatal flaw to your assumptions that you’ll get access easily and without cost?

MALCOLM TURNBULL:

Well, obviously I’m not uninformed or inexperienced in dealing with Telstra. I’ve had a lot of dealings with Telstra over the years.

JON FAINE:

That doesn’t mean they’ll dance to your tune.

MALCOLM TURNBULL:

No, no doesn’t mean you’ll let me finish a sentence either but what it does mean is that they are getting paid under the existing contracts which we will honour, $1500 per premise as it is connected to the NBN Co and whereupon they switch their copper network off, so that it is of no value at all. Under our approach because premises will get connected to the NBN sooner – that’s to say, more quickly, Telstra would get paid more quickly. So it is in their interests, because they would get their payment – it wouldn’t get any more than they’re contracted for but they would get them sooner – it is in Telstra’s interests to go along with the proposal we’ve made which is why all of the stockbroking firms have said, and I think it’s a fair comment, that our approach is a mild, not a big positive, but it is certainly a mild positive for Telstra. So Telstra shareholders are no worse off and they might be a little bit better off and that is why Telstra has an interest in going along with that.

So this is actually very well thought out as opposed to some of the loopy, uninformed, reckless comments that you’ve seen from people like that gentleman Mark Gregory at the RMIT who not so long ago was saying Julia Gillard should get the army to build the NBN, and yet he’s apparently treated as a serious commentator in this field.

NBN: Black Holes in Coalition FTTN Plan

Previously I've written that the Coalition Financials don't add up for their majority FTTN NBN Plan: they've deliberately omitted material figures.

One of the major differences between Fibre and Copper on the "last-mile" is ownership and reasonable reimbursement for a compulsorily acquired asset:

• For copper lines, 100% are acquired and each must be paid for, in service or not.
• For Fibre, compensation is only required for loss of earning capacity: only services in-use must be compensated by NBN Co.

Those are just the tip of the iceberg... Below is my current list, totalling around $22 billion extra in CapEx.

• Financial projections supplied have material amounts omitted:
• Interest, Depreciation, Change in Working Capital.

• Modelled period is "short", only to 2019.
• Every other model is to 2021 or 2024.
• Model projections are cited for 2021, so we're told the model was run, just withheld.

• Model omits critical expense and revenue inputs: passed and connected subscribers.
• Following the assumptions included in prose, I was unable to recreate the figures within a reasonable margin.
• Those numbers are in the NBN Co Corporate Plan and were necessary to create the Revenue figures.

• Large CapEx items, now clearly identified by NBN Co, seem assumed away:
• CapEx for Wireless & Satellite is around $3.1 billion, we can presume are included,
• but there is another $6 billion of CapEx for necessary facilities that may be missing.
• This was always apparent as the difference between the FTTP CapEx ($28.5B) and full CapEx ($37.4B) in the 2012 NBN Co Plan.

• Major cost inputs, with high uncertainty, seem to be missing from the calculations:

• The only FTTN cost that can be infered is the $900/line guesstimate for 8.9M lines.
• $8.1 billion seems to be the full FTTN cost assumed by the Coalition.
• That appears to be around half the Coalitons' own estimates to purchase the Telstra line asset.

• Telstra line costs, either as CapEx or OpEx aren't mentioned:
• Purchase over 3 years at current PSAA rates (MT: $1500, SJ: $1200) for 8.9M copper lines: $13.35 billion or $10.68 billion.
• We know the lowest price to be $11.3 billion from the recent NBN Co figures on FTTP Access.
• Lease 8.9M lines over 25 years at current ULL rates of $16/mth/line ($192/yr/line) or $1.7 billion per year.
• Telstra would likely contest this with the ACCC and ask for increases based on increased maintenance required for higher-spec lines, plus remediation and reconfiguration costs.
• Telstra could ask for $27/mth/line, the same wholesale price charged by NBN Co and agreed to by the ACCC,
• or $2.9 billion OpEx from 2017.

• Copper network costs are not apparent:
• Reconfiguration for DSL,  not Phones: Telstra has commented that 40% fewer nodes are needed, but only if the network is reconfigured, requiring major labour input and new copper to be run.
• It's not free, but is cheaper at 1500m than extra nodes.
• At $120/line for 8.9M lines: $1 billion.

• Rehabilitation/remediation of last-mile copper for DSL: Telstra's copper "last-mile" is reportedly very degraded and needs extensive repair/replacement to bring up to DSL-spec.
• In 2005, Trujillo seems to suggest $4.7 billion could be paid by the government to rehabilitate the network for 12 Mbps, not 25Mbps.
• $2.6 billion was quoted for 6Mbps as part of $5.7 billion for only "Big 5 cities".
• Later than year, Telstra presented a VDSL solution for ~90% national coverage for $11 billion, with Trujillo citing $15 billion for 98% coverage a year later.
• Telstra has halved its lines workforce since 2005, we can't presume the network has improved.
• The minimum copper-only rehabilitation is $10-$15 billion, based on the 2005 figures.
• This might be as low as $5 billion with 28% Fibre & 62% copper.
• Telstra in 2005 highlighted remediation as a major cost, comprised of:
• Removing 7,500 Pair Gain systems (RIM's and CMUX's), now more
• Bridge taps and loading coils
• replacing copper.

• Customer Premises Equipment, NTD's (Network Termination Devices) are not mentioned, presumably a cost to now be borne by the subscriber.
• The NTD now marks the edge of the Telco network, it must be installed by them.
• The current NTD's provide 2 Phone sockets and 4 "UNI" sockets for broadband and other digital services, such as video.
• The NBN is VLAN based, not PPPoE like current ADSL services.
• Current ADSL modems may work for a short transition period,
• all subscribers will need to be upgraded to NBN compliant NTD's.
• My estimate is $450/premise ($200 + $250 labour). For 6.3M FTTN services connected,
• $2.8 billion extra is transferred to subscribers or is missing.

• Compulsorily acquired assets appear now not to be compensated.
• Network Operators currently relying on ULL and LLS access will have their investments orphaned when the copper is cut to install nodes. These include:
• DSLAM's not fully depreciated.
• Phone services over non-Telstra networks
• Telstra RIMs and CMUX's.
• The biggest compensation due may be to Optus and Telstra for phone services and RIM's.
• There will be 10-20,000 devices involved.
• Compensation might be $1-$3 billion.

• Full Node Costs, both number and Cost-per-node are unstated in the plan. Nor is the critical determining factor, the distance rule stated: Is it 400m, 800m or somewhere in-between?
• "60,000" nodes have been spoken about,
• maybe at $30,000/node + $75/line-card + my guess $3,000 for 10Gbps GBIC's (4/node: dual uplinks and 2-per-end). 
• $1800M + $650M + $180M
• ~= $2.5 billion
• There's also 81,000 km of fibre to be laid and jointed at $25,000/km
• $2 billion
• And a share of the $1.7 billion transit network and PoI's
• Plus extra for Exchange switches and other equipment.
• 1,000 exchanges with $250,000 of switches and ancillary equip.
• $250M, minimum
• Scaling up from 1500m to 800m and onto 400m is not simple:
• whilst the area per cell is notionally "radius squared", four times as many cells are needed when reducing the distance by half, in practice other effects come into play:
• For 1500m to 800m, I'll assume a 3.5 ratio allowing unserviced areas.
• For 800m to 400m, I'll assume 2.1 ratio to allow for majority "same run".
• The best data we have are the 2006 Analysis Mason estimates  of 38,457 nodes (20723 for "Big 5 cities" + 17734 for a full FTTN)
• This was for 12Mbps ADSL2+ at 1500m with 33% services direct from exchanges, costing only 40% of lines off Nodes.
• Without a 40% improvement from network reconfiguration
• Nor with the 28% FTTP coverage in the Coalition Plan
• or 62% of FTTN coverage via Nodes.
• Fewer services can be directly connected to cheap exchange lines as distance reduces by geometric area:
• 1500M: 33.3% = 66.66% node-equivalents in the field
• 800m: 8.3% = 91.7% in field
• 400m: 2% = 98% in field
• Using the 2006 Analysis figures, 57,685 node-equivalents were needed.
• For 800m:
• 57,685 * 3.5  (scale factor) * 0.6 (reconfig) * .917 (field) * 0.62 (fibre)
• = 68,872 nodes or $2.9 billion with previous cost estimates
• For 400m:
• 57,685 * (3.5 * 2.1) * * 0.6 (reconfig) * .98 (field) * 0.62 (fibre)
• = 154, 567 nodes or $5.7 billion with previous cost estimates
• Tesltra commented on the FANOC proposal, cutting the copper and adding new nodes would cost $1 billion extra at least, plus massive disruptions. That was for only "the Big 5 cities", add 50% national.
• The Coalition does promise that in the second upgrade, to 50Mbps in 2017-2019:
• only 90% of FTTN premises will be guaranteed 50Mbps.
• Is that an 800m rule with vectoring, a software upgrade, or
• through a 400-50m rule?
• Transmission lines reduce 'exponentially' with distance.
• If 25Mbps is available at 400m, only 20Mbps at best is available at 500m and 6Mbps at 800m. Distance losses are much higher with VDSL than ADSL2 and 1, so attainable rates will be lower.
• A $3.5 billion difference in 800 vs 400m.

• Existing Phone services are not mentioned:
• The two 2005 Telstra plans seemed to assume ATA's within the nodes, allowing non-DSL subscriber service to continue unaffected.
• Current NBN NTD's place those ATA's within them, either requiring transitional node equipment or special through-cabling, or the disconnection of phone-only services.
• There are no arrangements or costings mentioned for ownership, control and operation of the new Phone network, based around VoIP and Soft Switches.
• If they are assumed to be already provided by NBN Co, they are a major cost item
• and commercial arrangements for existing network operators like Optus need to be clarified.

NBN: Trust the Coalition, Sure Can!

What's the Coalition's agenda with their NBN policy?
Specifically:

• Where do they place the National Interest viz a viz other concerns?
• How do they regard preserving Telstra's business and the investment of the 100,000's of small shareholders that bought T1, T2 and T3 from them?
• How might they regard the business of the government owned NBN Co?

The evidence from the Howard government is deeply disturbing and we know they both soundly rejected the warning delivered about Telstra in 2005 by Sol Trujillo and refused to act to address the challenges, though it was well within his remit:

the Coalition seem to me to be the ultimate cynics and political opportunists.

I'd like to examine three themes:

• What happened with Sol Trujillo in 2005 prior to the final T3 sale.
• What a reasonable course of action with Telstra, its FTTN and eventual sale would've been.
• John Howard's personal record, as Treasurer and as Prime Minister.

Around 15 years before Howard was Prime Minister, he was Treasurer presiding over the worst recession Australia had seen since the 1930's Great Depression,  clashing heavily with Fraser as well. This is how Fairfax describes his performance, it doesn't speak of a man, or party, "good with numbers" or willing to put National Interest ahead of Party Political concerns or individual agendas [see as well the National Archives view of the period]:

The 1982-83 recession, over which Howard presided, was the worst since the Great Depression, according to former Reserve Bank governor Ian Macfarlane.

When Howard became treasurer, the budget deficit was $3.2 billion, inflation 8 per cent, the unemployment rate 6.3 per cent and the growth rate 1.6 per cent. When he surrendered the Treasury keys to Paul Keating in March 1983, the budget deficit was $4.3 billion, inflation was 11 per cent, unemployment was 10.2 per cent and growth was a negative 0.4 per cent. Not a beautiful set of numbers.

The black hole of the budget deficit forecast quickly grew to $9 billion when Hawke and Keating examined the books. The economy, moreover, was in deep freeze, though Howard never publicly admitted to a recession, unlike Keating. It coincided with a drought, for which Howard could hardly be blamed. His period of office was the relatively unproductive era of "fighting inflation first" and intractable budget deficits.

Howard notched up one record. The misery index — the rate of inflation and unemployment combined — was at its highest when he was treasurer.

The scorecard on interest rates, which Howard used in the 2004 federal election to scare voters away from Labor, is not that good either. From 1977 to 1982 the mortgage rate was set at 13.5 per cent and the average rate was 10.5 per cent, business interest rates were 17.5 per cent and the average overdraft rate was 15.8 per cent. Moreover, there were two periods when mortgage defaults hit a peak — 1978-79 and again in 1982.

Even as Prime Minister, Howard was seen by his own party, as "mean and tricky", having Shane Stone, President of the Liberal Party, write him a memo in 2001 detailing the problems and remedies, advice he somewhat followed. Nicely summarised on "7:30" as:

The Government was "mean and tricky, out of touch and not listening" and it had deserted its own voter base, especially small business and self-funded retirees.

Going forward to 2005, on the evening that the Trujillo briefing paper was released to the ASX, Howard was interviewed by Kerry O'Brien on "7:30", amply demonstrating that notorious streak of denying all problems then ducking and weaving, refusing to answer straight-forward questions.

On the day of the meeting, 11-August, Howard was reported as saying "We'll consider Telstra's bush plan".

It didn't stop there, Howard publicly turned on Trujillo and Telstra, accusing them of "disgraceful behaviour". The most interesting part of this article is the Government, in the 2005 Budget, expected $5.25/share for Telstra T3 (it got $3.60, vs $7.40 for T2). Clearly Howard is blaming Trujillo and the Telstra Board for speaking the truth and somehow that crashed the share price. An ASIC investigation ensued, directed at the Telstra executive team, but failed to find serious misconduct.

We know that Trujillo was know for being "very direct" and from a press report on the day that there was ample time for him to deliver his Bad News, Good News message, but it wasn't well received by Howard on the day, and the senior ministers with him weren't able to change the decision.

Mr Trujillo and Telstra chairman Donald McGauchie flew to Canberra for the meeting after unveiling the telco's record full year net profit of $4.45 billion in Melbourne.

Nationals leader and Deputy Prime Minister Mark Vaile, Treasurer Peter Costello, Finance Minister Nick Minchin and Communications Minister Helen Coonan also attended.

After an hour and 45 minutes, Mr Trujillo and Mr McGauchie emerged from the top-level meeting looking grim but with little to say to the waiting media throng.

We know from recent history that Trujillo's plan was a good one:

The TLS share price has boomed since Telstra agreed to the NBN Co work and Structural Separation.

The question for Abbott, Turnbull and Fletcher from this is:

Why didn't the Coalition in 2005, when it controlled Telstra and had the chance, separate it into Retail and Wholesale companies and take Trujillo up on his 3 year FTTN-based NBN? They could've sold the two entities separately in 2008, once the wholesale NBN was established.

From the recent valuation by the stock market, it's probable that the expected $5.25 price would've been achieved or even the $7.40 of T2 or better.

With more than 4 billion shares in play, the Howard Government seems to have botched a simple, clear-cut business decision worth $1.50 - $3.00/share or $6-12 billion.

Why did the Coalition deliberately ignore a very clear message of a "clear and present danger", then go onto sell to the general public an asset they knew was impaired?

In any other context, this would have attracted a very far-ranging inquiry from the Corporate Regulator and the ASX:

• When did the managers of the business first know that the business was in trouble and unlikely to meet claims in the prospectus?
• from the 2005 presentation, we know PSTN income was in decline in 2002, the business was meeting dividend payments from reserves and since 2000, had under-invested.
• When did the owners selling the business know that is was impaired?
• The most senior levels of the Coalition most clearly knew on 11-Aug-2005 after the Trujillo briefing.
• It seems unlikely, or negligent, if they hadn't been made themselves aware of the situation sometime in 2001/2 when the share price had joined the "dot bust" and was in serious decline.
• When did sophisticated investors understand that Telstra was an impaired asset?
• At least in 2005, after the release of the briefing paper to the ASX.
• Probably in 2003, when the "dot bubble" had washed through, but the core business was in serious decline.
• When did naive, small investors  understand that Telstra was an impaired asset?
• Obviously, NOT in 2006 before the T3 float.
• Presumably in 2010 or 2011 when the share price hovered around $3.

In the normal course of events, owners that knew, or should've known, information material to a prospectus, would be guilty of a serious offence under the Corporations Act.

Lets put legal & regulatory niceties aside, this is not the forum for such things.

The whole of the Coalition's senior ministry knew by Sep-2005 that they had a seriously impaired asset for sale and that there was a reasonable and achievable plan to salvage it, and that proceeding with the sale to hundreds of thousands of small, naive investors would cost those people dearly.

Why did the Coalition at its most senior levels choose to screw-over both Telstra the company and the hundreds of thousands of average households who believed the Coalition promises? This was a deliberate action, consciously undertaken: the ultimate cynical, opportunistic political act.

The greatest shame is that the National Interest, for both urban and country dwellers, was sacrificed to no good end.

With this history, why should the electorate believe anything the Coalition says about an NBN now?