There’s something revealing in the fact that the NBN bidder with the apparently non-compliant, incomplete proposal yesterday was the one doing the most talking about it—and, judging by its statements to financial analysts and journalists, dealing with reality.
Telstra did everyone a favour by stating what has been obvious to most informed observers for months– that the government’s RFP goals are admirable but unsustainable in a real, commercial world, especially in a once-in-50 years economic crisis.
So Telstra has basically said that to make this work, it will cap the overall spend at under $10 billion. Offer VDSL2-derived speeds to about two-thirds of the population, which, by my reckoning, gets you to about the Albury-Wodonga or Launceston level. ADSL2+ speeds will suffice for the next 20-25%, getting you to the sub-10,000 town population level. HSPA and, in a few years, LTE, which Telstra chairman Donald McGauchie thinks will give FTTN a run for its money in the low density areas, will do for the last 10%.
Keeping costs down allows Telstra to promise something that was always going to be the NBN Achilles’ heel—ensure that entry-level broadband is affordable at a time when household budgets are under real pressure. Significantly, Telstra executives told an analyst meeting yesterday that they could finance their half of their build bill through organic cashflow.
The proposed $9.7 billion spend also cuts across what should have been a Terria/Optus advantage on price. Instead, the Optus bid now finds itself with a 50% higher $15 billion cost base and a requirement for more expensive capital. With Optus promising to contribute $1-2 billion and the government $4.7 billion, presumably it would need to find $8 billion from outside financiers.
But at least Optus has revealed some details on its proposed build in terms of node, base station and fibre numbers. What’s more it is aligned with the industry’s most reliably low-priced vendor, Huawei. It is significant that Telstra chose to take an indirect stab at Huawei in its 12-page proposal yesterday, pointing out that its vendor Alcatel-Lucent has the highest US security clearances.
This is potentially a key point of cut-through: Federal Cabinets of all colours tend to ask serious questions about these things.
DARK HORSES: Then there are the two dark horses: Axia and Acacia. Both put out press releases yesterday brim full of promises about open access and neutral goodness.
Both were also light on detail for firms so light on local reputations and track records.
Acacia name-checked three potential suppliers, four access technologies and promises of a fair payment for use of Telstra facilities. Oh, plus 12Mbps to 100% of Australians.
Meanwhile, Axia gave absolutely no information at all about its bid other than the fact it has coined a catchy, trademarked name for it: “Open Access Real Broadband.”
Both Axia and Acacia have some accomplished individuals involved, and in the case of the former, some impressive contract wins. But if they want Expert Panel and Federal Cabinet buy-in, they need to get community and commentariat buy-in and they are nowhere near leaving first base. They should consider answering some questions—like where’s the money coming from? How does your business case stack up if obstacles get in the way, such as a Telstra boycott of network usage? Are you aware of a recession that mitigates the economics of good intentions?
And a question none of the four were answering yesterday: how much will you charge for wholesale access and how much will typical users pay? At least Telstra offered some indications of protection for low-priced services. But it was astonishing how little was revealed given the flurry of press appearances and releases.
CRYSTAL BALL: Here’s what I think will happen. Conroy has been a stickler for process—why not when it allows one to evade discussion! And despite the criticisms from Michael Egan and Nick Minchin yesterday, he has always said this is nothing more than a request for proposals, as opposed to a tender.
He has also said that non-compliant proposals will get a look-in. So he has four national proposals and two state proposals to send off to the Expert Panel.
I believe the Expert Panel will quickly reject the Axia and Acacia proposals, while perhaps insisting on enforcing some of their better ideas on the winner.
This will simply be on grounds of their comparatively riskier financials, the legal risks to the Commonwealth and, likely, the political risks of anointing an unknown. Perhaps a role can be found for them somewhere though, maybe in the last 10% of the population Telstra doesn’t want to serve, or, as a policy experiment in one of the states. This whole thing is one damn experiment, why not embrace the spirit!
For the main game, it comes down to Terria/Optus versus Telstra. The former have put in a 900 page bid, which sounds like an impressive piece of work for an audience of seven.
But I suspect that Telstra will win the day, partly on the legal risk issues again, but also, with supreme irony, because it will offer a better cost-benefit return and less financial risk. That $5 billion end cost difference may tell in the end. And Optus would be entitled to feel extremely aggrieved at such an outcome—if its bid is judged too expensive and risky, that is almost certainly because it complied with the RFP guidelines, whereas Telstra has not!
GOAL ACHIEVED: So Conroy gets his process and it throws up Telstra as the preferred candidate. The original intentions of the competitive bid process—which was to moderate Telstra’s unilateral demands, as opposed to stripping Telstra of its market position—are largely fulfilled.
Negotiations ensue. And suddenly we get thrown into an 2 year time warp where the issue becomes—again—a disagreement between Telstra and the ACCC over access terms. Remember the ACCC not too long ago rejected the FTTN undertaking of the G9 access seekers themselves on the grounds it wasn’t fair enough to access seekers!
But this time, given NBN was a core election promise, Conroy and Prime Minister Kevin Rudd will likely get directly involved in the process and work out a middle position that placates Telstra and gets its signature.
The key here will be equivalence. The ACCC and Telstra will never agree on how to define it. Federal Cabinet abhors a vacuum and will do it for them. And ultimately, Conroy and Rudd will try and escort any conflicts to a compromise which will make and break industry fortunes—and, of course, promote their own ahead of those of any specific industry stakeholder.
That means an NBN of some type, and given the scaled back intentions of the Telstra plans, one that might actually be a) affordable to access seekers and b) affordable to end customers. No, we won’t live happily ever after. Yes, people will still complain about Telstra. And guess what, we’ll be shocked at what you can do when there is a mass market with 25Mbps plus download speeds.
Adjust your business plans accordingly.
by Grahame Lynch
