There's an unpleasant truth about the three remaining main NBN proponents: none of them have secured the capital to fund their bids and the frontrunner hasn't even confirmed its major equity partner, says Grahame Lynch  

While the last three years have essentially been ones of gridlock and stasis when it comes to FTTN (and an not unconnected stealth boom for 3G/HSPA), it is more than likely that we will see some radical developments in the NGN world in 2009—even if Telstra tries to use the courts to suppress use of its network assets.

The whole RFP process has always been about contriving competitive tension in order to moderate Telstra’s pursuit of self-interest as it sought to upgrade its PSTN to an FTTN network and potentially sideline access-based competition. Let’s not pretend otherwise: the G9 said as much itself when it first called for a FTTN tender early in 2007 and described the exact same process occurring in Singapore at the time as a means to moderate the instincts of SingTel.

So Telstra now finds itself outside a process designed to moderate it with one or more of Optus+Terria, Axia Netmedia, Acacia, TransACT and the Tasmanian Government seemingly in the box seat to pick up the Expert Panel’s nod and find themselves in contention for anointment by Senator Conroy come mid-March.

But as CEO Sol Trujillo informed us last week, Telstra won’t take developments lying down. For a start, it can upgrade its HFC network covering 30% of Australian households—generally the most lucrative and viable households mind you—to speeds of 100Mbps and, if the HFC community is to be believed, 160Mbps at the node. Singapore’s Starhub demonstrated 145Mbps some 18 months ago. Optus will do exactly the same upgrade if it perceives a market advantage in doing so.

LTE is on its way, and that will take wireless speeds from the base station to 100Mbps as well, heading up to beyond 1Gbps at low mobility in about 3 to 4 years. As long ago as February 2007, DoCoMo demonstrated 5Gbps speeds in a 20MHz slot using prototype LTE techniques.

Telstra will even potentially populate the NBN with its custom, but only in places where the NBN likely loses money on averaged prices. How’s that for revenge?

Add in the competitive tension provided from Optus, Vodafone and Hutchison 3G as well as Unwired’s putative WiMAX network. Those wireless congestion issues won’t look so relevant when demand is spread across five networks with hundreds of megahertz and potentially much more at their disposal, and which happen to be at the receiving end of much telecom R&D in the world today—focused primarily on how to promote capacity on finite spectrum resources!

CONTENTION? But I hear the objections already, indeed Senator Conroy himself has already made them. Wireless and HFC is shared, while the glorious NBN will have dedicated connections of at least 12Mbps per person without contention! Right on! But I see nothing in the RFP that specifies 2.4Gbps connections to the node and up to 16.8 terabits to the SuperPOP which is about the order of what one would have to do to guarantee uncontended 12Mbps service and, thus, genuinely “differentiate” oneself from these “inferior” shared technologies.

In the face of all this, the NBN winner/s would probably be compelled to make some adjustments to their plans. I wouldn’t be surprised if, given the legal and “future-proof” difficulties associated with non-Telstra FTTN, the winning proposal didn’t go straight for FTTH in some areas, and wireless in others a la Opel. Acacia has indicated as much, and Axia seems to lean that way.

I’d also be surprised if there wasn’t some leniency sought in other areas. We’ve already heard ideas about overbuild prohibitions—which would have to cover HFC and 3G to truly benefit the NBN owner—and full cutover rights to Telstra copper, which is appreciably different to current ULL access rights, and, thus, legally untested. Add some more: an in-vogue Obama policy idea floating around the traps right now is tax breaks for broadband investment profits—if the NBN will be as difficult a business proposition as I suspect, it would be a no-brainer for the government to offer that one. What’s to lose?

Another would be relaxed requirements in areas such as the five year rollout timetable or the 98% population reach target, particularly working backwards from the central cities where the intensity of HFC competition might make the NBN less viable than in suburban and regional centres.

Conroy is certainly going to be forced to offer something because I see no evidence that the three main bidders can currently back up their bids with real finance to the tune of $10 billion or more.

Optus has explicitly said it wants to kick in only $1-2 billion of the required capital for its bid, and just prior to the bid deadline, said it was actively searching for a lead partner to head its bid. Given the reporting requirements of the Singapore and Australian bourses, I would be surprised if it has secured such a partner without disclosing such a development.

Axia is a smart outfit that has skillfully negotiated the vogue for “neutral” network operators and won sinecures in Canada, France and Singapore.

But it is not a bank—it turns over less than A$80 million a year. In Singapore, it was brought in as the neutral front and gets 30% equity while kicking in around 1% of the cost—its three partners are all ultimately owned by the Singapore state. It will need to bring in similarly large partners with generous pockets to get anywhere near an Australian NBN build.

Acacia is an impressive collection of telco and moneyed individuals but has remained admirably committed to the spirit of the RFP gag in terms of media relations. I understand it spent tens of millions of dollars on its bid, but unlike the other bidders, it has no revenues or credit history to speak of. The only external advocacy of its financial credentials I can find comes from FTTH expert and advocate Stephen Davies who points specifically to the presence of Solomon Lew and Leon Kempler on its board—these connections to “Israel and the Jewish community” apparently will lead to “multiple sources of equity funding.”

“The Jewish business community are very shrewd and clever business investors,” says Davies. “Solomon Lew is Jewish and very wealthy. He has made many smart investments. Another director is Leon Kempler – chairman of Israel Chamber of Commerce. Again a wealthy man with many connections.” So there you have it, Expert Panel. If you have any doubts about the financing of the NBN give it to Acacia as their “Jewish” connections will ensure that your RFP mutton will turn out as beautiful NBN lamb chops! Given the poor quality of much Australian broadband discourse over recent history it would be almost unsurprising for the NBN debate to be informed by such an age-old and cringe-worthy stereotype.

REALITIES: The sad fact of the matter is that the Expert Panel cannot reasonably recommend any of the three major bids when matched against the RFP’s requirements that one must provide evidence of financial capacity to fund the bid.

Can the Expert Panel be reasonably expected to anoint a bid where it cannot identify or even predict the eventual lead partner? It’s asking too much, so expect, at best, that any recommendation will come with substantial caveats and qualifications—likely to include a “to do” list of legislative and RFP requirement amendments to facilitate a solvent bid. And many “if…..but.... then” qualifiers.

These might include proposals to seize the assets or freeze the investments of other carriers—likely very WTO and constitutionally unfriendly. They also might include a watering down of RFP goals—very politically unfriendly. And they might include new financial dispensations, such as tax holidays or the re-fashioning of the $4.7 billion government equity contribution as a grant—very fiscally unfriendly. At worst, there may be no recommendation.

In a sense, Telstra’s Sol Trujillo did the Expert Panel a big favour last week when he outlined his NBN defence plan—the so-called Plan B.

The panel can now match what I presume are the fairly optimistic revenue projections of the three major bids with the likely reality of a Telstra response.

Add the ACCC pricing advice given to the Panel. This is likely to provide another bucket of cold water. The ACCC’s Analysys cost model released in Christmas week provided no solace for any existing or putative network investor, Telstra or otherwise—it calculates even lower access prices on Telstra’s network than is the case now. How could a new and fragile NBN operator viably attract mass migrations from existing Telstra wholesale customers in such a scenario?

By Grahame Lynch