Thursday, June 18, 2009

Separation key issue in Australian NGN debate

Comment from David Kennedy, Research Director, Ovum

“Telstra delenda est”
MELBOURNE, AUSTRALIA: During the Punic Wars, Roman Senators ended every speech to the Senate -- on whatever topic -- with the words “Cartago delenda est”: Carthage must be destroyed.

This sentiment is evident in the ACCC’s submission, which is reasonably representative of non-incumbent views. The submission calls for:
· Full structural separation of Telstra’s copper access network.
· Forced divestiture of Telstra’s HFC cable network, subject to the nature of any Telstra involvement in the new FTTH network.
· Mandatory undertakings and once-and-for-all access determinations, to replace the current piecemeal negotiate/arbitrate model of wholesale price-setting.
· A new telecommunications–specific regime for facilities access.
· New directive powers for the ACCC to issue binding rules against anti-competitive conduct.

However, there are also some jarring notes amongst the submissions. For example Optus, Telstra’s largest competitor, argues that a national FTTH network is only sustainable in the absence of fixed infrastructure competition. This implies a transition to a statutory monopoly by rolling all of Australia’s access networks into the new NBNCo. This clashes awkwardly with the ACCC’s contention that a divested HFC network would provide valuable competition in the transition period to a national FTTH.

Common ground is still possible
Telstra cannot ignore the groundswell for separation. Under the Government’s FTTH plans, separation is the end game anyway. Its challenge is to manage the process and defend its own financial interests.

However, nor can the Government ignore Telstra’s capacity to damage NBNCo’s business case. If the NBNCO must build its network and fight Telstra to peel away customers (separation takes away Telstra’s copper, not its customers), then the Government’s subsidy costs will be vastly inflated.

The model that is now being widely discussed in the industry is for Telstra’s copper access network to be rolled into the NBNCo. This would achieve structural separation in the short-term, while creating a sustainable access operator with an established revenue stream. In order for this to be attractive to Telstra, it would need to get a lot of equity and some kind of guarantee on the financial return on that equity.

This model reduces the FTTH upgrade from a commercial challenge to an engineering one to be managed by the NBNCo. Customers will be cut over to the new network automatically rather than having to be captured. This will allow NBNCo to focus on growing new revenue as FTTH is rolled out.

If acceptable parameters for such a deal can be found, then the Government will have pulled off a remarkable coup. If not, then a lose/lose scenario seems inevitable.

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