Thursday, July 9, 2009

Diverging incentives emerge in Australia's NBN

David Kennedy, Research Director at Ovum

AUSTRALIA: The Australian government announced in April 2009 that it was abandoning its tender for the construction of an FTTN network, and would instead pursue an FTTH access network to reach 90 percent of the market within eight years.

The accompanying discussion paper sought recommendations for regulatory change both in the short term and in the long term. After the publication of the submissions on 12 June, the expectation was that the government would digest the submissions and develop draft policy proposals.

In fact, the relevant Minister issued a press release last Friday 3 July, seeking industry input on several specific issues related to the NBN:

* The optimal access regime for the NBN, including, for example, the legislative obligations that should be required to ensure the NBN company operates on a wholesale-only, open-access basis; the process for identifying services to be offered; how the prices and non-price terms and conditions of those services should be set, and for how long; and the role of the Australian Competition and Consumer Commission.
* The appropriate equivalence obligation for the company and the services it offers, and how this would operate in practice.
* The nature of ownership restrictions applied to private-sector investors to protect the government’s equivalence objective for the wholesale-only network.
* Arrangements for the government to sell its stake in the network in the future.
* Any other rights and obligations to be conferred on the company.

These are all very good questions, but why are they being asked now, and in this manner?

Diverging incentives
When the industry submissions were released on 12 June, it became apparent that most industry operators, particularly Telstra’s competitors, were focused on the short-term structural separation of Telstra’s copper access network. In contrast, scant attention was paid to the regulatory requirements for an NBN. This is why the government has been forced to seek further input.

We believe that this reflects a gap between the industry and the government. While the government is committed to the long-term goal of building an FTTH access network in Australia, Telstra’s competitors have far more interest in the regulation of the existing copper access network than in an FTTH network that will take years to build.

So far, this is mere short-termism and therefore unsurprising. However, there are deeper forces at work that are setting the government and Telstra’s competitors more seriously at odds.

Telstra’s competitors are currently abandoning DSL resale and are generating good operating margins on their installed DSLAMs. The NBN threatens this arrangement because it will ultimately force them off regulated ULLS into the uncertainty of a wholesale fibre network, where wholesale pricing and their ability to differentiate may be less favourable.

We think these fears are well-founded, because the NBN will be far more viable if ULLS is actually cut off as FTTH is rolled out, avoiding revenue fragmentation and reducing the need for government subsidy of the NBN.

There is also a real prospect that the current de-averaged prices for ULLS access, with lower prices in the cities, will give way to uniform national wholesale pricing and push up access seekers’ costs in their key markets.

Transition management will be key
This problem underlines how tricky the transition from copper to NGN will be. In fact, the policy challenge can be summed up as a complex process of transition management.

The apparently minor incident of a press release points to the more substantial reality: that the government, Telstra’s competitors and Telstra itself do not have the same incentives in this process. As a result, the Minister cannot assume that he will have the automatic support of either side of the industry for the government’s NBN objectives.

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