OVUM評論：Telstra and NBN Co reach milestone agreement on fiber rollout

A heads of agreement, not a final deal

Telstra and the government-owned NBN Co have been negotiating the terms of Telstra’s involvement in the NBN project for over a year. On 21 June 2010, the government, the NBN Co, and Telstra jointly announced that they had reached a non-binding agreement for Telstra to progressively transfer its wholesale and retail traffic to the NBN as it is rolled out over the next eight years. Importantly, the government has achieved a political victory by progressing negotiations towards the successful rollout of the NBN in advance of the national election expected later this year. As the situation in the UK with the fixed-line levy demonstrates, a change in government has the potential to derail what had been planned.

The parties have agreed the compensation to be paid to Telstra for the loss of its fixed access revenues and for the use of its ducts, and for transferring the cost of the USO to a new USO Co, giving the agreement real substance. The net present value of this compensation will be A$11 billion, which is in the region of estimates of value made by financial analysts. This money will ultimately come from the government.

Of course, this is not a final deal, and either party could walk away before the deal is finalized. The parties cannot yet share details, and it is clear that some of these details remain undecided. The announcement nevertheless demonstrates a willingness on both sides of the table to progress the negotiations, and makes the prospect of a successful rollout more likely.

Regulatory approval will be required for any final deal, either through an authorization for a non-compete agreement or legislation. Neither of these can be guaranteed, since the regulator has not seen a final deal and the government does not control Parliament.

Implications for the NBN Co and Telstra

First and foremost, this announcement makes it much less likely that Telstra and the NBN Co will compete in the wholesale market. The business case for a privately funded national wholesale-only fiber network is weak at best. We believe that substantial public subsidy will be required whatever the competitive scenario, but competition would have inflated the level of subsidy required. Of course, the government must ultimately contribute the A$11 billion, but this is less than the total losses that competition would have generated over the eight-year rollout timeframe.

Like the NBN Co, Telstra gets added certainty out of this agreement, which offers a clear pathway to migrate its business to a next-generation fiber environment and locks in the value of its customer base and physical assets.

Implications for the industry

If this heads of agreement can be developed into a final deal, the implications for the Australian industry are enormous. Will the smaller ISPs and operators emerge winners from this upheaval?

First, Telstra and the NBN Co’s interests will be increasingly aligned – Telstra will be the NBN Co’s biggest customer. To complicate matters, it is likely that the NBN Co will buy backhaul capacity from Telstra in rural areas. It is essential that the rest of the industry demands transparency in any final deal to ensure that no hidden cross-subsidies creep into pricing arrangements between the two companies. It will be the role of the regulator to scrutinize this.

Second, and in the medium term, the access network will be commoditized. The whole industry will need to seek competitive differentiation in improved customer service, managed service infrastructure for enterprise, media services for consumers, and mobile infrastructure investment.

This will be a major shift in the pattern of competition, but one that Telstra will be well placed to make. With an A$11 billion war chest to spend over the next eight years, and reduced exposure to the cost of a copper access network, Telstra will be free to invest in a range of new strategies, technologies, and services. It will therefore be a strong competitor in any industry future.