Australia’s NBN poker game reaches final round

Posted by Tony Brown Thursday, March 19th, 2009

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Australia’s communications minister, Stephen Conroy, and Telstra are engaged in what feels increasingly like a high-stakes poker game over the country’s A$15 billion (US$9.7 billion) National Broadband Network.
When Conroy announced that the government would have already announced the winner of the contest to build and operate the NBN had the horrendous bush fires in Victoria not forced it to divert its attention there, he had a very small audience in mind for his comments: Telstra.
Similarly, when Telstra announced that it was spending A$300 million to upgrade its HFC cable network in Melbourne to offer subscribers a 100Mbps broadband connection by December, it is fair to assume that the operator also had a singular audience in mind: Conroy.
By claiming that the government has all but decided who should get the NBN deal, Conroy is telling Telstra that it had its chance and blew it and that the government is deadly serious about excluding Telstra from the NBN process.
By announcing the Melbourne HFC-network upgrade, Telstra is returning serve, saying that no matter what plans Conroy may have to exclude it from the NBN, Telstra has enormous operational power in the market and will be a nightmare competitor for the NBN winner.
Of course, Telstra’s HFC network covers only 2.5 million homes in major cities and does not reach regional and rural areas. But these urban homes contain exactly the kind of upscale consumers the NBN operator will have to lure onto its network if it is to have any real prospect of commercial success.
Conroy, of course, is steadfastly ignoring Telstra’s none-too-subtle muscle flexing and is maintaining the line that he is working on deciding who from the remaining NBN bidders, local firms Optus and Acacia and Canadian-backed Axia, should get the nod.
Where we go from here is anyone’s guess and really depends on how much political capital Conroy is willing to spend on leaving Telstra on the NBN sidelines and appointing either a single NBN winner or allowing the remaining bidders to form a consortium to deploy the network.
Plenty of people in the Australian political and telecommunications communities are dying to see Telstra get a bloody nose and be left out of the NBN completely, and they are egging Conroy on to maintain his hard-line stance.
However, the minister must be aware that the NBN process is supposed to be about delivering a world-class – or at least halfway decent – broadband infrastructure for the country, not about settling scores.
In theory, Conroy has the power to keep Telstra out of the NBN process, but he knows that such a move would very likely lead him down a dangerous path.
Even if it were forced to allow access to its fixed-line infrastructure, Telstra would surely have a solid compensation claim to push against the government in return for doing so, and given the size and value of the asset, that claim could run into the tens of billions of dollars, causing a budget blowout to the government at a time when it can least afford it.
In addition, to ensure the success of the NBN, Conroy might also have to introduce legislation forbidding Telstra from competing against the NBN on its upgraded HFC network, a move that would surely lead to a lengthy legal challenge on anti-competitive grounds.
The only thing we know for sure is that Telstra is going to delay the process as much as it can – probably while beefing up its HFC networks in the other four capital cities – to make it as hard as possible for the NBN winner to build a successful business on the network.
Now, Conroy knows all this, and Telstra knows he knows it, so it is hard to believe that he will choose the nuclear option of excluding Telstra from the NGN unless he has no other choice. And he is a not at that point yet and does not need to get there either.
The whole thing really boils down to whether Conroy is really willing to hand the NBN to someone other than Telstra.
Most analysts say the A$15 billion quoted cost of the national rollout is optimistic and that an additional A$10 billion could be needed to reach full nationwide coverage. Can any of the other operators really take on board such costs without asking for more cash from the government?
If the government excludes Telstra and then has to hand over more public cash to complete the network, there will be hell to pay politically, especially given the likely damage to Telstra’s valuation on the share markets if it is excluded from the NBN.
Therefore, it is time for the minister to acknowledge the practicalities of the situation and bring Telstra back to the table to hammer out an NBN deal. That might not leave all parties jumping for joy, but it might at least help avoid years of legal wrangling and a costly infrastructure delay to the country.
tony.brown@informa.com