Should We Believe The Opposition On Broadband?

With the recent acceptance of Telstra’s structural separation undertaking (SSU) by the ACCC, the last significant hurdle for the volume rollout of the National Broadband Network (NBN) has been overcome.

Of course, the federal opposition is still on the attack, offering its cheaper yet significantly less advanced plan, that will commit us to higher upgrade costs in the future.

This is led by Malcolm Turnbull, and to a lesser extent, the Member for Bradfield, Paul Fletcher – a former telecommunications executive with current number two placed telco, Optus.

I want to focus on Fletcher for this article.

Some years ago, he wrote a book entitled “Wired Brown Land?” about the long-running saga into the long envisaged upgrade of broadband services in this country. Here is a heavily abridged version of it on Google Books:

Despite the above version being so abridged, there are a lot of “useful” and “interesting” quotes from Fletcher, that when read against a media release he made less than two weeks ago on his current opinion on the state of play, become far more useful and interesting.

Let’s take a look at just a few of them.

With respect to the decision in 1994 by Optus – (in a joint venture with US company Continental Cablevision) – to spend $3.5 billion dollars to roll out a HFC network – (the kind of network the Coalition are partially hedging their bets on in their NBN alternative plan) – in the most profitable areas of Australia; on the ultimate failure of that network to make a profit, Fletcher commented in his book:

“In financial terms, the investment in the HFC network never achieved a positive return – or anything even close. In fact, when Optus was acquired by SingTel in 2001, the value of the HFC network in the company’s accounts was written down by around $1.2 billion. The reason for the dismal result? Building an access network is very, very expensive. To make your money back, you need to get a huge number of customers. When Optus began offering services on the new network, 100 per cent of customers were with Telstra. It was a tough battle to win them away.”

In his recent media release, he states:

“You could not possibly come up with a higher risk, more disruptive, more eggs-in-one-basket way to upgrade Australia‚Äôs broadband infrastructure.”

So, in the first instance, the reason for the financial failure of the Optus Vision HFC network was because they couldn’t draw enough customers away from Telstra.

Yet apparently, in the case of the NBN where Telstra has agreed – (and this has now been ratified with the acceptance of the SSU by the ACCC) – that they will be decommissioning their copper network and moving all of their fixed line telephony and broadband customers onto the NBN, this will be a failure.

How does it follow that the Optus network failed because it couldn’t win enough of Telstra’s customers, that the NBN will fail given that it will gain almost all of Telstra’s customers?

It doesn’t.

Flippety floppity, Mr Fletcher.

The NBN doesn’t seem anywhere near as risky on those terms.

He even mentions the write-down in his media release (quoting against his book):

“When SingTel acquired Optus it wrote down the value of the HFC network by 1.2 billion dollars.”

Conveniently however, he chose to omit why it had to be written down, and what might have stopped it from having to happen.

Even after being quite clear and understanding of the reasons in his book.

Another common salvo against the NBN by the opposition is that the network won’t deliver any significant economic benefit. Previously, Fletcher seemed to be of a different opinion:

“Telstra was proposing to build an asset of considerable economic and social significance. By 2005 the Internet had been available to Australian consumers for nearly a decade and millions of people used it in their home and work lives. But many Australians were limited to relatively low-speed Internet access; only a fortunate few enjoyed true broadband speeds. Building a new national broadband network would give almost all Australians a guaranteed high-speed Internet connection; in turn this would stimulate usage and drive economic and social benefits.”

Firstly, he stated in his media release that “in my view the first lesson is that you can’t mandate take up”, even after saying in his book that improved broadband would “stimulate usage”.

Further, this is an even more interesting position to take, given in a recent speech to the parliamentary joint committee on the NBN, Fletcher stated:

“That is why the coalition have consistently called for a cost-benefit analysis, because it is a respected and well-understood methodology for dealing with the questions of how much money ought to be spent on particular projects, what the design of those projects should be and, in turn, what the benefits are that are obtained as a result and therefore does it make sense to proceed with the project and allocate scarce government funds to it, in a world where, as we all know, there are many more claims on the government purse than can all be met?”

So when he wrote the book, he understood the benefits of improved broadband, yet now when his job is to help Malcolm Turnbull “demolish the NBN”, suddenly his vision of the benefits has disappeared?

More flippy-floppiness.

Another argument from the Coalition is that fixed line revenues are falling – (“with most people now owning an iPad or iPhone or an Android equivalent, they do not necessarily want to be tied to a fixed line in their home”) – but fortunately, the Paul Fletcher of a few years ago has an answer for that too:

“A few years earlier, the only way for a consumer to get Internet access from home was to dial a special number provided by their Internet service provider. The consumer’s modem would then establish a connection over the line – at a maximum speed of 56 Kbps. Because this tied up the phone line – and it could not be used for voice calls at the same time – many households took a second phone line just for Internet access. But by 2005 many customers had switched to broadband using ADSL. With ADSL they could access the Internet over a phone line while still having the line available to make a voice call.”

“For phone companies, therefore, the arrival of ADSL was a mixed blessing. While it brought a valuable new revenue stream, it also contributed to a shrinkage in fixed lines, as many people who previously took a second line went back to using one line only. That meant a lot of revenue from monthly line rental on those second lines stopped coming in.”

So broadband itself is the reason for the decline in traditional fixed line revenues? You don’t hear them pointing that one out very often, do you? Yet they are happy to tell you its all about people moving to mobile broadband.

Go figure.

Further, another line has been “why are we replacing a great big private monopoly with a great big new government-owned monopoly”?

Fletcher to the rescue again:

“No competitor could afford to build a network which duplicated the reach of the FTTN network. So on that network Telstra would enjoy tremendous pricing power.”

It could be argued of course that NBN Co will have tremendous pricing power on the NBN – however, since they are required by the legislation that enables the NBN to even exist, to charge the exact same price for all products to all access seekers, their potential ultimate pricing power is removed.

It simply doesn’t exist.

Shall we continue?

“Many economists argue that such industries are ‘natural monopolies’, meaning that they have economic characteristics such that inevitably one company comes to dominate the sector. They point out that telecommunications is capital intensive – enormous amounts need to be spent to build a telecommunications network.”

In other words, no commercial telecommunications company is likely to ever build a truly national, open-access broadband network with equal pricing regardless of location, forcing such a network to come about in a different manner. A natural monopoly perhaps?

Seems he agrees on that one too.

My favourite quote from his recent media release is this:

“Today I want to argue that over the last twenty five years, in Australia and around the world, we have learned some important lessons about effective policy in this area.”

Go and read even the abridged version of his book linked above – you’ll see that his observations in no way demonstrate any effective policy “in this area”, with policy after policy after being policy being struck down as a failure.

The NBN policy is the only one that has cut through the existing mire, and the only national broadband policy proposed by anyone at anytime that has actually reached the point of being built.

Of course, we’ve already seen how another opposition attacker of the NBN, Senator Barnaby Joyce has changed his mind from a fibre network being a great idea, to being utterly opposed to it.

It’s all on the record.

Should we believe an opposition front against the NBN – (members of whom have sold out their personal beliefs of just a few years ago) – who are just being deliberately and antagonistically negative towards a government policy they want to cut down?

Where has their personal integrity gone?

Against the Coalition’s continual chopping and changing of their position – (even when they were in government) – the NBN seems like effective policy to me.

UPDATE: With appreciation, Paul Fletcher has responded to this article, and I have subsequently followed up against his response.