Telstra's poison chalice is NBN 2.0

Five years ago Telstra began the process of embracing a competitive fixed access market based on a new fibre access network. Sometimes change is forced on us and the end result is positive. But what would you do if you had the opportunity to slide back into old habits before you really understood the benefits of moving forward? Telstra's Thodey has a hard decision to make in the coming months. Will Telstra move forward or slide back? Today this quandry is discussed in the article NBN 2.0: Telstra’s poison chalice. What do you think Telstra should do?

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Telstra’s CEO David Thodey will soon face a management decision that might seem like a golden opportunity but could rapidly become a poisoned chalice.

But before we discuss the dilemma facing Thodey, let's discuss Telstra’s history and the decision making that led to the advent of NBN 1.0.

Have you ever wondered why Labor decided to build the NBN? Was it grandstanding on a national scale? Or was it an attempt to remedy the fundamental deficiencies in the Australian telecoms landscape?

The Next G journey

To understand Telstra’s role we need to go back to the period where it was emerging from the privatisation process. Ziggy Switkowski was Telstra’s CEO and as an organisation the telco was struggling with a low share price and ongoing privatisation. The only outcome of note was the introduction of Bigpond.

In 2005, Switkowski’s successor Sol Trujillo gave Telstra the impetus it needed by introducing Telstra Next G with High-Speed Downlink Packet Access (HSDPA) which effectively doubled the volume of data on the Telstra mobile network.

One thing was certain, a lot of Telstra’s forward planning relied on taking every opportunity to thwart or slow the rise of access network competition.

Over the next decade Telstra secured considerable funding for successive mobile network upgrades, often putting its hand into the public purse to use funds allocated to the universal service for mobile network upgrades.

Yet successive governments failed to convince Telstra to upgrade the fixed access network. The reason for this was Telstra’s ability to grow revenue by utilising public (state and federal) and private funds to build out the largest mobile network which gave it an advantage over the competition.

And there are only two other mobile network carriers to compete with whereas in the fixed access network market there were more than 10 serious competitors.

Remember the many and varied reasons why Telstra could not share mobile network infrastructure with Optus and Vodafone? This pantomime led to Optus and Vodafone being forced to build out competing infrastructure which led to many buildings having three mobile network towers when one would suffice.

Telstra realised that any upgrades to the fixed network could potentially be a disaster. It would complete the physical infrastructure upgrades and the large number of DSL competitors would jump on board.

The telco tried to slow the advent of competition by firstly, preventing access to exchanges. When it was forced to provide access, it limited access and put more hurdles in place than you would find in the Grand National. Years of court actions followed.

Telstra’s intransigence and demands that competitors offering DSL paid an effective license to use the copper by having a Telstra telephone connection inevitably led to the introduction of the Unconditioned Local Loop (ULL) Service in 2007. Even here, Telstra took the government to court in an effort to slow the introduction of ULL.

For Telstra’s strategists, the advent of ULL was ample justification that it was right to not upgrade the fixed access network.

Stuck in a rut

Telstra is still stuck in this mindset. In 2010, Thodey told shareholders at the AGM that the copper network was obsolete and uneconomic when justifying why shareholders should vote for the NBN Co agreement. However, the Coalition’s win has seen him change his tune.  

It looks like the copper network isn’t so bad after all, good for the next hundred years.

Thodey realises that control of the copper network under the Coalition’s Fibre to the Node (FTTN) NBN will be another opportunity to slow competition.

The Telstra boss and his team can rightly pat themselves on the back when Conroy signed up to a leasing deal for space in the Telstra exchanges, Telstra backhaul from PoI and access to the pits, ducts and traps needed for the NBN.

By maintaining control over even part of the infrastructure Telstra remains in a position to slow competition and extract unwarranted profits.

The other player in this drama is the Australian Consumer and Competition Commission (ACCC) which has been playing catch-up for the last decade.

Even now, the regulator is falling behind as Telstra seeks to gain further competitive advantage through NBN 2.0.

So far the regulator has failed to articulate how NBN 2.0 competition will be delivered and what steps it will take to limit Telstra’s ability to wind the clock back to the post-NBN era.

But does Thodey really want to roll the clock back? More importantly, can he roll back the clock, given the Coalition’s commitment to structural separation?

The Communication’s Minister Malcolm Turnbull wrote on his blog on September 4, “the Coalition has been emphatic that we are absolutely committed to structural separation to create a level playing field for retailers – see pp 10-11 of our policy”.

Could the upcoming decision by Thodey be counterproductive?

For the last four years Telstra has been focused on the post-copper world, and has turned its attention to the provision of new services, wholesale applications and building markets based on fibre network capability.

Does Telstra really want to be smack in the middle of yet another fixed access network war?

Over the past year Telstra has been transitioning Bigpond into Telstra Media, which includes the introduction of Sky News, MOG Music and other strategic partners.

This is a necessary step forward for Telstra and its efforts to compete with an ever-expanding array of competitors in the online media space will be constrained by any return to a copper-centric network. 

A key outcome of the shift to a fibre network is the introduction of traffic class management and the capability to improve customer experience with online entertainment services.

Telstra’s re-entry into the fixed access network could become a hindrance to its growth, especially at a time when incumbent telcos globally are keen to enhance their standing with their customers and rehabilitate their image.

It might be worthwhile for Thodey to rethink the poisoned chalice being offered by the Coalition government.

Telstra has two options in the in the upcoming discussion on an NBN 2.0 agreement. Firstly, Telstra could sell the copper network to the Coalition, extract a premium for shareholders and pick up maintenance responsibility. Or, Telstra could effectively price the copper network out of NBN Co’s reach.

If Telstra opts for the latter option it can then focus on magnifying the market opportunities that will come from a national fibre access network and ensure that Telstra does not fall behind comparable competitors in the world market for new fibre-based products.

Thodey is likely to take the first option and line Telstra's coffers with gold. However, retrogressive thinking is not in the long-term interest of the Australian telecoms landscape nor is it beneficial to Telstra and its shareholders.

Mark Gregory is a Senior Lecturer in the School of Electrical and Computer Engineering at RMIT University. You can follow @_markagregory on Twitter or read his blog here.