Fast download camouflages faults in the network
THE Gillard government's much-awaited business plan for its national broadband network is three parts puff and two parts smoke and mirrors, with a pinch of fact thrown in.
And while the government's twin messages that the network will be transformational and the billions of dollars in taxpayers' money will be repaid with interest might sound impressive, dig deeper and they are based on a lot of assumptions and hyperbole.
The ultimate success or otherwise of NBN Co and its ability to contribute 1.3 per cent to the country's gross domestic product will boil down to its ability to create competition, which, in turn, will come down to the price that households are charged for broadband and the ability of the regulator to regulate.
According to the heavily bowdlerised business plan, the headline wholesale price of a basic internet connection will be $24 a month for 12 megabits per second (Mbps) download speed. When an internet service provider adds their margin, the business plan estimates that it could cost households between $53 and $58 a month for a plan with 12Mbps speed and a 50-gigabyte (Gb) download limit. For more active users, that would jump to between $78 and $85 on a 500Gb plan. It doesn't break this down between regional Australia and the cities, where the retail prices will differ, despite the wholesale fee being the same.
While the jury is out on the network, given so much detail is still missing, including the final details of a proposed agreement between Telstra and NBN Co, some, including telco expert Paul Budde, are confident it won't be a white elephant. Indeed, Budde believes some offerings will include free access sponsored by advertising. "Internet service providers can also reorganise the wholesale products that they buy and offer even lower retail prices than the $24," he said.
The argument here is that once penetration starts picking up and economies of scale benefits come through, more innovative products will become available.
In the interim, people will hang on to their cheaper copper-based services, but when real competition kicks in, with lower prices, the mass market will move to fibre.
Whatever the case, even on its own measures the project will lose money and we don't know how much. Towards the back of the business plan, the weighted average cost of capital over the life of the project is estimated at between 10 and 11 per cent, which is well below even its most optimistic internal rate of return (IRR) of 7.04 per cent.
The government glosses over this by comparing the IRR to a 10-year bond rate of 5.41 per cent, but a bond return is riskless and a project such as this has a lot of risks, including a cost blowout or lower than forecast traffic.
The business plan released yesterday was 160 pages, which is a slimmed down version of the full 400 pages, which the public won't get to see. What it does contain is 120 points of interconnect (POIs), rather than the original NBN Co proposal for 14 or the push by the incumbents for between 200 and 400 POIs, so they wouldn't have to scrap their infrastructure.
Agreeing to 120 POIs is a happy compromise and means the government won't have to subsidise Optus to the tune of hundreds of millions of dollars.
The government's stated aim is to provide uniform national wholesale prices to stimulate competition, particularly in rural areas where competition is absent.
However, taxpayers still won't know how much it costs until they have seen the detail of the deal NBN Co makes with Telstra, which is supposed to be released before the end of the year. The final price will also hinge on whether there are labour shortages triggering a cost blowout and, like toll roads, it hinges on getting the traffic forecasts right.
But for Telstra, the NBN represents its day of reckoning after 25 years of gaming the regulatory system and dominating competition.
The latest figures show that Telstra is still the dominant telco, with more than 70 per cent of fixed and voice-market revenue, 70 per cent of fixed-broadband market revenue, more than 55 per cent of wireless broadband and more than 40 per cent of mobile-market revenue.
What its share will be once the NBN is established is what Telstra investors will have to grapple with.
Telstra chief executive David Thodey must now focus on Project New, which is supposed to transform the telco and bring it into the new age.
The grandly named national broadband network was the government's single-biggest 2007 election promise after tax cuts. Instead of unveiling a $4.5 billion fibre-to-the-node network after it came into office, it decided to shift a decimal point and announce a $43 billion fibre-to-the-home network. It was this that got it across the line to form a majority government after the last election.
If the Gillard government can pull it off, it will set up the country for the new digital age and create a new Telstra.
If it fails, the government can kiss its increasingly shaky credibility goodbye.