Analysis: Quigley's balancing act

Should the NBN favour existing ISPs and telcos or new market entrants?

The Federal Government has charged Mike Quigley with building a national network to fix failures in the structure of Australia's telecommunications market.

But the NBN Co chief executive officer [pictured] must also ensure it doesn't inflict too much pain on Australia's telcos and internet service providers.

Arguably, the two goals are mutually exclusive.  For the NBN to be worth its $43 billion investment, the network must be disruptive. But it won't look good for the Government or Quigley if telcos and ISPs go belly up in the process.

This conflict becomes glaringly apparent when one considers the NBN's choices in regards to the level of sophistication NBN Co will build into its network.

From the outset, Quigley put a stake in the ground and said that NBN Co would only provide a Layer 2 service.  A Layer 2 network is one in which NBN Co would only provide the physical layer (in this case, the fibre) and the data link layer of the network - while the internet protocol and other services above those layers would left to ISPs to provide.

Further, NBN Co will only provide this connectivity between the houses of end users and 200 points of interconnection around the nation. The Government-owned company is looking to build these interconnects in places where at least two (three, ideally) operators can provide backhaul connectivity - what Quigley terms "contestable backhaul".

Using a Layer 2 model, the role of the NBN Co is simply to "move bits from a premise to a point of interconnect", says Christie Boyce, NBN Co's head of industry development, speaking at a Communications Alliance event last week.

A Layer 2 network, she said, was the "best option when we look at objectives given by the Government" - providing "healthy competition" and "maximum end-user choice".

"We're all about providing a foundation," she said. "The point is we're not the glamorous end of the industry. We are not delivering groundbreaking apps and services.  

"We're about creating enough space for retail service providers to innovate and differentiate on top of foundation we've created."

Vendors weigh in

But there are voices in the industry that have questioned whether NBN Co should invest further into the network stack by deploying Layer 3 routers, which would see NBN Co provide internet protocol services over the data network.

Cisco chief technology officer Larry Bloch argued late last year that a Layer 3 NBN would enable a new generation of retail service providers to connect to the NBN that provide alternative services to internet connectivity.

A national IP network would enable e-health providers or utilities, for example, to offer remote health monitoring or smart grid meters without them requiring carriers or ISP's to act as an intermediary.

Bloch argued that only the major incumbent telcos, established prior to the NBN, will thrive in a Layer 2 environment - whereas a Layer 3 network would open the floodgates to greater innovation.

It was a statement that wasn't received well in Canberra and Bloch was later rebuked by boss Les Wiliamson for contradicting Cisco's policy, even if he was speaking with what Williamson said was "the national interest" at heart.

Bloch isn't the only voice calling for Layer 3 services to be considered.

Cisco rival Juniper also employs a technologist that is running with the line that the NBN Co should consider a combination of Layer 2 and Layer 3 services in order to provide opportunities for service providers in the market.

Benjamin Hickey, consulting engineer with Juniper, told iTnews the debate has derailed into an "either/or" argument between Layer 2 and Layer 3, with "perfectly valid arguments for both sides".

Hickey accepts that NBN Co needs a "defensible line in the sand" with regards to its technology choices, that NBN shouldn't build backhaul where it exists and that existing ISPs and telcos shouldn't be railroaded.

But he believes that even if a Layer 3 NBN provided unwelcome competition to ISPs in terms of access, they will maintain an advantage through their billing systems and relationships.

"A Layer 3 NBN is by no means the death knell of ISPs," he said.

Hickey believes that an investment in a Layer 3 Network could "break the existing mould" of internet provision in Australia and apply the "kind of [application] innovation that we have seen on the internet" directly to Australia's national network.

The advent of the internet, he argues, was a truly disruptive technology as it offered "both ubiquitous access for users" plus a "low barrier to entry for start-ups wanting to serve those users".

"If an entrepreneur has an idea, it can take off at rapid speed on the internet, or it might die just as quickly," he said. "And what's truly beautiful about it is that there is not a high cost of failure. It's the perfect breeding ground of innovation."

A Layer 3 NBN, he said, pushes the NBN Co to focus on providing connectivity and "allows entrepreneurs to worry about things specific to the business model they have in mind."

Hickey asserts that NBN Co could choose to "decouple" the backhaul and the access network to ensure it doesn't compete with existing carriers and ISPs in backhaul, but still open up competition for services in the access network.

The natural argument posed against Hickey and Bloch is that start-ups still have an innovative platform on which to launch services, regardless of Quigley's technology choice.  It's called the public internet, and higher-speed broadband will only serve to spur innovation on it.

Hickey argues, in response, that the public internet serves up apps on a "best-effort basis" and comes loaded with the security and reliability risks.

Hickey's argument is that the NBN presents an opportunity to adapt the low cost and high innovation qualities of the public internet but work around the internet's inherent shortfalls by delivering services over the NBN instead.

But Boyce contends that if NBN Co invests in a Layer 3 network, the Government may find itself "limiting product choice".

If NBN Co provided the IP layer, she said, "to some extent the [only] products available will be the ones we've white-labelled".

Quigley's view

Quigley said he would only consider upgrading the NBN to Layer 3 at a later date if the Layer 2 network suffered from "market failure" - such as a single wholesaler at a given point of interconnection.

"Yes, we could have gone to Layer 3, but it would have taken us into a whole new space," he told the forum the next day.

"I agreed with the Government that this is something we would try to avoid. We'd have disintermediated a whole bunch of people in the [internet] industry. We'd have made life easier for a bunch as well, but we'd have come along, this Government enterprise, and would be taking up an increasing part of the value chain. That's something we don't want to be."

Quigley noted that "chief among those" pushing the Layer 3 model are "those that want to sell us Layer 3 gear", a clear indication to the likes of Cisco and Juniper that he isn't going to cough up for more expensive gear without a good reason.

"They can also sell us Layer 2 gear," he told the forum. "We have to tread very carefully."

What do you think? Has Quigley made the right call on Layer 2? Which model will breed the most innovation?