How NBN Co struck its bothersome business deals

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How NBN Co struck its bothersome business deals

Exclusive: Two months after the ACCC's formal warning, what’s changed?

NBN Co is continuing to assert itself in the enterprise and government market, recently signing on big four bank Westpac in addition to the likes of Woolworths, Coles and Australia Post.

The company has made direct approaches to upwards of 200 major Australian accounts, and a fresh wave of new wins from this outreach seems inevitable.

But there is still considerable discomfort about NBN Co being in the enterprise and government (E&G) market in the first place, and then around how the newcomer has behaved once there. 

NBN Co copped a rare formal warning from the Australian Competition and Consumer Commission (ACCC) in October over its behaviour.

But outside of that, NBN Co has largely avoided major scrutiny of its business operations. 

It’s clearly in NBN Co’s favour to avoid further controversy, given it eventually hopes to take 20 percent of its total revenue from the sector.

And so two months after the ACCC’s formal warning, there is still little clarity - and only growing questions - about NBN Co’s participation in the E&G market.

For the first time, iTnews can reveal how NBN Co came to be there, how we understand it struck the business deal with Macquarie Telecom that led to a formal warning, and what has happened since.

From the top

In summary, iTnews can reveal that:

  • NBN Co shopped a ‘whole of business’ deal to as few as two retail service providers (RSPs) prior to striking a landmark six-year deal with Macquarie Telecom in June 2018.
  • Other RSPs offered the deal - both before and after Macquarie Telecom signed on - were told they needed to go exclusive to NBN Co at the expense of all other wholesalers they worked with. They refused.
  • Demands for exclusivity made the deal unpalatable. This was a bigger problem for NBN Co when it had no signatures, and so it did what it could to get one, and found trouble as a result.
  • Macquarie Telecom signed on but not exclusively. Its deal is understood to have never been pitched as an exclusive arrangement, but rather as one that preferenced NBN Co in instances where a business customer wanted new fibre to be built. Macquarie Telecom remains free to use other wholesalers in other circumstances. This - on the surface - is not the same deal offered to others. 
  • No one, apart from the ACCC, has seen the specific terms of the NBN Co-Macquarie Telecom deal. The two parties to the deal refuse to release the contract text, aggravating suspicions it contains elevated terms not available to everyone.
  • Macquarie Telecom’s deal is unchanged after the formal warning. There has been no rollback of terms. That could suggest Macquarie Telecom is not benefitting from any special deal or terms. But no one is sure.
  • NBN Co has published “standard terms” of engagement for business deals - it was compelled to by the ACCC - but it is unclear how closely these match the specific deal terms Macquarie Telecom has obtained.
  • No one is entirely sure what the other was offered or agreed to. The one party that could solve that mystery - NBN Co - isn’t talking.
  • RSPs continue to raise concerns about the way NBN Co conducts itself in the E&G market, but these concerns aren’t universally held. Some privately welcome NBN Co’s disruptive presence.
  • Few, if any, like that NBN Co - a wholesaler - is making approaches and striking deals directly with end users. 

What NBN Co says

NBN Co refused to provide its side of the story, both immediately after the formal warning and later when iTnews filed a series of detailed questions, which it called “unsourced suggestions and speculation”.

“The ACCC raised some concerns with us about transparency and timely communications with RSPs which we have worked through with them,” NBN Co’s spokesperson said.

“We take our regulatory obligations extremely seriously. 

“We’ve firmed up processes that help ensure compliance and we believe will provide simplicity, flexibility and better access to commercial arrangements for the benefit of industry and the business market.”

Barring a minor mea culpa, many believe NBN Co’s attitude since the ACCC investigation has been largely that it’s ‘case closed’ and everyone should move on.

The network builder’s public response was to frame the incident as an innocent error by a fresh-faced and process-immature business unit.

“For a maturing business, this has been a very valuable process, to work constructively with the regulator to firm up processes that not only help ensure compliance but provide simplicity, flexibility and better access to commercial arrangements for the benefit of industry and the business market,” it said at the time.

Chief customer officer - business, Paul Tyler, told a recent Senate Estimates hearing that the ACCC had vetted NBN Co’s business processes over the course of a year.

“The purpose of this was twofold: one was to look at our historical conduct and the other is on our go-forward conduct,” Tyler said in his evidence .

“There is no question the ACCC came to the view that in the early days of NBN Co’s participation in the business market, there were some releases of information to different retailers that happened at different times.

“But we really welcomed the activity and engagement with the ACCC. It helped us formalise some of our processes. 

“The ACCC investigated our practices and ensured that what we were doing was consistent with the intention of NBN’s participation in this market.”

Make your own rules

It could be argued that NBN Co has had to forge its own rules for the E&G market because its mandate to even be in there is unclear, and therefore mistakes were made while it tested guardrails for participation.

The original 2010 statement of expectations [pdf] envisaged connectivity for “homes, schools and businesses”. It never specifically mentions large enterprise and government as targets, though it does refer to “small businesses” and “small-to-medium enterprises” as intended beneficiaries.

In the 2016 statement of expectations, NBN Co’s remit was changed to “all premises” - and the government is relying on that wording to install NBN Co into the enterprise and government market.

At a recent Senate Estimates, Labor Senator Anne Urquhart sought “any written correspondence between the department [of Communications] and the NBN Co explicitly conveying the expectation of government that serving the enterprise market was a core mission of NBN Co”.

The response back was that “NBN Co serving the enterprise market is consistent with the Australian Government’s expectations set out in the 2016 statement of expectations that the NBN will provide fast broadband to all premises.” 

Vocus chief executive Kevin Russell in October called for the statement of expectations to be reissued with “clear ‘rules of engagement’ for NBN in enterprise.” 

NBN Co, however, appears to be treating the formal warning as a set of regulatory-approved guardrails. 

Its formal undertaking with the ACCC [pdf] contains pages of detailed requirements it must now adhere to.

It has since published materials outlining its approach to market as well as pricing that was previously listed as being available “by confirmation” only. 

The MacTel deal

Only three parties know with any degree of certainty exactly what the Macquarie Telecom deal says: NBN Co, Macquarie Telecom and the ACCC.

Like others that have tried, iTnews was unable to view a copy of the contract. However, through a range of interviews, we have developed an understanding of what it is thought to contain.

It is believed the Macquarie Telecom contract covers four main areas.

First, it allows Macquarie Telecom to migrate business customers nationwide to the NBN. 

Prior to the deal, Macquarie Telecom could only afford to connect to the NBN at eight metropolitan points of interconnect (PoIs), limiting its reach and the types of customers it could offer NBN services to.

That changed when NBN Co created a wholesale aggregation service called the virtual network-to-network interface (Virtual NNI). 

This product allowed multiple RSPs to share a physical NNI port, meaning they no longer had to each invest in having a physical connection to every PoI. 

That substantially lowered the barriers to selling NBN to a national audience, and Macquarie Telecom became a user.

Second, the NBN deal allowed Macquarie Telecom to offer business customers stuck with last-mile copper - and limited to a handful of Mbps per site - to upgrade to last-mile fibre.

That fibre can be used to run a range of business services, including NBN Co’s high-end Enterprise Ethernet (EE) product.

NBN Co sells Enterprise Ethernet to three zones of premises - A, B, and C.

According to those familiar with the structure, fibre builds to Category A premises are free (or deferred cost); a build fee is charged for Category B premises; while Category C premises require an onsite site survey to determine feasibility and costs.

Having the different categories is intended to be a mechanism for NBN Co to get reimbursed for more expensive builds.

But the categorisations aren’t the only determinant for how NBN Co costs fibre construction to these sites (and works out how much of the cost it is willing to wear).

Rather, it is understood NBN Co relies on a ‘black box’ algorithm to ultimately determine if a site or collection of sites qualify for free or deferred cost fibre. 

No one outside of NBN Co really understands the mechanics of how the algorithm reaches different deals.

But what is known is that NBN Co has said publicly it has certain commercial criteria it must meet. 

Customers’ sites - whether they are evaluated directly by NBN Co or through an RSP like Macquarie Telecom - are measured against this criteria. 

It’s understood Macquarie Telecom’s deal contains no specific clauses that override the categorisations. That is, sites it puts forward for fibre still have to clear NBN Co’s standard - and not completely transparent - qualification process.

Third, the Macquarie Telecom deal contained a similar offer for new customers. That is, new E&G customers to Macquarie Telecom that met NBN pre-conditions for deferred cost fibre builds could get them, too.

It is understood this wasn’t universally offered. 

iTnews is aware of RSPs that were offered deferred cost terms only for existing customers they could bring to NBN Co, not for new or future customers.

RSPs that didn’t have big existing customer bases to bring across to the NBN felt they had little to bargain with, and thus were unable to secure the same favourable terms for anticipated future customer growth.

Fourth, the Macquarie Telecom deal is understood to contain a series of obligations and incentives. 

This isn’t particularly unusual in commercial product or service supply contracts, where if one hits certain degrees of spend or volume, they can access certain financial incentives or special pricing.

In theory, companies with large volumes can exercise greater bargaining power and leverage than those without.

While that might be a common commercial construct, NBN Co’s problem is that it's meant to provide services on an open access and non-discriminatory basis.

The idea that NBN Co offered custom deal terms only through direct negotiation undermined its central purpose, and left the ACCC no choice but to intervene.

One-of-a-kind

With what is known about the Macquarie Telecom deal, a point of conjecture is how widely it was - and could be - offered.

NBN Co’s Paul Tyler said at Senate Estimates that the deal Macquarie Telecom wound up agreeing to was shopped to an unspecified number of others.

“What happened was that we put in place a ‘whole of business’ deal that we made available to the market,” Tyler said.

“We tried to get a number of different retailers interested in that deal, and we had limited success with that.”

iTnews’ own investigations suggest the deal was only ever offered to a very small handful of players.

It’s unlikely it was offered to RSPs like Telstra, Optus and Vocus because there was no way they would ever preference NBN Co over their own wholesale arms.

The ‘whole of business’ deal may have been offered to as few as two RSPs prior to Macquarie Telecom signing up.

News of the six-year deal and its terms upset others who then demanded access to the same terms.

Only then, some found the terms of the deal that Macquarie Telecom had agreed to unpalatable for their own businesses, and stayed out.

Another reason why only a small number of RSPs may ever have been invited into the ‘whole of business’ deal was because the terms were uneconomic to facilitate at an industry-wide level.

At least, that is a widely-held suspicion.

This theory is supported by the different volume breaks offered to RSPs to qualify for deferred cost fibre builds.

According to the ACCC’s formal warning, some RSPs were able to get deferred cost fibre for a deal with two premises; others needed five, seven or nine premises to get access to similar terms.

The ACCC was unimpressed with the variations, directing NBN Co not to set “a minimum number of sites” in relation to future offers of deferred-cost fibre builds. 

However, countering the view that the Macquarie’s deal terms were one-of-a-kind is the fact that the Macquarie Telecom deal didn’t change after the formal warning. 

“There have been no changes to the Macquarie Telecom and NBN Co agreement announced in June 2018,” Macquarie Telecom said in a statement to iTnews.

“We continue to work closely with the NBN Co as our preferred network access partner to provide the services our business customers need.”

That could indicate there are no specific terms in the Macquarie Telecom deal that could not be broadly applied and bankrolled by NBN Co. 

But it is hard to draw a conclusion either way.

Dealing direct

If there’s one aspect of NBN Co’s E&G play that unifies RSPs, it’s the company’s outreach, indicative proposals and contracts directly with end users.

Critics - and there are many - argue that NBN Co, as a wholesale-only network operator, should leave all interactions with end users to RSPs.

NBN Co CEO Stephen Rue defended direct dealing with end users at a recent Senate Estimates.

“It's always been common practice for wholesalers to talk to customers,” Rue said.

“Surely no-one thinks a business model based on customers not knowing their choices is healthy. 

The comments quickly drew short shrift from industry.

“I'm sorry Mr Rue, but no one at the wholesale divisions of Telstra, Optus, AAPT/TPG, Vocus, nor any other wholesale provider in Australia has ever proactively contacted the top 200 (or more) organisations in Australia, nor have they ever contacted any of the customers that Exetel has signed with these providers through our wholesale relationships, so your comments here are just wrong,” Exetel’s corporate sales director James Linton wrote on LinkedIn.

RSPs with their own wholesale divisions say the same thing: that end user-related interactions aren’t handled by wholesale, but are instead shared with an enterprise or business unit that manages the relationship.

NBN Co obviously lacks this same vertically-integrated structure, meaning there is no obvious place to pass leads it develops.

Linton called on NBN Co to establish a transparent deal management referral system.

“Sure [E&G customers] might come to NBN Co, but would it not be best to refer them to a list of certified Enterprise Ethernet RSPs, so they can work on providing the best option for their specific needs?” he wrote.

NBN Co’s Paul Tyler told Senate Estimates that referrals to retailers were against “policy”.

“We do not provide sales leads to retailers at all,” he said.

“That is certainly the policy. I have heard about examples where that has not been the case, but I have not found an example. 

“We certainly do not condone it, and we have policies and procedures in place to prevent it.”

But Linton challenged that publicly: “Well, Mr Tyler, I have examples of this which I am happy to share with the ACCC if you wish, but I would prefer to not jeopardise the employment of members of your team. 

“What needs to happen is NBN Co establish an RSP/channel partner portal where any lead is fed to providers who can service that leads location/s, giving all parties a fair chance of winning that business, plus also giving the end user the greatest number of potential RSP options.”

Privately, Linton’s blog post is seen as reflective of much of the industry’s thinking on NBN Co’s direct dealing ways.

It is also likely to be the tip of the iceberg in terms of evidence at the ACCC’s disposal should it need to police NBN Co’s E&G market involvement again.

The ACCC has threatened before that it might have to do so, and it is unlikely to be short of support if that were to eventuate.

Tyler defended entering direct contracts with E&G organisations on the basis that the contracts only covered fibre builds, not the provision of services over the fibre.

“The direct contracts we enter into with an end user are about the upgrade of the physical infrastructure only,” he told Senate Estimates. 

“It will only be about building fibre into the various sites that those end users desire.

“They [the end user] will come to us with a list of sites, and we will talk to them about the terms under which we would be willing to build fibre to those sites. 

“We sometimes enter into a direct contract with them, and at other times we enter into a contract with them through a retailer. 

“That is a different transaction to purchasing the carriage services - those broadband services - and they are something that we will never enter into a direct contract with an end user on.”

In some ways, NBN Co’s approach is similar in residential (and no less contentious): if residential users want to upgrade their access technology, they must negotiate terms and contracts directly with NBN Co.

This is changing, with RSPs set to be allowed to handle interactions with NBN Co on the user’s behalf. 

There is an argument to say this should always have been the default - that the company the customer has a direct relationship and contract with should handle interactions with the wholesale supplier sitting behind the scenes.

Insiders remain incredulous that direct contracting is in any way permissible.

“I actually think the real story - and I'm surprised this hasn't really become the major story - is the NBN wholesaler is out there doing direct deals with end customers,” one insider said.

“I still can't believe that NBN Co is allowed to do that. I'm surprised that hasn't been investigated.”

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