ISPs line up for slice of $250m backhaul fund

Both confirmed to iTnews today that if the backhaul blackspot program proves to be economically and commercially viable, they will enter or re-enter the construction space.

Communications Minister Stephen Conroy announced the funding fast-track last night, releasing a stakeholder consultation paper [PDF] that calls for responses from industry by May 12.

"We're very keen to get involved," said Maha Krishnapillai, director of government and corporate affairs at Optus.

"A lot of areas don't have competitive retail supply and they will get that with [the introduction of new] backhaul. For example, Optus can't economically service around 50 per cent of businesses in Australia.

"The addressable market Optus and others will have available is dramatically changed with these decisions on backhaul and the NBN. The industry is excited about the significant increase in the addressable market for data services in regional Australia."

iiNet CTO Greg Bader said the Perth-based ISP will also be involved in the consultation process.

"I've chatted to the [DBCDE] briefly and we are setting up a more detailed meeting over this," Bader said.

"We're more than happy to be part of the consultation process/paper and think it's great that they are talking to the industry.

"The OPEX (operating expenditure) on backhaul between the exchange and capital city point-of-presence is still the single biggest variable in our [valuation] model to roll out [services] to an exchange.

"If this program through competitive access provides an economically viable solution for us - then we will be building," he said.

Optus and iiNet are likely to be the proverbial tip of the iceberg when it comes to participation in the Government scheme.

Infrastructure providers with ties to the utility sector - for example Nextgen - are also likely to bid, according to telecommunications analyst Paul Budde.

"This is an important test case for how serious companies are to participate in the Government plans," Budde said.

But not everyone is convinced ISPs are appropriate candidates for backhaul builds.

"It's possible for ISPs to build backhaul but it would be wrong to underestimate the kind of resources they'll need to build out this infrastructure," said David Kennedy, research director at Ovum.

"It's very different from putting DSLAMs into exchanges. Building these links can sometimes require hundreds of different land access agreements and be subject to a number of different environmental processes.

"The legalities are quite complex and can't be rushed. The Federal Government may need to look at overriding various state environmental and indigenous ownership laws but I'd be surprised if they had the appetite for that."

Read on to page two for how the plan will affect Telstra Wholesale.

Apart from acknowledging years of criticism from the ISP industry over the state of competitive backhaul in Australia, the $250 million funding fast-track could also be seen, in some ways, as a ploy to undercut Telstra's wholesale revenues on monopoly routes.

These are routes the incumbent has traditionally said are the most expensive to lay and maintain, hence the higher data transmission costs.

A Telstra spokesperson was unable to comment on these issues at the time of publication, saying only that the telco is still considering its response.

But the stakeholder consultation paper and the Senator clearly have Telstra in their sights.

"In regional areas where competing backhaul networks are not present there is little pressure on a supplier to offer low prices and higher quality services," the paper said.

"This can mean that ISPs and other service providers can't make new services available to consumers in these areas at prices that are competitive, when compared to similar locations that have alternative backhaul supply options."

Krishnapillai believes the backhaul investment will "go at least half way to overcoming Telstra's stranglehold in regional areas" where there is currently only a single access route.

"You've only got to look at the competitive response of Telstra to see the payback of bringing additional backhaul to a location," Krishnapillai said.

"Whenever there is a competitive threat, Telstra have dropped the backhaul and even retail pricing in an attempt to stop people putting [competitive] services in those areas.

"Commercially they can pick off any player one by one, but a comprehensive rollout program [like this one] will make it harder to do that."

The argument holds some weight. Upon signing over up to three-quarters of its data transmission services into Tasmania from Telstra to Basslink, Internode received an offer from the incumbent of "considerable" wholesale price reductions to stay with them.

The example seems to suggest there is some room for wholesale transmission services in Australia to fall if competitive links are rolled out.

Kennedy believes further guidance is needed over who will set access prices on the new links.

"It's still quite early days and as such we haven't had much indication on how the Government will build competitive tension into the process to achieve competitive pricing," Kennedy said.

"What I think they need to look for when allocating operator rights for these networks are guarantees or undertakings from the networks on price.

"If they [the Government] don't lower prices sufficiently to make broadband access provision possible in the selected regional areas it's going to be $250 million for nothing.

"They need to bring backhaul prices down. And they're going to have to decide who sets the prices and to whom they give that responsibility."

Kennedy warned against the option of leaving pricing to a ‘war' between Telstra and the new network operator.

"It could be they'll just leave it to some kind of chance and let Telstra and the new operator slug it out," he said.

"But given it's $250 million, what they don't want to see is a duopoly pricing regime emerge."

In a statement, Senator Conroy produced an ACCC shortlist of places with only a single provider of backhaul services.

They include Geraldton in Western Australia, Mt Gambier in South Australia, Broken Hill in New South Wales, Mildura in Victoria, Mt Isa in Queensland, and Darwin in the Northern Territory.

But the $250 million is unlikely to be limited - or possibly even to be delivered - to these areas. "It's an indicative list," Conroy said.

"The consultation [paper] provides stakeholders the opportunity to help identify and prioritise regional locations for investment."

On a separate note, Kennedy also said he was "disturbed" at the Government's plans to roll this backhaul investment up into the next-generation access network.

"I think integrating the two is really a bad idea, frankly," he said.

"The access network is clearly going to be the dominant access operator in the country. To horizontally integrate that with the backhaul network which is competitive is a really bad idea, [and one that potentially] risks re-creating the problems we've seen with Telstra in the past 20 years.

"Government funding of the access network should be ring-fenced. The wholesale access provider should be structurally separate from the rest of the industry," he said.