The NBN debate: Where smart people say dumb things

As the ACCC consults on Telstra’s Structural Separation Undertaking and the Definitive Agreement reached with NBN Co, the NBN’s fixed line monopoly has been called into question.  David Havyatt responds to the critics, with a fine serve for Bob Brown as well.

David Havyatt.

In its discussion paper on Telstra’s Structural Separation Undertaking, the Australian Competition and Consumer Commission has asked some tough questions about whether the deals on Hybrid Fibre Coax (HFC – pay TV) and wireless services will have an adverse impact on competition.

Writing in the Australian Financial Review Michael Porter takes the view that the HFC network should be used as part of the NBN instead of fibre-to-the-premises. Meanwhile, two other economics professors Joshua Gans and Jerry Hausman used a submission to the ACCC to suggest that the HFC networks should be retained as competitive infrastructure and that the wireless constraint is also anti-competitive.

None of these three views stands up to scrutiny.

HFC networks for broadband.

It is interesting to note that Gans and Porter were contributors to a 2008 report by the Committee for the Economic Development of Australia (CEDA) that referred to “four doors to greater competition”. 

The report was largely prompted by a Telstra campaign directed against the original NBN plan.  Three of the other authors in the report were paid consultants or commissioned experts by Telstra at the time. That should set your alarm bells ringing already.

One of Telstra’s primary objections was the requirement for structural separation. The latest Gans and Hausman submission at least welcomes the separation decision. 

Gans and Hausman cite reports that claim that broadband take-up has been stronger in markets where there has been infrastructure-based competition in broadband. These mostly model HFC vs ADSL, not HFC vs FTTP; they also come from markets with monopoly HFC networks. 

Australia’s rather quaint duopoly followed Telstra making an NPV negative decision to build HFC to block the competitive threat from the Optus HFC build (see Frank Blount in Managing in Australia). It was proposed to Paul Keating that the country be divided into monopoly franchises instead but Keating wisely said no on the basis it was Kerry Packer asking.

Optus thought this was anti-competitive, mounted a legal challenge (claiming $900 million) but settled for what Telstra told Senate estimates was a "miniscule amount."

After a couple of years of following each other up and down our city streets, Telstra and Optus stopped building with only somewhere between 20 and 30 percent of Australian premises passed. 

Neither Telstra nor Optus has shown any interest in extending the reach of these networks.  They have major problems accessing Multi-Dwelling Units (apartments). They also have extremely high operating costs – the exposed coaxial connectors corrode quite badly.

Returning to Porter, he thinks using the HFC will save construction costs. He grossly overestimates the coverage of HFC in doing so. But the bigger error is comparing HFC speeds of 100 Mbps to FTTP speeds.

There are two big differences. 

The first is shared capacity between all customers on a node (HFC) versus dedicated capacity back to the exchange (NBN fibre). The second is in the boost fibre gives to upload speeds; it is faster upload speeds that will improve the quality of two-way videoconferencing.

Gans and Hausman take the view that we want competition between HFC and FTTP, saying “the presumption and evidence thus far is that competition spurs investment in these industries – even when characterised by a natural monopoly".

That may well be the case but it certainly isn't efficient investment. A natural monopoly is defined as one that is sub-additive in costs - that for any level of output, one firm can produce the output more cheaply than two. That's why you only have one water pipe to your home.

HFC and telephony originally did different things and competed in some areas - HFC never did telephony well, and copper never did pay TV well – but both could do broadband. The analogy is gas and electricity – they have different strengths but both supply energy.

But FTTP does all three better than either HFC or copper. There is no efficiency gained in duplicating it. 

Neither Telstra nor Optus is showing any interest in using HFC as an alternative to FTTP or as competition to FTTP.  They probably know more about the technical viability than economics professors.

There is, however, an unresolved problem of Foxtel.  It will be great if Telstra and its Foxtel partners can work out a revision of their agreement so that Foxtel can also migrate to the NBN Co multicast facility. 

The agreement on wireless

The agreement between Telstra and NBN Co on wireless is much more restrictive than the Gans and Hausman submission suggests.  Telstra doesn’t offer to not compete, only to not “market its wireless services as a direct substitute for fixed services".

It might be argued that the clause is ineffective, as to market wireless as a direct substitute for fixed services would probably be classed as “misleading and deceptive conduct.” Not being in Australia, the good Professors might not have noticed that we are well over the debate about 4G being comparable to FTTP, despite the comments they cite from Ofcom.

Further, Telstra isn't the only wireless provider. Both Optus and Vodafone will launch 4G and vividwireless already has. Spectrum auctions in 2012 could even introduce more operators (though experience suggests the market can't sustain more and that maybe less is better). So what if Telstra doesn't offer 4G as an alternative for the short period around decommissioning copper? Others will.

And customers can still buy it from Telstra; they aren't saying they won't sell it. 

The clause is very much a very standard one between an upstream and downstream player where the upstream guy is making the big investment that the downstream guy will use best efforts to sell. It’s the contractual way of dealing with some of the known problems of not being vertically integrated.

Browned off

Meanwhile, just to show the planet is going completely crazy, Bob Brown has introduced legislation to restrict the construction of mobile base stations. Much as I would like to say I told you so, the proposal is dumb on so many levels.

The Australian Mobile Telecommunications Association's Chris Althaus has already focused on the potential implications for the NBN but there are bigger issues.

Firstly, the consultation called for already occurs under an effective industry code that mobile providers have complied with. Secondly, mandatory spacing from “sensitive sites” simply increases the likelihood the school falls into the middle of the beam of most intensity. 

Bob Brown is a medical doctor, he should be able to understand simple physics.

Brown also seems to believe in fortune tellers; he thinks mobile operators can forecast their tower needs five years hence! They won’t even know what LTE spectrum they have until the auctions in 2012.

But the biggie is that the recent labelling of mobiles as a "possible" cancer risk relates only to handsets held to your head, not base stations. The best way to reduce the power that the handset operates at is to be close to the base station. A good way to be close is to have more of them.

In fact a really good solution is to have your very own femtocell - just like Optus sells. That, of course, gets connected using fixed broadband.

Can we please be allowed to get on with delivering the future now?