Tuesday, August 08, 2006

Tricks for old goats

The bomber has been bellowing like on old bull 'bout broadband – but as usual, he was making little sense, and demonstrating a poor grasp of the broader issues. The proposed fiber investment was simply a shot at circumventing the declaration of the copper network, and only made commercial sense to Telstra on these terms. There are alternative broadband investments, such as ADSL2+, that make better sense from a purely economic point of view – however they are based on the declared copper network, and are therefore subject to existing access arrangements.

Sure, if Beazley can convince the electorate that there is a broadband crisis, and that it is the Government’s fault, then it may make good politics. However, he runs the risk of looking like he’s fighting Sol’s corner, not the consumer’s corner, which is not really the natural home of the labour party.

It the Government / ACCC had given Telstra the commercial assurances that they desired, Telstra would’ve pulled up the existing copper node-loop, and replaced it with fiber. This would’ve meant that the ‘declared’ infrastructure – the stuff on which the Government set the prices Telstra could charge its competitors – would’ve been replaced with ‘undeclared’ infrastructure – on which the Government did not set the prices Telstra could charge its competitors. This would’ve allowed Telstra to regain control of the bulk of the wholesale prices it charges – effectively guaranteeing Telstra a new piece of monopoly infrastructure from which it may earn its fresh stream of excess rent.

This investment offered only marginal technical benefits above what is available from copper local loop, and ADSL2+ enabled exchanges, but it had a valuable strategic advantage. Telstra was willing to pay $4bn (the investment’s cost) to get control of the wholesale price they could charge, even though it would not give them a significantly better product for the retail market. The fiber product is only a little better (technically) than the ADSL2+ product, so Telstra would’ve struggled to charge much more for it then they might’ve for ADSL2+.

The fiber investment would’ve given Telstra the power to charge competitors whatever it liked – which would’ve almost certainly led to higher prices for broadband, regardless of the speeds on offer.


Anonymous said...

good story, but keep em coming. Whole blogg seems to have gone off the boil since the departure of Luke 'drinky' Van Hoft.

Matt Canavan said...

Definitely a plausible story but I think there are other factors at work.

1. I am not fully informed about the negotiations, but I think Telstra had already conceded that the fibre would be 'declared' or at least that an access price would be set, perhaps though for a long period of time to give it certainty.

2. I agree that initially the fibre will add little to ADSL2+ but it will save on operation and maintenance costs. Eventually the copper will have to be replaced since it will simply cost too much to maintain.

3. The fibre also has the potential to be much better than ADSL2+ once it is profitable to extend to the curb.

Overall, this stuff is bloody hard to entangle: Telstra could be being nefarious or it could have a legitimate business case. Ever way, I don't envy the ACCC.

Dave Brown said...

Well here's a pitch. Let Telstra build its own network and charge what it wants. If you don't like the prices, don't buy the product. Want to whinge, well build your own network.

Why should Telstra do anything for its competitors. It's not a charity after all.

And if it were to build the fibre network and tear down the old copper one, it would still have to compete against the threat of a wireless network.

I never did think i would see the day when this rag went soft!

Matt Canavan said...

"Want to whinge, well build your own network."

That's the central problem, it's inefficient to do that. Just look at the duplicate HFC networks we currently have, neither of which are profitable.

We haven't gone soft, access to essential infrastructure has a long legal tradition and is a key element of making markets work.

Dave Brown said...

I disagree.

If you over regulate, then firms just will not provide the infrastructure in the first place.

I see the Telstra issue as classic government intervention gone wrong. They over regulate, reduce returns on capital, Telstra says enough is enough and refuses to provide any more infrastructure.

What does the public get....No fibre optic network. We're stuck with ole man copper. And who's to say that network will be upgraded.

The point is, if I were the Telstra CEO, I would be playing the same game as Sol T. He is the central figure, not the ACCC.

Matt Johnson said...

I tend to agree with you dave. In the blog, however, i was trying to point out that the bouhaha surrounding the fibre network was bollocks.

I doubt that yesterday's technology (fibre) makes a good investment in a world where copper is not declared.

the main game here is finding an investment that's not subject to massive soverign risk.

Browny said...

Fair enough