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NBN is a $43 billion mistake

Posted : Monday, March 22, 2010

Michael Porter's article on the issue was also published in the Australian Financial Review

Published for ACE online: Thursday, 18 March 2010

The main problem with the forced feeding of fibre as part of Telecommunications Minister Stephen Conroy's national broadband network is that faster internet is happening anyway. Self-financed. But he is using his power to create an expensive new telecoms monster that he will need to protect. And he is unwittingly destroying community wealth - and so undermining Telstra shareholders who have assets that should form the core of separate competitive broadband entities.

There are many ways to meet the needs for fast digital information. While it is true that fibre-optic cable is the fastest vehicle for digital signals, that is not correct per dollar spent. Massive 100-plus Mbps speeds are now on offer in Melbourne via hybrid fibre-coaxial cable and Foxtel - but take-up is minimal-suggesting there are issues with pricing, packaging and (most of all) demand.

Other countries are running trials - paid, for example, by Google in the United States - where up to 500,000 houses will be provided 1 gigabit speeds for free as a test. But Conroy wants to spend up to $43 billion of our money on new fibre when we already have fast systems in existence or ones that are increasingly available and affordable.

People are increasingly capable of accessing efficient broadband to suit their tastes through what we at the Committee for Economic Development of Australia have labelled "Four Doors" - mobiles, cable, ADSL wires and, of course, fibre. Fibre is already rolled out extensively but not universally. Rather than force-feeding fibre, the government should be enabling competition and perhaps subsidising some remote connections in exchange for reforms and unbundling of Telstra.

Most people are happy with current speeds but have complaints about price and lousy service from phone and internet companies. There is a need for better service in many areas, but this doesn't mean there's need for a government-owned NBN rollout financed by taxes or debt.

The one product in our community that can self-finance is digital information, as new internet-based services and television are bargains and the deals and options will only get better. But not when packaged with an uncosted and unevaluated spending of tens of billions of dollars.

Most informed assessments of the NBN rollout are that it is foolhardy and unnecessary.

It's also seen as irresponsibly smashing the capital base of Telstra, something that I as an economist and shareholder deem unnecessary. There are risks in the broadband space, and since Telstra is in all the "Four Doors", a share split is a sound way of allowing Telstra shareholders to gain from all the parts they like - and not be forced into submission to whatever role is left for Telstra. No, they could now participate as shareholders in all the different markets for broadband.

The government should allow Telstra to develop what may be called an NBN using its ducts and existing fibre, conditional only on a separate share split - whereby shareholders get three shares at the price of one Telstra share. Let's tentatively assume Telstra would label those shares as MobileTel (3G, 4G), CableTel (for the shares in Foxtel assets) and NBNTel (for the new access rights, copper and fibre assets folded in).

Let's get on with it. Who would lose? Taxpayers would certainly gain, as would Telstra shareholders if the new broadband space became truly dynamic and expansive. All existing telcos would face genuine competition and not from a government-owned NBN.

Is it not far better that the government draw a line over the past and enable or assist a split, so Telstra shareholders initially own these three separate shareholdings? The NBNTel shares would reflect a generous but market-based valuation from folding in the Telstra key copper assets, ducts and access points to get the show on the road.

It is clear to most in Melbourne that with cable down almost every street (due to Telstra and Optus) we can have very fast broadband via Foxtel using data over cable service interface specification 3.0. The emerging 4G mobile standard means wireless broadband options will also be fast and competitive.

This strategy will make mobiles, TVs, iPhones, iPads and other computer devices fabulous information sources of the future, using fibre in all manner of delivery infrastructure - pipes, rail and sewers included!

Yet the government has mandated spending $43 billion on digging up the streets and hanging wires in trees. It is being rolled out in some electorates already, starting in a voter-ready Tasmania.

Does the federal government not need to get back to its economics texts and start to understand that competitive markets and private investment are the key - not more big spending? Does not Treasury need to ensure some modicum of a return to competitive sanity in the infrastructure and telecoms markets?

Can't we forget the Australian Competition and Consumer Commission in this case as we facilitate really competitive infrastructure?