Speech to the CommsDay Summit
10 April 2013
Well thank you very much for that generous introduction Phil and thank you Grahame Lynch and all the team at CommsDay for putting on this conference, yet another CommsDay conference and can I just say to return all the flattery what a great job CommsDay does generally and has done for many years, providing really the most informed commentary on the telecommunications sector in Australia. And can I also say Phil your new podcast Crosstalk is really excellent and I’m a ferocious listener to podcasts because I listen to them whenever I do any exercise and because I find exercise, while it’s very good for you, I don’t find it terribly interesting so you represent one of the distractions that I enjoy.
So that said I’m going to talk, I’m going to try and talk briefly so that we’ve got plenty of time for questions.
Now as you know our plan with the NBN is to ensure that all Australians get access to very fast broadband sooner, cheaper, at less cost to the taxpayer and more affordably for the customers. The only way you can do that in our judgement and I think this is the judgement that many telcos around the world have reached, including BT and Deutsche Telecom and AT&T and many others, is to use a cost-effective mix of technologies so that where you can leverage the existing legacy copper network and thereby reduce dramatically the time you take to affect your broadband upgrade and the capital cost of it you should do so, so long as you do not compromise your broadband objective.
Now I know I was just talking to Dave Bernstein out in the lobby there as he’s been saying, although it’s something that is rarely reported in the Australian press which doesn’t have a great deal of interest in what’s happening in other markets but as Dave’s been saying and as you all know and there’s a lot of vendors who are very aware here, very very high speeds are being delivered on VDSL on fibre-to-the-node especially with vectoring, with the noise cancellation technology available I know ADTRAN’s talking about it there in the lobby and of course Alcatel is talking about it, of courseall the vendors are talking about it. Very very high speeds and reaching 100Mbps on the so called rotting, degraded, last century copper wires. Now you’ve only got to look at a company at Belgaom in Belgium which is using exactly this approach for the express purpose of being able to compete with its cable company rival and being able to deliver an absolutely guarantee highest quality of service 50Mbps and up to 100Mbps but a guaranteed 50Mbps so that they can offer a full range of video television services, channels, free to air, pay TV channels, video on demand, the works, high-definition, all of that being offered on fibre-to-the-node. So the idea that you cannot deliver very high speed broadband over the technologies we’re talking about is simply wrong and it’s proved wrong is just about every comparable market around the world.
Now this audience knows that because you are technologically literate and experienced and I’d just encourage you to tell your friends because at the moment there is a huge campaign of misinformation being conducted by the Labor Government on this issue. I just want to now deal with a couple of things that have come out of the launch yesterday, issues that people have raised. As you know we have modelled what we think it will cost Labor to complete the NBN according to their plan and we’ve come up with a figure of $94billion. Now as many of you know, I’m not inexperienced in the business of media and telecom economics. I can tell you, if I were in my old line of work, looking at the NBN Co on behalf of an investor or perhaps to advise them on raising money or something, I would take a bleaker view of their prospects than what we have there.
I just want to just remind you of some of the assumptions. These are some of the assumptions that underpin this figure. We’ve assumed that their rollout will take an extra four years to complete. Well you see in the first four weeks of this year they were passing 28 premises a day. So I think saying it’s only going to take four years is very, very generous. Very, very generous.
We have said that their average cost of passing a premise with fibre to the premise is only going to be $3600. Now that is well below what it is currently costing them, as we’re advised. They will not tell us what it is costing them to pass a premise at the moment. That is a state secret apparently. It’s not a state secret anywhere else in the world but it’s a state secret here in Australia. Is anyone prepared to put their hand up and say ‘I’ll bet my house on the fact that they will come in around that $2700 figure they have talked about in the corporate plan?’ I don’t think so.
We’ve assumed that the revenues – the wireline revenues – will continue to be the same share of revenue, GDP, whatever you want to call it, that it has been for as long as anyone can remember. You’ve got to remember that the NBN Co is assuming that their revenues, their ARPU, is going to grow at 9 per cent real over the next decade. Well this is a heroic assumption. You could never bank that. It is inconceivable. I mean everyone in this room knows that telcos have been provisioning infrastructure to enable people to get more and more bits and bytes than ever before but they haven’t been paying any more for them. That’s why telco executives sometimes descend into self pity and try to seek sympathy in vain. In vain they do, but still you could understand it. But no, according to the NBN Co business plan the cost of broadband which has been going down for a decade is suddenly going to go up. I mean, this is an extraordinary assumption. So what we’ve done is assume that the same pattern that has occurred over the past decade, where the share of wallet and revenue growth continues.
Now they’re the assumptions – and we’ve assumed that the number of wireless only households will be higher. And I think we’re all recognising that that’s going to be the case – the only debate is how much higher. So none of the assumptions we’ve made about the NBN Co’s plan are unreasonable. And you could make a very good case for them being, for making tougher assumptions. And if I was making a standard analysis in my old line of work, and I was presenting to a board or investors a base case, best case and worse case, what we’ve presented would be a best case or very close to a best case for the NBN Co. And again I just – and if you think we’ve got some of these assumptions wrong, just tell us. But I don’t think anyone can reasonably say that what we’ve presented here is unreasonable. And this gives you that $90 billion and that is an absolute shocker. It is an absolute shocker. It not only involves expenditures of a scale not seen before in any project in Australian history, but it also involves much higher prices and much greater delays.
I see the Labor Party has been out saying that our approach will be bad for the bush. Let me get a couple of things clear here. The biggest barrier to internet access is not technology it’s lack of income. People in the lowest income decile or twenty per cent are much less likely to be accessing the internet than people in more affluent demographic groups and that is simply because of affordability. So one of the problems with Labor’s plan is not simply that it imposes a huge burden on the taxpayer but of course sees internet access prices rise and this is why the RSPs, Telstra, Optus and others, have been into the ACCC complaining about that and making that point. And I commend to you the analysis especially that done by OPTUS was I think was very insightful into that and exposed this, as indeed did Telstra’s. So if you consider that there are more lower-income people and groups in regional Australia a broadband plan that makes internet more expensive is clearly going to penalise regional Australia more than the more affluent cities. Our plan will make internet access much cheaper than Labor’s will we’ve set all that out in the papers. So that’s one very important point.
The second point is this. The satellite program continues. We’re not assuming that satellite availability will be any different; in fact, we’re assuming that the satellites will arrive on time and in accordance with the contract. We wouldn’t have gone about it in the way Labor has but we’re not seeking to turn the clock back, the satellite availability is still there. As far as fixed wireless is concered were assuming that that will continue to roll out and we support that but with the very important detail that is of critical importance to rural and regional Australia and those of you involved in the wireless know that the biggest complaint you get in the bush is not about broadband it is about mobile phone coverage being inadequate, you know: “my phone doesn’t work, I get out in the paddock and I can’t getting any cells on my phone, I’m driving from home to town and there’s blackspots all the way along the freeway”, that’s what people are complaining about.
Now you’ve got to ask yourself, and I’ve talked to this group this meeting before about this, you’ve got to ask yourself, how out of touch can a government be that it would engage in a massive multi-billion dollar investment in broadband infrastructure including fixed-wireless infrastructure in the regions and do nothing to enhance mobile coverage at all. Clearly the obvious thing they should have done was say to the carriers, to Vodafone, to Optus, to Telstra, look we want you to provide fixed wireless in these areas, we know it’s not economic, tell us what sort of subsidy you need to do it, this is not of course, dissimilar to the Opel plan we had, and how it will enhance your mobile coverage, and then, all other things being equal, the people that ask for the least subsidy get the job.
Well NBN hasn’t done that. They’ve gone of and bought their own spectrum, they’re building their own towers, there’s nothing in their plan that will improve mobile coverage in the bush. We will do everything we can within the constraints we are left with to ensure the fixed-wireless rollout enhances mobile coverage in regional Australia. So that is a commitment and that is of critical importance to the bush. Now the final point I want to make is this. The NBN Co is saying they will only roll out fibre to the premises in towns or communities with a thousand premises or more.
Now we may think that sitting here in the middle of Sydney that a town with less than a thousand premises is a pretty small place but there are plenty of towns in country Australia with less than a thousand premises that do not regard themselves as an isolated hamlet, they regard themselves as pretty significant and important town . And you’ve only got to think of all the small towns up in the New England are that you think Tony Windsor might be more concerned about. A town like Bendemere for example, I was talking to Barnaby Joyce about that just this morning. It’s Ian Sinclair’ sold stamping ground in fact.
Now under our approach, fibre to the node is ideal for those smaller towns because in some cases the node may just be the exchange because the fibre is pulled though into the exchange it may be with VDSL and vectoring you can reach the bulk of that community without even putting in any cabinets. Some towns you may put in a couple of street cabinets but the bottom line that under the approach we’re taking you can extend fixed line wire-line broadband to more premises in the bush than you would under Labor’s fibre to the premises rollout and that obviously is better because the speeds available under that are considerably higher than the 25 Megs which has been offered as the only product under the fixed wireless broadband service. So those are some very important points about regional Australia.
Because I want to leave plenty of time for questions, I just want to conclude on a very critical issue for all of us. There has been a bit of a cheerleader, cargo-cult approach by some people to the NBN. There have been some people who’ve taken the view that they don’t care what the government spends, build this great big infrastructure and we can use it. Some ISPs some Telcos have thought this is a good idea because they haven’t had to put any money into the Capex themselves they’ve said “go on, knock yourself out, taxpayer spend as much as you can”.
The penny is only just starting to drop and it dropped pretty fast with the more astute players, that if you have a overcapitalised government monopoly you are going to end up paying higher prices. Do not kid yourself. What Stephen Conroy is trying to do is recreate the Postmaster-General and there’s a handful here who can remember those days but they were the days where people were expected to be duly grateful that the Postmaster-General had accorded them the rare privilege of allowing them to rent one of his fine Bakelite Telephones and whatever you do don’t chip it because that belongs to her Majesty’s Postmaster-General.
Now that’s basically where we’re hading back to, so we’re going to – as far as we can – and there are some complexities in this obviously with the agreements about HFC but we are going to seek to re-open the market to competition so that we’re not stamping out facilities based competition. We’re also going to ensure that we spend as little as we can to get this job done.
Now, some people have said, “Boy, $29.5 billion is a lot of money”, don’t we know it! It is a huge amount of money, but it’s about $60 billion less than Labor will have to spend so that’s one good thing and the other good thing is that you’ll have to recognise that we’ve inherited a lot of costs and expenses that Labor has created so we are not starting off from a blank sheet. We’re not starting off back in 2009, we’re in 2013 and we are where we are so what we’re seeking to do is to make the best of this situation to complete the NBN Co’s network as quickly as we can, as cost effectively as we can and in a manner than will make broadband access more affordable, not less affordable.
All of that has been set out in our policy paper – the financial assumptions are in the background papers and I would encourage all of you to have a look at them. Give us as much feedback as you can. As you know we have a very active dialogue with the industry, we don’t just because we’ve published the policy doesn’t mean we should stop we want that to intensify.
Again, I’ll thank you very much for inviting me here today Grahame and I look forward to your questions.
Thank you.
ENDS