Monday, 09 September 2019 07:15

Merge NBN Co with separated InfraCo, says telco guru Featured

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Telstra’s infrastructure division, known as InfraCo, should be completely separated from Telstra and become a new public company with minimal Telstra shareholding.

That would then enable it to be merged with NBN Co to form a major new telecommunication wholesale infrastructure company that would be better able to satisfy the original aims of the NBN and enable Australia to compete in a digital world.

That’s the view of Peter Gerrand, one of Australia’s leading telecommunications gurus. He certainly knows what he’s talking about – he formerly led Telstra’s network strategy division, and was subsequently Professor of Telecommunications at RMIT University and then the University of Melbourne. He is a recipient of the industry’s Charles Todd Medal, and was also the founding chief executive of Melbourne IT.

Gerrand has set out his views in the Journal of Telecommunications and the Digital Economy, in an issue devoted to NBN Futures. His paper can be downloaded here.

He argues that the original aim of the NBN, of providing universal high-speed access to the Internet, has been lost and that the network as it has been rolled out is not fit for purpose. “The NBN is currently largely a network for a nation of Netflix watchers, using 25/5 or 25/10 peak speed products,” he says.

He does not apportion blame, but suggests a way that the NBN of the future can provide Australia with the gigabit infrastructure it needs to become truly competitive in the digital millennium.

“As a national goal, all Australian businesses should have access to broadband infrastructure at internationally competitive bandwidths and prices, irrespective of their location (to the maximum extent feasible),“ he says in his paper. ”Why should they be offered less?”

The original NBN plan satisfied this objective for the 93% of premises intended to be served with FttP, an access technology that can be upgraded cost-effectively to gigabit speeds as required. “The current NBN will probably only satisfy this policy objective in about one in four premises across Australia, in service areas that are largely located in the capital cities.”

Professor Gerrand says that the government’s most recent Statement of Expectations for the NBN, which guaranteed 25 Mbps to all premises, but could not promise more than 50 Mbps to the majority, describes a network which is “ludicrously inadequate for innovative SMEs, and totally uncompetitive when compared with the 900/450 Mbps offerings now available, cheaply by Australian standards, to 70% of premises in New Zealand".

The answer, he says, is to first set the more robust national goal for internationally competitive bandwidths, and then merge NBN Co with InfraCo with the mission of achieving it. InfraCo was created as a separate business division by Telstra chief executive Andy Penn in 2018.  It is likely to be divested by Telstra as surplus to the requirements of its "Telstra2022" strategy, in which Telstra seeks to gain dominance of the 5G market. The merger would put into reality what Gerrand and many other say should have happened twenty years ago when Telstra was being privatised – the separation of Telstra’s wholesale infrastructure from its retail activities.

He estimates NBN Co‘s value at around $19 billion, and InfraCo’s at around $15 billion, and posits two scenarios: a government-owned NBN Co buys InfraCo, or a publicly listed InfraCo, fully separated from Telstra, buys NBN Co.

“The network assets owned by these two businesses are quite complementary: InfraCo owns Australia’s largest optical fibre transit network, and NBN Co owns Australia’s largest set of broadband fixed access networks. InfraCo’s ownership of the pits and pipes that NBN Co uses is a further area of exact complementarity. It is significant that NBN Co already depends upon InfraCo’s transit network, and is a major customer.”

There would be many advantages, Gerrand argues:

“The merged entity — let us call it ‘NetCo’ — would have greater managerial alignment in meeting Australia’s national infrastructure goals, most of which require advanced telecommunications technology. A concerted national effort to grow the digital economy would particularly benefit from the merger.”

He lists three significant synergies which would add value to NetCo:

  • Reduced costs with a single operations support system and single wholesale billing system.
  • No need for profit between the backhaul network (InfraCo) and the access network (NBN Co), thus ensuring that either output prices to customers can be reduced or profits to the owner increased – or a balance between these two aims, to make the merger acceptable to the key stakeholders.
  • NetCo would have greater resources — financial, technical and managerial — to plan and design the technology upgrades essential for the NBN access networks to remain fit for purpose.

Professor Gerrand also lists what he says are two important strategic benefits that the merger would deliver, from a national competition viewpoint:

  • NetCo can provide a level playing field of wholesale backhaul services to the whole industry, including Telstra – which would not be achieved while InfraCo remains owned by Telstra.
  • NetCo can do what the NBN Co alone cannot do, and what a Telstra-owned InfraCo would not do. It can offer cost-effective transit network services to new entrants into the 5G market, which is likely to become heavily dominated by Telstra.

“It is vital to clarify our national policy goals for our digital society and our digital economy before deciding the future of the NBN,” says Professor Gerrand. “Otherwise, its future will largely be left to the market – and we have seen how well that has worked over the past 20 years!

“Leaving it to the market, in the absence of national policy goals for how the NBN should support the digital economy, has created a national network which is largely optimised for passive Netflix watchers, given the government’s weak statement of expectations for the NBN. Only the approximately 21% of premises who receive FttP, as a legacy from the original NBN implementation, provide highly competitive advantage to SMEs operating in the global digital economy – and most of the FTTP service areas are located in the capital cities. The current NBN will increase the flow of population from the regions to the already congested capital cities, in order to obtain the higher bandwidths which innovative businesses need.

“NBN Co and InfraCo have synergies which can be crystallised via their merger to provide a balance between additional financial dividends to the new owner and reduced pricing to its wholesale customers. Or the owner can use the captured value of the merger to invest in the technology upgrades necessary for the network to become or remain fit for purpose, and hence more profitable.

“Whether NetCo becomes a public or private monopoly, its pricing and performance will need to be strongly regulated. This is important because of NetCo’s crucial role in supporting the national digital economy as a whole.”

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Graeme Philipson

Graeme Philipson is senior associate editor at iTWire and editor of sister publication CommsWire. He is also founder and Research Director of Connection Research, a market research and analysis firm specialising in the convergence of sustainable, digital and environmental technologies. He has been in the high tech industry for more than 30 years, most of that time as a market researcher, analyst and journalist. He was founding editor of MIS magazine, and is a former editor of Computerworld Australia. He was a research director for Gartner Asia Pacific and research manager for the Yankee Group Australia. He was a long time IT columnist in The Age and The Sydney Morning Herald, and is a recipient of the Kester Award for lifetime achievement in IT journalism.

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