The NBN-Telstra-Optus Deal Is Still Overloaded With Unknowns

Yesterday, NBN Co announced that it had successfully renegotiated its $11 billion deal with Telstra to acquire its existing copper network, as well as setting up contracts to buy and continue using the cable (HFC) networks owned by Telstra and Optus. While we're seeing lots of high-fiving going on about the deal and how it might speed up the rollout of the National Broadband Network, there are still lots of uncertainties — especially in terms of when consumers will actually get to enjoy the fruits of these arrangements.

Champagne picture from Shutterstock

These are the basic details, announced yesterday (I suspect that was a ploy to get onto the Sunday night TV news, invariably the highest-rated news broadcast of the week):

  • The renegotiated deal with Telstra retains the same value it had under the previous deal: $11 billion. Telstra was never likely to agree to anything other than this, given its obligation to "maintain shareholder value". As before, the payment will be made in tranches, dependent on the rollout of the NBN itself.
  • Rather than acquiring and then shutting down the existing cable networks from Telstra and Optus and the existing Telstra copper network, NBN Co will acquire those and use them to service premises where they are available and viable. Telstra will continue to have the right to use that cable to deliver Foxtel.
  • Telstra is also negotiating with NBN Co to help provide services to roll out the NBN. However, the details of those plans haven't been finalised. Those would involve additional payments to Telstra — but that is money that (arguably) would need to be spent somewhere.

The basic plan for NBN Co hasn't changed. Most premises will be serviced by fibre-to-the-node, with either a cable or copper connection to that node. Sites which already have fibre-to-the-premises get to keep it, and it's possible (but unlikely) that might also be necessary in areas where the copper isn't up to the task. Remote areas will be serviced by satellite.

The big unknowns

While the deals represent progress, it is still a major backdown on the Coalition's pre-election NBN pledge that every household would have some form of access to the NBN by the end of 2016, with a minimum download speed of 25 megabits per second. By 2019, 90 per cent of households were predicted to enjoy minimum download speeds of 50 megabits per second.

The first speed promise remains, but the time frame is much flabbier. We're now told that two million households will be connected by mid-2016, and that everyone will be connected by 2020.

The second promise — that 90 per cent of premises will have 50Mbps downloads — remains in place, but has no time frame attached to it. This isn't surprising, since there's no clear way just yet that existing copper lines served from a local node can be upgraded to those speeds. And of course, when the original deadline to connect everyone has slipped by four years under the Coalition plan, it's hard to stick to that kind of commitment.

It's also worth bearing in mind that there are two potential legal roadblocks to the deals as announced. Firstly, the Australian Competition and Consumer Commission (ACCC) has to approve the deals. With a 200-page contract to consider, that won't be a speedy process (especially bearing in mind we're about to hit the Christmas break). The Australian Taxation Office (ATO) also has to approve Optus' financial interpretation of its sell-off.

Add in the uncertainty over what kind of deal Telstra might make to help build the network, the highly variable nature of the copper network, and the list of reasons for delays NBN Co has already discussed, and 2020 seems like a very ambitious date. I'll stick my neck out and suggest there will definitely be delays.

And finally there's the biggest unknown of all — what upload speeds we'll actually get to enjoy. The Coalition's stated intention is that speeds will be "proportionate", which tells us precisely nothing. While upload speeds will inevitably be slower than download, the ratio can vary a lot. Under the previous NBN plans, there were four ratios: 12:1, 25:5, 50:20 and 100:40. For any customers on a copper wire connected to a local node, life's not likely to be much better than 12:1.

The bottom line? Progress is being made at NBN Co, but it still isn't time for anyone with a currently-poor connection to break out the champagne. You may well have five or more years to wait for any improvements.


Comments

    In Fairfax, they're reporting that the $11b is actually more like $90b over the life of the contract, but they don't explain how they equate that massive figure.. is that the cost of rental and maintenance on the copper over the next 30 years?

      It's $90B in total payments made over the life of the project, adjusted to reflect the current value of all of those payments today (ie $11B). For example, a payment of $1B in 30 years time is not worth $1B now, it's worth significantly less. So to get to the $11B figure they adjust each of the $90B of future payments to reflect what they are worth in today dollars. It's like a mortgage, you receive $500K now, but pay it back through a series of payment that add up to around $1.5M over the long life of the loan.

      Last edited 15/12/14 12:42 pm

        I could (maybe) understand that if the project was going to extend out to 30 years in construction.
        But it shouldn't be extending past 10 years, so at most they'll be buying the last copper in 8-9 years. Even assuming 5% inflation you get nowhere near 90 from 11.

        EDIT: found the relevant info in a crikey article..
        This NBN-Telstra deal is really worth more like $100 billion, which is the total amount that will be paid to Telstra over the next 30-plus years for access to its infrastructure and, after yesterday, additional design, build and maintenance work.
        http://www.crikey.com.au/2014/12/15/telstra-wins-we-all-lose-in-nbn-deal/

        So someone is making a guesstimate as to how much value Telstra will win in contracts in the coming years on top of the network value.
        All of a sudden the $41b MTM is sounding a whole lot more expensive than we were told and the difference between MTM and Fibre reduces to a negative value (even before factoring in economic benefit from the superior technology)

        Last edited 16/12/14 8:14 am

          It really depends on how the cash flows are structured over the next 30 years. I imagine there will be some upfront payments, and then a series of ongoing payments for the rental and maintenance of the infrastructure.

          Also, the discount rate (ie interest rate) used in the present value calculations is most likely based on a weighted average cost of capital (WACC) rather than inflation, and is usually in the teens.

          The $41B MTM figure is also an adjusted cost based on the present value of the all future costs. Using present value is the only way to do a comparison of various options with differing cash flows over the life of the NBN.

          I agree, the MTM will most likely prove more expensive as the assumptions used to determine the original figure start to prove unreasonable, as most have predicted.

    So wait - the Liberals just bought us an obligation to service and support not one, but TWO! decaying networks - and they consider that a win?

    While the FTTP is in the process of being liquidated, it's time to milk more profit from the rotting copper network and set us up for the inevitable fibre replacement, which will bring with it massive profits to the players who will emerge.

    Yet more delays, more expense and more government fantasies (read: lies). By the time the NBN does cover the whole country, it will be obsolete. Australia is already very low down in the broadband speed list of countries around the world.

    You all don't care that the deadlines are slipping because NBNco was LYING TO US about their progress. Obviously Labor did not want to supervise them too closely because the false promises helped win an election by gullible voters.

    Sounds like we should have stuck with Labor. Liberal party is full of S..t

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