Patchy Connections: NBN Co rivals on the rise, Elon Musk and Amazon too, as debt mounts

by | Jun 5, 2022 | Business, Latest Posts

The Coalition spent an additional $12 billion on the National Broadband Network (NBN) compared to the original plan, with little to show for it, while much of Australia still struggles with slow internet connections. Kim Wingerei looks at the options available to the new Labor government.

In September 2020, then communications minister Paul Fletcher announced an additional $3.5 billion in NBN Co funding “in response to increased demand for faster speeds”. In reality, it was an admission that the changes imposed on the NBN Co by Malcolm Turnbull and Tony Abbott back in 2013, were a failure.

Slowly, but surely, NBN Co is now implementing more fibre connections to the premises, which was the original plan. But we are still lagging far behind comparable countries in average internet speeds.

Meanwhile, the world has changed. Demand for internet capacity is growing by 30% a year, much more than the 13% NBN Co is forecasting. We all have more connected devices than ever; and mobile networks and low orbit satellite networks now produce speeds on par with what a fixed fibre network can provide.

To be viable, NBN Co was meant to provide services to 75% of all premises in Australia. It has now reached just over 70% and that is likely to be as good as it gets, according to former NBN Co chief technology officer, Gary McLaren.

Backflips and somersaults – the NBN black comedy takes a new twist

In many areas (and particularly outer suburban areas) it will face increased competition from the major retail telcos – Telstra, Optus and TPG – offering fixed wireless connections (4G and 5G) that are cheaper and often faster than what is possible on the NBN. Once these customers move away from the NBN, they are unlikely to return.

According to McLaren, this may eventually mean that the NBN is reduced to servicing 50% of premises, a far cry from the 75% objective.

Adding to its woes, the ACCC recently opposed NBN Co’s new pricing proposal which would enable the company to impose annual price increases of up to 3% above the Consumer Price Index (CPI).

According to the ACCC, the proposed pricing regime would:

likely force households and businesses to purchase high speed inclusions at a price that does not represent fair value to them based on their requirements.

NBN Co is caught in an almost impossible position. With peak funding of $57 billion by 2024, almost twice the $29.5 billion of the original plan, NBN Co is burdened with an enormous debt that current revenue cannot sustain. The likelihood of declining revenue and the certainty of increasing interest rates, won’t help.

An obvious step that the Labor government will almost certainly take, is to write off a substantial part of that debt. They can easily blame the former government for $12 billion, so that will be the minimum amount. It may well be more, taking advantage of the customary “honeymoon” period of an incoming government.

Beyond that, it doesn’t have many options. Labor has ruled out privatising the company, so it is likely to continue to be a burden on taxpayers for years to come.

Part of that burden is the fact that it has to continue to spend building out the network in regional Australia. The original satellite service cost between $2 billion and $3 billion and has seen significantly less take-up than planned due to restrictions on download quotas and slower speeds.

Looking after the regions has always been the challenge of Australia’s telecommunications policy. Telstra used to be lumbered with what was known as the “Universal Services Obligation” (USO), now NBN Co is carrying the can.

The degree to which NBN Co’s urban and suburban customers are cross-subsidising the regions is well hidden in NBN Co’s books. “It’s hard to decipher,” says McLaren, “but it is likely to be at least $500 million a year in capital and operating expenditure combined.”

McLaren contends that it would be much better for the cross-subsidies to be overt, then at least it could form the basis of a declared policy,

and Australians would surely support competitive internet connectivity in regional Australia as a worthy investment.

Alternatively, NBN Co could just walk away from offering unprofitable services to the region. That would remove at least one headache for its beleaguered management and board, but create a political firestorm.

Elon Musk’s Starlink service has already been available in parts of regional Australia for up to a year. Based on a global network of low orbit satellites, it offers speeds comparable to what’s available on fibre optic and 5G networks, is far superior to NBN Co’s satellite service, and is likely to be much more stable.

Starlink services are currently more expensive than anything the NBN Co is offering, albeit at superior speeds. However, it won’t be alone for long. Amazon is only one of several mooted to enter the market, which will drive prices down.

Elsewhere, Telco retailers have no option but to use NBN Co services for at least their urban customers, but there are alternatives, with more to come.

Australian telecommunications policy has been shambolic for decades. In many ways we are still paying the price for the lack of foresight that went into the Telsta privatisation all those years ago.

The previous government didn’t even listen to its own advisers and missed the opportunity to restructure Australia’s fixed broadband industry. The Vertigan report of 2014 suggested that Australia’s highly urbanised society would benefit from private capital and innovation.

NBN myths: inside the “independent” models which failed a nation

 

A key recommendation of the report would have seen the Multi-Technology Mix (which was the core change imposed on NBN Co by the Abbott government) as the basis for separating the infrastructure from service provisioning, also making it more attractive for private capital investments.

If the recommendations had been followed, it would have resulted in more efficient investment in the optical fibre that both fixed and mobile networks need to satisfy the ever-growing broadband demand. As McLaren says:

Instead, the Coalition perpetuated the old 20th century myth that broadband networks are natural monopolies in our major urban centres. But unlike the electricity and water networks on which this fallacy is based, broadband networks are continually evolving through technological innovation to respond to the high growth of the digital economy.

The new Communications Minister, Michelle Rowland, has a lot of work to do, balancing the realities of the “sunk” investment in the NBN with the demand for better, faster and cheaper Internet connectivity within the framework of a global telecommunications industry and hungry billionaires.

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Kim Wingerei is a businessman turned writer and commentator. He is passionate about free speech, human rights, democracy and the politics of change. Originally from Norway, Kim has lived in Australia for 30 years. Author of ‘Why Democracy is Broken – A Blueprint for Change’.

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