Today AAPT, Internode, iiNet, Macquarie Telecom, Optus, Powertel, Primus, Soul and TransACT released an interim working paper - prepared by dandolo partners and the Allen Consulting Group - highlighting key policy issues arising from Telstra's proposal to build a Fibre to the Node (FTTN) network.
The final report - prepared for the FTTN Consortium by dandolo partners and the Allen Consulting Group - including a detailed proposal for an alternative FTTN model which avoids the problems associated with Telstra's FTTN model - will be released within a fortnight.
Working paper released today
The working paper outlines four fundamental problems with Telstra's proposal:
- With its FTTN network reaching only 4 million homes and businesses, Telstra would create a two tier Australia, with less than half of Australia able to receive high speed broadband, and the remainder stuck with lower speed broadband;
- It would establish Telstra as the monopoly provider of FTTN - because there is no way for competitors to use 'unbundled' elements of the FTTN;
- It would seriously damage Unbundled Local Loop Service (ULLS) based broadband competition - indeed this appears to be a significant motivation for FTTN;
- It would enhance Telstra's capacity to sabotage its competitors.
Why FTTN cannot be unbundled - and why it matters
There are both technical and economic reasons why FTTN cannot be unbundled.
The technical reasons are:
- The 'node' is too small for competitors to install their own electronic equipment.
- It would be pointless for competitors to build their own nodes next to Telstra's nodes - as there will be no way for the competitor to interconnect with the copper wires which will run from the node to customers' homes.
The economic reason why a FTTN network cannot be unbundled is directly related to the small number of households served from a node - only around two hundred, as compared to the ten thousand or more served from an exchange. It is economically viable for a competitor to invest in putting its electronic equipment into a Telstra exchange but not a node.
By contrast, under the current network architecture, the network can be 'unbundled'. The benefits of competition based on unbundled services (ULLS and line sharing) are beginning to materialise.
Over the next three years, unless the ACCC and Government change the rules on line sharing and ULLS, the use of these services is likely to grow strongly - and in turn cause a step change improvement in the Australian broadband market. We can expect:
- strong growth in the number of customers taking broadband;
- continued improvements in pricing driven by competition; and
- steady improvements in the average bandwidth provided to customers, as more and more companies deliver speeds well in advance of Telstra's current limit of 1.5 megabits per second.
These gains will be substantial and tangible. If the benefits of an FTTN network are to exceed its costs, it will have to do even better.
By contrast, under Telstra's FTTN model - with unbundling not an option - the prospects for resale competition are poor. Australia has had considerable experience of resale competition in fixed line voice telephony. This experience shows that competitors operate on very low margins, so they are unable to put the incumbent under much price pressure.
The Top Ten Questions:
Our analysis has identified serious policy issues with Telstra's proposal. We suggest ten questions which highlight the issues. Policy approval for Telstra's FTTN proposal will require satisfactory answers to these questions.
1. Will Telstra's network upgrade create a two tier Australia?
Hypothesis: Telstra has 8.6 million customer premises in Australia. Its FTTN network will reach 4 million. The remaining 4.6 million will be in the second tier for broadband.
2. Will Telstra's upgrade really serve all service addresses in Australia's five largest cities?
Hypothesis: ABS statistics indicate that over 60 per cent of Australia's population is in the five major cities. The 4 million service addresses that Telstra says the FTTN network will serve are only 47 per cent of the 8.6 million premises Telstra serve nationally - significantly less than the figure of over 60 per cent suggested by Australia's population distribution. This suggests that many people who are defined by the ABS to live in the five major cities will not, in fact, be served by the new FTTN network.
3. How did Telstra choose the location of the exchanges to be upgraded to FTTN?
Hypothesis: Telstra has over 5,000 exchanges nationally; it will upgrade 450 exchanges to FTTN. It has chosen to focus its upgrade on the areas where it expects to face competition from competitors using the ULLS. For example, Optus has announced plans to build an ULLS-based network to 340 exchanges nationally.
4. Will the parts of Australia that are outside Telstra's FTTN network ever be upgraded?
Hypothesis: Telstra knows that if it heads off competition in metropolitan areas, the remaining areas of Australia generally do not offer a sufficient opportunity to competitors to build their own high speed networks (with a few exceptions such as the TransACT network in Canberra). Hence the fully privatised Telstra will see little need to invest to extend the FTTN network to the remaining parts of Australia - it will have successfully followed a 'cherry picking' strategy in metropolitan Australia.
5. Where is the business case for FTTN? How much of the justification for the FTTN network comes from heading off ULLS-based competition?
Hypothesis: A clear attraction to Telstra of FTTN is that it heads off the threat from ULLS-based competitors - by destroying the network architecture upon which ULLS is based. A significant component of the return on investment comes from heading off the competitive threat and defending existing revenues.
6. If Telstra is the monopoly supplier of FTTN, will prices be higher and take up lower than if there is competitive provision?
Hypothesis: If Telstra is the monopoly supplier of FTTN, prices will be higher and take up lower than if there is a competitive model for FTTN. As Australia's experience with DSL shows - and as cross country studies of European regulation proves - the more market power an incumbent telco has, the higher it will set prices, and hence the poorer will be the take up of new services.
7. If Telstra builds a FTTN network why should it get a holiday from the normal regulatory requirement to provide access to its network?
Hypothesis: The FTTN network will be a bottleneck access network, and under the regulatory principles that apply to all network industries in Australia - gas, electricity, water, rail and ports as well as telecommunications - the owner of that network should be required to provide access to it. The detriment to Australian consumers if there is no access to the FTTN network will outweigh the benefit received from having a higher bandwidth network available to a limited section of the population.
8. What is the role for unconditioned local loop service under FTTN?
Hypothesis: Once an exchange is upgraded to FTTN, only one third of customers within the network footprint will still have an unbroken copper connection to the exchange; the remaining two thirds will not, and hence will be out of reach to ULLS-based competitors. This is a major attraction to Telstra of building an FTTN network.
9. Can FTTN be unbundled - and if not, does this mean a return to resale competition only?
Hypothesis: Unlike the existing copper network, the FTTN network cannot be unbundled. This means that Telstra will face only weak resale competition, rather than the more intense competition emerging and growing that is based on unbundled services over Telstra's copper. This is a key reason why Telstra wants to introduce FTTN.
10. Why has Telstra failed to consult with industry on its proposed network redesign?
Hypothesis: Telstra has no interest in working co-operatively with the rest of the industry to upgrade Australia’s broadband infrastructure. Instead, it aims to use FTTN to stifle competition.
Media contact:
Melissa Favero
Optus Corporate Affairs
Tel: (02) 9342 5030