Australia's NBN: Who's really going to pay for it?

As Telstra CEO says Telstra must bear some responsibility for the state of the NBN we look at the history, current state and future of Australia's NBN.

With Australia's controversial National Broadband Network now nearing completion, arguments continue between NBN management, the government and the telecoms industry over pricing and the best way forward for Australia's internet.

Unusually, alongside criticism of the NBN, there has now been an admission that industry bears some responsibility for its huge cost, so far carried by the taxpayer. Telstra chairman John Mullen says that his company must shoulder some blame due to its own "recalcitrance" in attempting to thwart the then Labor government's NBN plans a decade ago.

Mullen made his remarks at the company's annual general meeting in Melbourne last month.

"It is always easier to comment with the benefit of hindsight," said Mullen, "but it is my view that over the last 10 years, private sector competition between strong players such as Telstra, Optus, TPG and others was always going to build 100 Megabit broadband access and speed to the majority of the population of Australia in an ongoing competitive landscape and at no cost whatsoever to the taxpayer."

Mullen freely admitted that the efforts of private industry would have left significant numbers of people in remote rural communities unserved. However the government could then have funded the connection of these communities at much less cost than building the NBN across the entire nation. This is the way events worked out in the UK and other places.

"Instead, however, in the NBN we have created a state-owned monopoly that is going to cost the country more than $50bn," Mullen told Telstra shareholders.

When the original NBN scheme was outlined by Labor in 2007, the plan was for a fibre-to-the-node network accompanied by structural separation of Telstra's wholesale and retail businesses. Telstra's then CEO, Sol Trujillo, was strongly opposed to this. When the Labor administration put out the original NBN tender Telstra submitted a bid that did not meet the government requirements. This led ultimately to today's government-delivered monopoly NBN, and thus - according to Mullen - Telstra "must bear part of the blame" for the huge costs to taxpayers that have followed.

Nonetheless, "whether we like it or not, the NBN is here to stay," Mullen added.

Never mind the quality, feel the (band)width

After Telstra's exit from the tender process in 2009, Labor announced that the NBN would deliver 90 per cent fibre-to-the-premises coverage and proceeded with a plan that included structural separation and billions in payments for Telstra. Telstra was paid for various services such as decommissioning the legacy copper network and use of ducts and pipes. Telstra, Mullen said, became less opposed to the NBN after Trujillo's departure.

In 2013 the Coalition government came in and changed the plan again from majority fibre-to-the-premises to the multi-technology mix of today. Much of the legacy copper network was repurposed to carry connections from fibre endpoints to premises. Today, over half of people on the old Telstra fixed network have migrated onto the NBN. Telstra has suggested that the NBN's presence will cost it $3bn per year in the future, once rollout is complete next year.

Mullen said that it's in Telstra's interest for the NBN to be successful, but suggested that NBN has "moved outside its mandate" in going direct to business customers and offering special deals to some retailers. In effect, the argument is that NBN is competing against Telstra in Telstra's market as a reseller of broadband services: but Telstra isn't allowed to compete against the NBN as a wholesale network operator.

"There is little doubt in my mind that were the NBN opened to competition, wholesale broadband prices in Australia would fall materially," suggested Mullen, adding that Telstra doesn't want to compete in the wholesale market: but it does want the NBN to "stick to its mandate" by keeping out of the reseller business.

Telstra, along with others in industry, also wants the NBN to lower its prices, arguing that they are too high and will reduce demand - or even drive consumers away from fixed broadband altogether. Current Telstra CEO Andy Penn said earlier this year that wholesale bandwidth prices have doubled under the NBN and are set to climb still higher.

"The consequence of this is that it is unprofitable for operators like Telstra to resell NBN … A number of operators today are already very publicly considering strategies to compete directly with NBN using 5G," Penn told the National Press Club in July.

Higher broadband bills, higher taxes … or maybe, both

At the moment the plan is that the government will recoup the cost of building the NBN by privatising it once it is complete. It has been argued that were the NBN to reduce its prices, its market value would shrink and the taxpayer would wind up covering much of the build cost.

It's also generally thought that one of the obvious contenders to buy the NBN from the government in due course would be Telstra.

Penn insisted that he didn't know whether reducing the wholesale prices charged by the NBN today would mean that it could be acquired more cheaply when the government sells it off. He did suggest that high prices would motivate industry players to sidestep the NBN using "other technologies" such as 5G wireless, and that this would slash the worth of the network as and when it arrives on the market.

"My view is it's unsustainable," Penn told reporters.

Some in government hold a similar view. Not long after Penn's remarks, Australian Competition and Consumer Commission (ACCC) chair Rod Sims said that NBN management should not be focused on recouping the taxpayers' $50bn at privatisation but, rather, on making sure that Australians could connect to the internet at reasonable prices.

"We must ignore those who worry about the value of assets that are sunk, and focus on how the NBN can best contribute to Australia," Sims told a Brisbane conference in August.

When the NBN first began selling broadband it had a 12Mbps product designed to be comparable with ADSL prices on copper connections. But the NBN's focus has now shifted to promotion of its high-speed 50Mbps and 100Mbps plans. Today 64 per cent of NBN subscribers have bandwidth of 50Mbps or more, and pay substantially more than ordinary DSL customers.

Sims said this has in effect shifted the normal price point of a broadband connection.

"We need to fix that," he said.

You've never had it so good

NBN CEO Stephen Rue has repeatedly rejected suggestions that NBN prices are too high. In a blog post last month, Rue wrote:

We commissioned AlphaBeta to compare retail pricing in real terms and found that in a study of almost 4600 broadband plans from 22 countries, Australia was the seventh most affordable market ...

Fixed-line broadband services today cost significantly less - and deliver very substantially more - than 10 years ago.

Rue and his AlphaBeta analysts make a good case, and the NBN's current monopoly pricing might well maintain its value as a market asset so as to minimise or even eliminate the blow to government coffers when it gets sold off.

But it would seem that Australian homes and businesses will pay the price for the NBN either way: through broadband prices, or a hit to the national finances which will ultimately mean bigger tax bills or cuts to other public services. And if things go some ways, if NBN prices do genuinely present a huge incentive to entry as Telstra's Penn suggests, it's possible that the NBN will be largely side-lined by 5G or some other new tech shortly after its long-delayed completion.

Then the $50bn cost of building it would be sunk indeed.