Where's the NBN policy?[source:...

Where's the NBN policy?

[source: http://www.businessspectator.com.au/bs.nsf/Article/NBN-Structural-Separation-Policy-pd20100507-584MP?OpenDocument]


Well it's an interesting week for the NBN, with the release of the novel-length report into its implementation that the Australian Government commissioned and then sat on for two months before letting the rest of us see it.

It's also been amusing to see the government running a 'budget level' media lock-up to explain and release the report before the general public (including me) got to see it.

Despite having had two months to sit on it so far, what we didn't see with the report was the government response to it, and at a deep level that is the thing that matters. We're told it'll be another month before that happens.

Of the 84 recommendations in the document, and rather like the Henry tax review process, the critical event will be the point at which we can all be told how many of those recommendations the government agrees with and how many they decide to leave on the carpet when the music stops.

Because what matters isn't the report, its policy, as a precursor to real action (and in this context, the work happening to date in Tasmania is simply the skirmish being conducted to limber up for the real battle.

And it will be a battle. A battle against a large vertically integrated incumbent, in Telstra, plus at least one challenger who is also undertaking rapid vertical integration (TPG).

What those companies do about the potential for the government to force equitable wholesale access or demand penalties if they undercut NBN access pricing will be interesting.

Telstra has spent the last decade demonstrating just how well it is possible to deflect, defer, avoid, and obfuscate 'level playing field wholesale access', as a vertically integrated company. The history of court battles in the past and the present chronicle their market power in this respect.

So much so that its quite obvious that the only way to get Telstra to play nicely in the NBN context is via structural separation.

Fail to do that, and the whole house of playing cards will fall, due to Telstra aggressively white-anting the process, simply because as a vertically integrated player, white-anting is more cost effective than playing nice.

But if it gets structurally separated (and really separated, not just a simulation), the two halves will modify their behaviour to become pro-competitive in their respective realms. This is because its the vertical integration that generates the anti-competition outcomes, and each half on its own just won't act the same way as the combined entity does.

Now, let's play a bit of a thought experiment about vertical integration in the Australian telecommunication market, and see where it leads...

Rumours reported in the tech media this week say that TPG is on the verge of buying AAPT.

AAPT own two important assets and one important access right (other than a rapidly dwindling retail broadband customer base):

1) They'd own the Optical fibres (obtained from Optus decades ago) that mean TPG would then own intercapital fibre to link directly with its recent acquisition of PIPE (that gives it fibre all the way to most competitive DSLAM's in Australia).

At that point, TPG (in the broadband context – which is what matters here) is quite literally just as vertically integrated as Telstra.

It then owns fibre end to end from exchanges through to all other states and back down into all other exchanges... plus the PIPE international cable system to take them all the way to international markets.

Hence: End to end fibre from Guam to the DSLAM in your suburb, and all points in between.

Let that sink in for a minute.

2) They'd own a major shareholding in iiNet, via AAPT's existing major shareholding in iiNet.

Let that sink in too. Imagine that TPG then makes an offer that Amcom (who own the other major stake in iiNet) decide to accept, and suddenly TPG owns an effective controlling interest in iiNet, and completes the vertical integration process upward into multiple sectors of retail, as deeply as it has completed it downward, into multiple sectors of fibre asset ownership.

3) They would have access to the zero cost peering agreement that lets AAPT (and by extension, TPG in this scenario) exchange traffic with the BigPond and Optus national networks at (effectively) no cost, while all other market players are required to pay for that access.

This is the infamous 'Gang of Four' peering cartel that some claim no longer exists, but that my seven figure annual costs paid to access that cartel says otherwise.

All of this leads to interesting questions about just how vertically integrated a company has to be in order to be considered in the same basket of market power as Telstra.

If such a vertically integrated TPG existed, would the government then need to structurally separate them as well?

To avoid an unfair disadvantage to Telstra, logically, it should... but, well, I'd hardly expect such an integrated TPG to take that notion lying down.

As always, it seems, in the telecommunications sector in this country, we do live in interesting times.