Australian NBN study challenges incumbent Telstra

David Kennedy/Ovum
12 May 2010
OvumThe Australian government has released the implementation study for its proposed National Broadband Network (NBN). The study recommends aggressive wholesale pricing to drive rapid fiber uptake.
The government has not responded formally, but argues the study demonstrates the feasibility of a national fiber rollout in competition with the incumbent, Telstra. However, the study does not appear to factor in Telstra’s response.
In 2009, the Australian government established a National Broadband Network Company (NBN Co) to build a wholesale-only FTTH network to cover 90% of the market. The government commissioned McKinsey to prepare an implementation study for the project, which was released on May 6.
The study recommends that FTTP be extended to 93% of premises and that the NBN Co launch two Ka-band satellites to deliver 12Mbps services to 3% of the remaining market. The intermediate 4% of the market is to be served by 12Mbps wireless technology, with the operator to be selected by tender.
Access services will only be offered at Layer 2, but the study is open to the NBN Co offering Layer-3 services to support services such as IPTV. The study also recommends that the network be designed to support future Layer-1 unbundling, but this is not recommended during the eight-year rollout.
The cost of the entire network is set at A$42.8 billion ($38.3 billion), almost precisely the same as the government’s “back-of-the-envelope” calculation from April 2009. Of this amount, A$26 billion is for fiber, a realistic figure in our opinion.
The study is long, but the strategy is simple: McKinsey explicitly recommends that the NBN Co set wholesale fiber access prices mainly in order to drive take-up.
Specifically, it recommends a low double-play wholesale price point of $30 to compete with current wholesale DSL pricing. Higher-speed services will cost more, but how much more is unknown. This pricing is intended to drive high take-up rates within the fiber footprint of 6–12% per annum. Migration incentives of A$300 per customer are also proposed.
Talk of “take-up rates” means that the scenario being modeled is a competitive one, where the NBN Co is winning wholesale customers off the Telstra network.
The implementation study implies that the low wholesale price point will cause traffic to migrate off Telstra’s copper network, ultimately forcing Telstra to migrate also.
The government has not responded formally to the study, but has made its intentions clear – it will proceed with the project as outlined by the study, with or without Telstra. The government has demanded that Telstra finalize negotiations with the NBN Co by the end of June, implying that the NBN project will proceed without it after then.