Telstra and Optus to participate in NBN

In two separate deals announced recently, Telstra and Optus revealed they would each migrate customers from their broadband networks to the NBN (National Broadband Network).

This is a significant milestone for the NBN - together, Telstra and Optus represent more than 60% of the retail broadband connection market.

The federal government has provided NBN Co with a funding agreement to support these deals.

Telstra, which at times has seemed reluctant to take part in the NBN, has signed definitive agreements with NBN Co and the Commonwealth for its participation in the NBN.

If the deal goes ahead, Telstra will migrate services offered within NBN-enabled areas from its copper-based Customer Access Network and broadband hybrid fibre coaxial (HFC) cable network to the NBN.

Under the deal, Telstra will provide NBN Co with access to certain broadband infrastructure - dark fibre, exchange space, lead-in-conduits and ducts - to expedite the delivery of the NBN. This will last for somewhere between 35 and 60 years.

In return, NBN Co will pay Telstra progressively for the migration of customers, and for the access to Telstra’s infrastructure. Telstra expects this to deliver approximately $11 billion in post-tax net present value over the course of “many years”.

“We've taken considerable time to reach today's agreement. But it has been worth the wait. It means we can build the NBN more cost effectively and with less disruption and greater certainty than had we duplicated Telstra’s existing infrastructure,” said NBN Co CEO Mike Quigley.

The Telstra deal is still subject to a number of checks, including ACCC acceptance of Telstra’s structural separation undertaking and Telstra shareholder approval.

“The signing of these agreements is another important step following two years of complex negotiations between Telstra, NBN Co and the government,” said Telstra Chairman Catherine Livingstone.

Livingstone said Telstra decided to participate in the NBN on the basis that the transaction is expected to provide the company with “the ability to recover more value for the business than the available alternatives, given the loss of value after the NBN policy announcements”.

Similarly, Optus today announced that it will decommission its HFC cable network and migrate customers to the NBN.

NBN Co will make progressive payments to Optus based on the number of customers that Optus migrates to the NBN.

These payments are expected to total a post-tax net present value of approximately $800 million.

Industry reaction

Nigel Pugh, Consulting Director at Ovum, said the Telstra deal was of benefit to both Telstra and NBN Co.

“It's clear that Telstra has done its own cost benefit analysis for its participation in the deal versus the alternatives and has determined this is the best approach in the current environment,” he said. “This will also be a positive for NBN Co as the key hurdles to its nationwide rollout will have been overcome.”

Pugh said an initial reading of the deal’s cessation clauses seems to indicate that the deal is resistant to a change in government, should Labor lose the next federal election.

“NBN Co will have to reach 20% fibre coverage for the compensation payment to occur and, based on our reading of NBN Co’s three-year corporate plan, we think this will be a stretch to achieve by 2013,” he said.

Paul Budde, telecommunications commentator, said the Telstra deal will speed the delivery of the NBN.

“In our eyes, the future of the NBN looks now secured. The Opposition Shadow Minister Malcolm Turnbull has already indicated that he is not going to turn the clock back; but he, of course, is still planning changes if they would win the next elections,” Budde said.

But despite this progress, there are still significant hurdles for the industry to overcome.

“What still needs to be sorted out are the regulatory circumstances around the structural separation of Telstra based on the progression of the NBN. However, more important at the moment are the regulatory arrangements for the transition period,” he said.

“The industry still doesn’t trust Telstra to do the right thing and demands far-reaching regulatory intervention that would see some sort of a functional separation of the Telstra network from the Telstra retail services,” he said.

Telstra, Budde said, would prefer to avoid such intervention and come to an agreement that is acceptable to all.

“The only solution that BuddeComm sees here [is] that such a process needs to be facilitated by the ACCC and if an agreement can be arranged this would need to be formalised by them,” he said.