Does Palo Alto's FttP rejection hurt the NBN?

Summary:It turns out that the city at the heart of Silicon Valley can't afford to roll out FttP to its own residents — but how does that affect the financial viability of our own FttP NBN?

News that the city of Palo Alto, California has all but rejected the idea of pervasive fibre to the premises (FttP) will be welcomed with open arms by opponents of the National Broadband Network (NBN) — but is it an indictment of the whole idea of an FttP NBN, or a validation of the unorthodox strategy being taken by NBN Co?

Turns out that the local government of Palo Alto — an affluent community in the heart of Silicon Valley that's ironically also the manufacturing base for NBN Co satellite builder Space Systems/Loral — believes that it's not going to be cost effective to expand its FttP network any further. Its decision apparently stems from an independent report that concluded, "A fully user-financed citywide fibre-to-the-premise system is not possible to achieve in Palo Alto. An opt-in FttP system can be built using a combination of upfront user fees and city financing, but there is very little probability of the debt incurred being repaid through operations."


Palo Alto's councillors have concluded that FttP is financially nonviable; does that kill the case for Labor's NBN? (City Hall image by Nimur, CC BY-SA 3.0)

Sound like a Liberal Party press release? It gets better. The report considers a best-case scenario in which homeowners pay US$1000 to get an FttP connection, and then pay US$75 monthly for their subscription. At a take-up rate of 20 per cent, the report concluded that such a system would lose several hundred thousand dollars per year. And that's just in one city.

Given his history of latching onto economic and overseas political reports to justify his opposition to Labor's FttP plan, I have no doubt that Malcolm Turnbull will rush to say that this report is further evidence that the current NBN is a half-baked, overdone and far-too-expensive venture. If they can't even justify FttP in the heart of the technology world's innovation capitol, he may argue, how can we justify rolling it out across an entire country?

Citing the report's financial modelling and monthly subscription prices that seem largely in line with what Australian NBN providers are paying — all magnified by a lack of Australian co-contributions, and the vastly larger scope of our project — such an argument might seem to be right. But there are several other variables that reflect just how different the Palo Alto experiment is from our own.

Like all major telecoms investments, FttP is desperately uneconomical when done in small quantities.

Consider, for example, the localised nature of Palo Alto's roll-out. That city's population is just 64,403 people, spread over about 26,500 households. This is hardly a sizable population — many Australian councils have four or more times as many people and households — and it's a disaster for an FttP roll-out, because the base costs of the optical equipment alone would skew the business case towards financial disaster.

Like all major telecoms investments, FttP is desperately uneconomical when done in small quantities. As Conroy pointed out two years ago, and continues to argue: the Tasmanian NBN would be nonviable by itself. Indeed, Mike Quigley made claims to a recent Senate Estimates hearing that the NBN would not be commercially attractive if sold off incomplete.

America's highly decentralised local-government layer tends towards disarray; it is only large-scale operators like Verizon that have the geographic spread to roll out FttP over a large area with something resembling cost effectiveness — yet, even their interest in unilaterally pushing FttP is limited, because they have extensive investment in existing copper and cable infrastructure.

Put simply, the US just does not need fibre; with cable infrastructure well-established in the US since the late 1970s and available to nearly every home, cable and local-telephone services are already in competitive lockstep for broadband customers. There really is no place for a third network topology. For them, FttP is a telecoms frisson for those Americans who want a third broadband option.

Much of Australia, by contrast, doesn't even have a second option. And just because the US does not generally need fibre, does not mean that we are automatically in the same boat. Despite what Turnbull would have us believe, Australia's cable infrastructure is a pale imitation of that overseas.

It is only Telstra's cable that even reaches most capital cities; Optus' network, the closure of which caused Turnbull and others to recently raise such a stink, is only available in limited parts of Sydney, Brisbane and Melbourne. Not even Optus sees value in maintaining that network long term if it can get NBN Co to do its dirty work.

In other words: HFC's limited scope has generated none of the competitive pressure that Palo Alto's fibre has faced from existing alternatives, and it would never do so, no matter how much a coalition government would try to prop it up with subsidies.

(You could, perhaps, reproduce some of the US market's competitive tension by selling existing Telstra, Optus and TransACT cable to a new third-party operator, but good luck finding a commercial operator that has any interest in that idea.)

In truth, Palo Alto's step away from FttP is not a condemnation of the technology or its viability, but rather a general reflection of the limited opportunity to introduce a completely new communications topography into a market that is already effectively serviced by alternatives. But Australia's market is not already effectively serviced by alternatives, and the existing infrastructure is on a doomsday countdown that not even Telstra wants to be a part of.

If FttP is therefore a logical next step, it then follows that the NBN must be accompanied by changes to the competitive model, so that the network can be assured of high take-up and cross-subsidised low prices. These changes may raise the hackles of pro-competition cheerleaders like Turnbull, but at some point the government must consider a compromise in the name of outcomes.

There will be times when consumers' best interests are served by managing competition, rather than promoting it at all costs.

As we've seen over the past 15 years, stubbornly sticking to the competition-at-all-costs line is unlikely to deliver the type of consumer benefit for which deregulation was originally designed. Competition compromises may seem unattractive, but there is a good case to be made that they are necessary to deliver the outcomes that Palo Alto could not; hence the ACCC's concession that it would serve little good to block the NBN Co/Optus HFC deal.

Perhaps the conflict comes from the ACCC's design itself: one of those Cs stands for "Consumer", and another for "Competition". But there will be times when consumers' best interests are served by managing competition, rather than promoting it at all costs.

It may not always uphold the Coalition's free market ideals, but — as Palo Alto has learned at great expense — a fundamentally objective and pragmatic approach to competition, and one that is not afraid to consider tweaking it as well as encouraging it, may prove to be the only way to chart a viable communications future.

What do you think? Does the Palo Alto decision taint our own FttP NBN project? Or is it just a reminder that we need to take overseas comparisons — and blind allegiance to competition — with a pinch of salt?

Topics: Broadband, CXO, Government : AU, NBN, Optus, Telcos

About

As large as the US mainland but with a smaller population than Texas, Australia relies on ICT innovation to maintain its position as a first-world democracy and a role model for the developing Asia-Pacific region. Award-winning journalist David Braue has covered Australia’s IT and telecoms sectors since 1995 – and he’s as quick to draw le... Full Bio

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