FCC fail casts doubts on Libs’ NBN subsidy plan

FCC fail casts doubts on Libs’ NBN subsidy plan

Summary: Malcolm Turnbull’s plans to build our rural NBN using direct subsidies reflects classic Coalition theory, but the failure of a similar US program suggests his blind faith in the private sector may well be misplaced.

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Supporters of the Coalition's alternative NBN plan — the improvement of rural fixed and wireless broadband services through direct subsidy programs — may have been heartened by news that the US Federal Communications Commission (FCC) administered Connect America Fund (CAF) has recently awarded US$115 million in subsidies to internet service providers (ISPs) serving 400,000 residents in 37 US states.

This sort of program mirrors the statements in Malcolm Turnbull's recent polemic (insistently entitled "Why the Coalition's NBN plan is superior and why it will be better for the bush"), made in response to a spray from his counterpart, Communications Minister Stephen Conroy.

The FCC was unable to give away US$185 million in subsidies because ISPs still could not make the business case work.

In that thought piece — which sparked an avalanche of controversy as journalists and industry figures set about fact-checking Turnbull's relatively flexible and self-serving grasp of the facts — Turnbull made it clear how the Coalition will service rural areas: "rather than establish a monopoly and seek to overcharge the cities to subsidise the bush, we will ensure that support for the bush comes from a clearly defined subsidy, so that everybody knows the actual cost of ensuring equality of access".

Like many of Turnbull's NBN-related statements in recent years, this plea for transparency seems to make sense in theory, but falls to pieces under the crushing weight of reality. Just as one learns upon digging further into the details around CAF, the US Government is finding that the program — a reworked universal service obligation program budgeted at US$4.5 billion per year, overall — is actually likely to provide far less for 18 million rural Americans than it was supposed to.

Turns out the FCC had originally allocated US$300 million for rural subsidies, but that many ISPs — notably, behemoths AT&T and Verizon — flat-out refused to take the money, which works out to US$775 per household.

Yes, you read that right: the FCC was unable to give away US$185 million in subsidies because ISPs, which under CAF are also required to invest in the infrastructure that's rolled out, could not make the business case work, even with the subsidies.

There are many conclusions to be drawn from this. First of all, perhaps, is that the government should have offered more money per household. Second of all, perhaps, is that the ISPs were only interested in cherry-picking those few households where they had already seen a marginal business case for investment, but needed a CAF-like subsidy to get their cost-benefit analysis over the line.

Thirdly, however, we must consider a more likely — and more damaging, for Turnbull's privatised Utopian vision — possibility: that there simply is not a viable business case for private enterprise to deliver services to rural and regional residents. In more densely-populated America, that's a revelation; in Australia, which has the world's lowest population density, it is a disaster.

Whereas so many NBN advocates and opponents seem content to duke it out over broadband speeds and well-reasoned statements about future broadband requirements, the potential role of the private sector in a Coalition-run telecommunications environment remains a far bigger issue.

That private sector, after all, has repeatedly shown itself as being uninterested in extending city-grade services to rural regions: even with the marginal successes of the Australian Broadband Guarantee (ABG) program, most rural areas of Australia (not to mention many areas in and around our major cities) are still struggling to get usable broadband. Can we really believe Turnbull's claims that ABG Mark II would be anything better?

Would crowd-funding replace a coherent, consistent roll-out of the type that experience has shown simply will not be rolled out by the private sector?

Even if Turnbull were not to pursue the purchase of Telstra's copper or the Optus HFC network — both wildly expensive propositions with uncertain outcomes and more latent show-stoppers than the next season of The Voice — his blind faith in the good intentions of the private telco sector remains dogmatically intact, if not realistically feasible.

Turnbull says he will consult with our three carriers about their plans to roll out 4G in rural areas, and ask them to name their price — excuse me, "nominate how much subsidy they would need to do it" — to make sure it happens.

No points for predicting a sizeable gap between the Coalition's estimate of how much it would cost, and the cost that the carriers name. Would Turnbull be able to convince them to meet him halfway?

Even if he could, any government-funded 4G services rolled out in rural areas by our mobile carriers would be subject to widely varying service quality, and the need to split fixed-broadband spectrum between fixed and mobile users.

This last point would confound many efforts to deliver widespread LTE-based broadband; you can bet carriers would allocate only enough spectrum to deliver the Coalition's 12Mbps minimum service guarantee, and not a bit-per-second more. The rest of the spectrum would go to more-profitable mobile services — ensuring that the Coalition would have invested untold hundreds of millions to subsidise wireless carriers, building a dead-end solution that would relegate rural residents to 12Mbps services for decades to come.

Whether or not the US's FCC can find takers for its free money remains to be seen — but its failure, so far, to find takers for over half its funding bodes poorly for rural subsidy schemes, and would seem to reinforce Labor's argument for government intervention to ensure minimum standards of service.

It's worth noting that the subsidy money was offered to the same sector that has shown it's still willing, in certain cases, to explore new models for fibre delivery. Google, for one, announced just days ago that it's looking to crowd-fund the delivery of 1Gbps fibre services in Kansas City, Missouri — and Facebook groups are already uniting communities pushing for similar offerings from nearby St Louis to Orono, Maine and elsewhere.

That's interesting, and it's a valid discussion for another day as to whether crowd-funded infrastructure would ever make a difference in Australia (NBN Co is said to be exploring the possibilities of its Network Extension Program with a number of rural councils). It might be a nice compromise for NBN Co to get councils to chip in for a broader fibre footprint, which would bypass complaints about wireless infrastructure and bypass any manipulation that may be taking place.

But would it replace a coherent, consistent roll-out of the type that experience has shown will not be rolled out by the private sector — even when it has the government throwing money at it? No way. Telcos are in make-or-break mode and infrastructure investment is the furthest thing from most of their minds; consolidation and rationalisation will be the industry's defining characteristics for some time to come, and they are not consistent with Turnbull's presumed investment epiphany.

Far from the debate about fibre NBN speeds, this is the fundamental gap between Labor and Coalition NBN policies — and it's a gap Turnbull will have to work much harder to bridge than he seems to think.

What do you think? Could subsidies encourage the private sector to reach the areas it has rejected for years? Is the reason for the FCC's shortfall only because they're not offering enough of a subsidy? And what are the implications for long-term investment value if the Australian government hands out massive subsidies to deliver outcomes it cannot control?

Topics: NBN, Government, Government AU, Telcos, Telstra

About

Australia’s first-world economy relies on first-rate IT and telecommunications innovation. David Braue, an award-winning IT journalist and former Macworld editor, covers its challenges, successes and lessons learned as it uses ICT to assert its leadership in the developing Asia-Pacific region – and strengthen its reputation on the world stage.

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18 comments
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  • Coalition SOP

    Just like their anti-Greenhouse gas plan, the whole point of their Broadband plan is to transfer taxpayer money directly to private corporations.
    lehnerus2000
    • This sounds good, let's do it!

      I take it you folks in Australia aren't running a government deficit, and don't have a national debt. Here in the US, we're having a real problem getting people to understand that we already owe almost a year's GDP, and we can't just have everything nice we can think of.

      Of course, like you, we have journalists who always write this stuff up as government bringing good stuff to the people (however it is funded), with no thought whatsoever to who is going to pay for it or when. Journalists do this because they are mean, and they want to saddle today's schoolchildren with crushing debt when they become adults. Nyaa, that's not true. It's just that journalists don't think much about money. They only think about ways to make government bigger.
      Robert Hahn
      • Err

        Perhaps it's best to at least know a little before making foolish comments...!

        http://en.wikipedia.org/wiki/Economy_of_Australia

        http://online.wsj.com/article/SB10001424053111904140604576493831749969702.html
        RS-ef540
        • Your links are suppose to show what?

          and why do you believe they establish the comments as foolish?
          Richard Flude
          • Baa again...

            Sorry, I should have known better than expect the uneducated sheep to understand...

            Enjoy continuing to be the perennial sheep, when the NBN is ditched... you and your family deserve it :-)
            RS-ef540
      • That's right

        The private sector can't build a business case with subsidiary, the government sector simply doesnt prepare one (or as is the case of Australia any form of cost benefit analysis).

        It's a myth that population densities in Australian towns are below that of America. Whilst Australia has a low population density it is also very urbanised.

        The NBN hasn't yet delivered on its promises for the first few years. But ignore the damage of a monopoly telecoms provider over the history of regional Australia (where I grew up) and the benefits brought by competition and throw it back to the government.

        It takes quite an imagination to present the "evidence" of market failure when telecoms returns over the past decade have been close to zero, the NBN corporate plan has 7%. Simply hilarious.
        Richard Flude
        • That's not right at all

          You seem to be suggesting the NBN doesn't have a business case. http://nbnco.com.au/about-us/corporate-plan.html There you go. 10 seconds on Google would tell you it was released 20th Dec 2010.

          "But ignore the damage of a monopoly telecoms provider over the history of regional Australia"
          Part of the advantage of the NBN is that it removes Telstra's monopoly. The reason it was so damaging is that they were vertically integrated (ie. the same company providing the infrastructure also provided the services on the infrastructure). The NBN is infrastructure only, it encourages competition by giving all ISPs a fair go.
          karl_w_w
        • Competition?

          "the benefits brought by competition"... LOL
          RS-ef540
      • Ignorance is Bliss

        Robert.
        What are you ranting about.
        The private sector fails to deliver and National Communications is critical infrastructure for both economy and security.
        In Australia our NBN is a Government Business Enterprise funded initially by INVESTMENT from the Government largely from Bonds and Borrowings (Not Taxpayer Taxes). Designed to cover 100% - 93% of Premises by Fibre, some wireless and some Satellite.
        Wholesale ONLY allowing maximum retail competition, designed to repay all borrowings and return a LEGISLATED max profit of 3.5% above the Government Bond Rate.

        A tad better than your private sector obsessed situation needing Billions of Tax Dollars thrown to the private sector who still insist on their profit margins and yet will not deliver anything close to what our GBE NBN will.

        Smart?? - not really
        Ideological Purity - sure
        Abel Adamski
        • Apparently so

          From the article, we can glean that in neither the U.S. nor in Australia can private sector actors find a business case for extending city-grade connectivity to rural areas. In fact the article says we may just have to admit that there is no business case, i.e. it does not make economic sense. If it is to happen, it can only be accomplished by allocating capital by political means, knowing in advance that money will be lost.

          Now here you come reciting chapter-and-verse some hoo-hah used to pass the NBN legislation about how it will get its money from investors (public and private) and return a profit. You recite this as if we had not just heard multiple reasons why this particular effort cannot return a profit no matter how much fairy dust and unicorn poop you sprinkle on it. This idea is a money-loser. Get it? You can't "return a profit" from an effort that loses money, regardless of what some politician told you.
          Robert Hahn
          • Why don't we follow you instead

            Robert, very good points.
            All levels of Government should immediately cease and desist from wasting money (Taxes) on Education, Roads Health, Defence.
            It should all be provided by the private sector on a for profit basis. Won't it feel wonderful as you drive out of your driveway and pay you toll to realise that you are contributing to someone's dividends even if they refuse to fix those potholes as not economic to do so.
            Abel Adamski
          • Get your own potholes

            Do your politicians run on "eliminating waste" too? Ours do that every time. Education, Roads, Health, Defense... you name it. Our guys call it "waste, fraud, and abuse," and every election year they promise to save lots of money by eliminating it. They don't because they can't. Humans don't know how to run anything perfectly, and if you spend a trillion dollars, it's a good bet that a hundred billion or so will go down a rat hole.

            You seem to be operating on one of those logical fallacies that goes, "He believes A, therefore he must also believe B, therefore I will attack B and claim that I have refuted A." So drive on your own potholes.
            Robert Hahn
          • Differences

            Hi Robert.

            You're right in saying that NBN Co can't make a profit in the bush. No one can, for any fixed line service. It's just not possible. It's why we currently have the USO and why the NBN is a good way forward.

            You see while the NBN services in the bush are acknowledged as not being profitable the ones in the cities are. Those city people will pay a little more to subsidise those less fortunate.

            So overall the NBN can be profitable, not it's remote services, but overall. No pixie dust or unicorn poo required.
            Darren Leyden
          • A and B

            Robert.
            Try the concept of essential infrastructure now encompassing Broadband for business (the economy ), Government applications and services and last but not least the retail consumer.
            Those Nations that have the best and broadest spread broadband will have a competitive advantage.
            Your much vaunted private sector and technological superiority has been largely due to your Governments investment in scientific and technological research, poaching the brightest and best from Nations such as Australia as they have no future here due to past government stupidity and failure to emulate your Government in supporting science and technology. Plus and this is a biggie - since WW2 so many of our technology inventions have been taken by your government on the grounds of "national security" to end up benefiting your private sector. I have friends that that happened to back in the 50's and 60's during that Cold War.
            So have another look at your perceived reality
            Abel Adamski
      • More than just delivering an unprofitable service

        The NBN in current form is much more than just delivering 21st century communications services in an equitable manner. Yes if you just l;ook at providing that service it is not profitable, however you need to look at the associated benefits. These benefits include better health and education services, supplying the opportunity for business opportunities for the population, reducing pollution and the consumption of no renewable energy sources through less need to travel, easing the stain on local natural resources such as water and costs to local government bodies for supply of water, sewage and other services.

        By enhancing the ability of smaller regional communities you allow people to stay in them and also allow them to grow reducing the strain on large cities and creating and maintaining a more liveable environment with less social problems. Many of these benefits are long term, something nearly all companies and many people and politicians have trouble comprehending the importance of this long term planning and provision as it extends beyond the next election cycle or financial report.

        Fact is if Australia had relied on private companies to supply services our population would be even more concentrated and their woul dbe nobody in the regional and rural areas producing the food and other raw materials that society depends on.
        Cowcakes
  • Well Done

    Well researched and analysed David. For the rural sector wholesale only fibre backhaul bypassing as many smaller towns and settlements as possible is necessary. NBN can't at this point be expected to build that. Lateral thinking and alternatives must be sought out whether from private sector (up North win/win for Miners), local communities and councils with maybe State and Federal subsidies and even the NBN as part of their outreach program.
    Will help local wireless providers, the Mobile Carriers and the NBN. will take time. but with Local and State and Fed Govt. involvement permits and regulations can be coordinated.
    A Win Win for all parties, but will take Good Will and Co operation and a preparedness for a low ROI over a longer Term (Maybe tax incentives could be applied )
    Think outside the crippling Private Sector Square for the National interest and a strong foundation for our economic future
    Abel Adamski
  • You always nail it David...

    Time and again, Aussie telcos (heck, even most Aussie companies in other areas) have proven they'll always take the easy/high profit route and ignore everything else (the reason a lot of them are in so much trouble these days thanks to online shopping). Even the USO was a kludge that only "kinda, sorta" worked.

    I lose more respect for Malcolm every time he opens his mouth these days, which is a real shame, he can be a very intelligent guy when he's not running with Tonys "throw money at private enterprise/middle class till the problem goes away" ideas.
    Tinman_au
  • The FCC is in another country

    Forget the FCC fail, we have to make our own mistakes.
    daryl.cheshire@...