Optus HFC deal kills monster govt created

Optus HFC deal kills monster govt created

Summary: Two weeks since NBN Co announced its game-changing agreements with Telstra and Optus, most subsequent discussions have focused on the ex-monopolist rather than its biggest rival. Yet while many have argued that Optus is getting an $800 million free ride, few have recognised that decommissioning the Optus HFC network embodies the significant failings of 14 years of competition just as much as the buyout of Telstra's ducts.

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Two weeks since NBN Co announced its game-changing agreements with Telstra and Optus, most subsequent discussions have focused on the ex-monopolist rather than on its biggest rival. Yet while many have argued that Optus is getting an $800 million free ride, few have recognised that decommissioning the Optus HFC network embodies the significant failings of 14 years of competition just as much as the buyout of Telstra's ducts.

Remember that while Telstra grew organically through the decades, Optus was created — enabled might be a better word — from the wreck of AUSSAT, then backed by favourable legislation that enabled it to seize a foothold in the market. Its mandate was to introduce Telstra to the supposed ravages of competition, and the company climbed the learning curve quickly. So, too, did the Labor and Coalition governments regulating it.


The winter of his content: Optus CEO Paul O'Sullivan knows the company's future lies in content — but how will it shape up?
(Credit: David Braue/CBS Interactive)

Yet the mistakes started early: a core premise behind Optus' creation was that it should build a second physical customer access network to compete with Telstra's, and that network was, of course, to be based on the then high-tech hybrid fibre-coaxial (HFC) cable. Yet with all the enthusiasm about the presence of an anti-Telstra, nobody considered what an absolute waste of money this would be. Logic said that Optus and Telstra could have worked together to bring HFC infrastructure to a much bigger portion of Australia, but the competitive spirit in which Optus was hatched meant that this wasn't possible.

Even back then, the government could have well and truly anticipated the train wreck that was coming — but blind political pressure, to prove that the new competitive environment was delivering consumer outcomes, kept it from forcing the point. Instead, it left Optus to try to fight the colossus that is Telstra, using only the strength of its HFC and its gut determination.

Whether by design or by happenstance, Optus carried the burden of building its own HFC network and, with the blessing of a government that was keen to promote appearances of competition at any cost, rather than undertaking the less palatable separation of Telstra, it drag raced Telstra through our suburban streets, only to run out of funding long before it had managed to fulfil its vision of building an alternative local loop.

Customers were spoiled for choice in a marketing sense, but with two networks covering 20 per cent of Australian homes, and one network covering 100 per cent of them, the dynamics of today's ADSL marketplace were already beginning to play out. Optus was counting on content to build revenues in the face of a commoditised access business, but big bucks partnerships with US content providers simply didn't resonate with customers as the company hoped. Even less so when a bigger Telstra was feverishly securing key deals to build out its own content proposition.

Optus was counting on content to build revenues in the face of a commoditised access business, but big bucks partnerships with US content providers simply didn't resonate with customers as the company hoped.

Content-focused duopolies quickly went the way of the dodo, and Telstra's bundling strategies, larger market size, better advertising, exclusive content agreements and iron grip over ADSL-equipped local loops left Optus little wiggle room. It wasn't long before Optus was backing away from its pay TV roots, ceding the pay TV market to Telstra and redoubling its focus on mobiles to compensate. Yet while Optus' cable business and bundled HFC local-loop businesses may have been tidy little revenue spinners over the years, networks like this cost an absolute fortune to maintain. It can't have been long before the costs of the HFC network, compared with its return and growth rates, began raising concerns.

If the government had separated Telstra from the get-go, and forced it to allow competitors to have access on its new HFC network, Optus would never have needed to spend billions duplicating that roll-out, and we'd have more of the country cabled with a (relatively) open, wholesale access network. Years later, Optus knows as well as anybody how expensive and bothersome it is to own your own infrastructure, and I imagine that — even though the deal could be diminished by what is estimated to be up to $100 million in early termination payments — CEO Paul O'Sullivan struggled to play hard-to-get when NBN Co offered him $800 million to close up shop.

Not only does that put a fair bit of dosh into Optus' war chest, but it relieves the company of the burden of maintaining an infrastructure that has always been redundant. We now know that the future for Optus — and, indeed, for any carrier — lies not in owning massive duplicate consumer networks, but in exploiting available telecommunications services to deliver services and content to customers as effectively as possible. The NBN has made this very clear, but Optus' challenging content model was already hinting at this years ago.

Optus spent billions to be able to offer the same connectivity services as Telstra, but when it came to content, the government-backed competitor could never shake that perception that it was a "me-too" player. Even though it has a strong business footprint, in the consumer market it simply was never able to give most consumers a good enough reason to choose it over Telstra; in addition, its TV-optimised network has lost any technical advantage it might have had. To this day, its remaining pay TV operations are performing so badly that Optus excludes them from its consumer revenue results, so as to be able to report stable revenues.

Little wonder that O'Sullivan used his recent speech at the CeBIT conference in Sydney as a platform to attack the proposed Austar-Foxtel merger, and agitate for more openness in content: he knows all too well that exclusive content deals favour Foxtel's market reach. Telstra regularly beats Optus handily in securing exclusive content, thereby removing most of the incentives for customers to choose an Optus pay TV package over a Telstra package.

Optus' experience with its HFC network has been a learning experience for all involved, but decisions made in the 1990s have now come home to roost. Those that argue that the government had no business buying out Optus seem to have forgotten this; the government is shelling out billions to absolve itself of its 1990s-era mistakes, and this deal is as much a part of that as NBN Co's deal with Telstra.

Telstra naturally lashed out at the suggestion, and there are questions as to how much the government can interfere in private sector content deals. That said, the direction of a post-HFC Optus will be of great interest: freed of its expenses in duplicating Telstra's HFC network, can Optus use its cash to turn a corner in Australia's content services market? Or will it simply focus on NBN content, working to turn its customer base onto the prospects of a new era of content deals?

Optus' experience with its HFC network has been a learning experience for all involved, but decisions made in the 1990s have now come home to roost. Those that argue that the government had no business buying out Optus seem to have forgotten this; the government is shelling out billions to absolve itself of its 1990s-era mistakes, and this deal is as much a part of that as NBN Co's deal with Telstra. There will be no piggybacking on top of Foxtel this time, since every ISP will have the ability to deliver pay TV services over a network that's as fast as the HFC network that Optus spent billions to build. This time around, the competitive landscape is far more level, and means of market differentiation will be different; so, too, will be the Optus that emerges.

HFC nobbled, where does Optus' future lie? Can it ever be more than a pale imitator of Telstra when it comes to consumer services? Will it always be forced to compete as a cut-rate provider, or will freeing it of HFC allow it to spread its wings and find important new business directions?

Topics: Telcos, Broadband, Optus, Telstra, NBN

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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15 comments
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  • Very interesting analysis; thanks, David. For what it's worth, I think that the deal will unshackle Optus from the past and set it up to head off in productive new directions.

    We can expect to see interesting new retail packages, lots of tailored bundles of fixed-line and mobile broadband and all-in-one phone services, tying in to cloud based services and overall entertainment packages. We have the beginnings of this now, but I expect there to be much more seamless approach in the next few years - helping to tie down customers and create loyalty with value-added services.

    Optus is very well placed to do well in this sort of environment. As the biggest non-Telstra player, it has a lot of valuable infrastructure in place (HFC was not among it), and still lower overheads in some areas. A good position to be in - provided that the management is competent and agile enough to market a new vision of what Optus can offer.
    Gwyntaglaw
  • "Logic said that Optus and Telstra could have worked together..."

    Except that the former monopoly/then-near-monopoly may have decided that the only logic it wanted to use was legal, financial and operational muscle to knock out the competitor and get back to its comfortable PMG/Telecom position.

    Pity that none of the pollies were capable of seeing that coming.
    gnome-8be8a
  • gnome, let not your heart be troubled by history, and rejoice that thanks to Senator Conroy the new fully competitive world of free enterprise and fierce, but open, competition has engulfed Australian telecommunications.

    Let us embrace this new situation that will deliver great advantage to the Australian customer and make the old devious game whereby Telstra opponents used complaint of "Telstra monopoly" to restrict Telstra and advantage themselves.

    Naturally, as is expected in any vigorous competitive situation, those involved can expect fierce and relentless competitive pressure from opponents and with the possibility of cries to the ACCC now denied the Australian consumer will be the winner.
    sydneyla
  • First, thanks for putting some of these issues down so clearly. There is way too much waffle written about this matter. Nice to have someone cut through.

    What I'd like a clearer idea on is just what Optus (and Telstra for that matter) will actually offer to a customer. To me they are going to become useless middlemen selling services no one wants or needs.

    There are 2 fundamental elements to the telecommunication market: infrastructure and content.

    As I understand it, NBN will provide the infrastructure. As we saw in the 90s, duplication of infrastructure is a colossal waste of cash, so a single national provider makes sense, properly regulated with effective oversight.

    When it comes to content... well there's this great big thing called the internet. Content, cloud services, apps; you name it, I can get it from the net.

    So I see a need for NBN and I see a need for the internet.

    But as far as I'm concerned, Optus, Telstra etc will become redundant.

    Of course, Telstra and Optus do have a future, guaranteed not by a natural role in the telecommunications market, but by distortive legislation and long-term corporate contracts.

    Legal mechanisms like exclusive content deals are the only thing they have going for them. Such deals are not advantageous for the consumer; they just add a layer of needles cost and control.

    The trend is towards a liberation of the consumer from such distortions, towards a more natural outcome where infrastructure and content are the main factors in telecommunications, not government policy, shonky economic theory and highly paid consultants.

    In my opinion, the whole sector has been run as a multibillion-dollar sham for over a decade, and probably the decade to come by the looks of it.

    Where necessity and change collide, expect scam artists to squeeze in for some easy cash.
    nicwalmsley
  • nicwalmsley, it appears to me that (for myself) I will experience no change whatsoever when (and if) the NBN is operational.

    At present I have two mobiles, a home phone, a TTT, Foxtel and Bigpond. My understanding, and expectation, is that these services will continue with Telstra delivering the service to me as before. Where I would think a change may occur is the level of competition that will exist now that the yoke of unfair regulation has been lifted from Telstra and Telstra is allowed to compete in a fashion expected in a free and open competitive system.
    sydneyla
  • Until your last two lines you actually made perfect sense Syd... kudos...

    But typically you just had to spoil it all and slip back into your NWAT time machine to again WRONGLY mention "unfair" regulations...sigh!

    And the comically ironic part, saying YOUR company will be "allowed to" compete in free and open competition?

    Err you mean, at last they will be made compete, rather than being the monopolist...?

    But to DT's credit he has embraced the NBN challenge and regained a lot of people's lost trust in Telstra (including me) especially lost during the "dark ST years", by negotiating a nice outcome for Telstra and their stakeholders and NBNCo/Australia of course!
    Rizz-cd230
  • Hi Rizz. Please feel free to ignore my last two lines.
    sydneyla
  • Either that or I do like everyone else, see your name, know what to expect and just ignore the lot...!
    Rizz-cd230
  • No problems Rizz this is a free country, do whatever you feel comfortable with.
    sydneyla
  • Ok... I feel comfortable highlighting those commenting with a political and particularly, a disgusting greed agenda, to everyone else...

    So guess what?
    Rizz-cd230
  • Don't forget Rizz, greed is good.
    sydneyla
  • You know Syd, coming from most others I'd take that as jest...

    But you actually do promote exactly that...

    So thanks for that frank admission (in regards to the worst kept secret in comms ~ Syd = greed).
    Rizz-cd230
  • Suspicion always haunts the guilty mind. And also for you Rizz. Guilt has very quick ears to an accusation.
    sydneyla
  • My biggest concern with "carriers as content providers" is it opens a huge can of worms, just look at all the crap that goes on in the US with justs one example being that some telcos are accused of throttling content provider "XYZ" because they have a deal with provider "ZYX". A carrier should be exactly that, they should provide data access regardless of the data's origin...
    Tinman_au
  • I love my Optus HFC.....
    locky84