Telstra's NBN deal a win-win: analysts

Telstra's NBN deal a win-win: analysts

Summary: Communications Minister Stephen Conroy has managed a real, tangible win-win outcome with yesterday's deal between Telstra and the National Broadband Network Company (NBN Co), according to telecommunications analysts.

TOPICS: Telcos, Telstra

Communications Minister Stephen Conroy has managed a real, tangible win-win outcome with yesterday's deal between Telstra and the National Broadband Network Company (NBN Co), according to telecommunications analysts.

Yesterday, Telstra revealed it had signed a preliminary $11 billion deal with NBN Co that would see the telco migrate its telephone and broadband customers onto the fibre National Broadband Network, with its copper network to be shut down and no more broadband services to be provided over its hybrid-fibre coaxial cable network.

It was a day many thought might not ever come, but did: a day Telstra agreed on a way forward.

What was agreed was non-binding and ultimately up to Telstra's shareholders to approve. Though with a large jump in the company's share price today, analysts say there's hope in securing the votes the company needs when taking the deal to the market early next year.

Analysts also say it's an agreement likely to benefit the telecommunications giant in the long run.

"What a way to retire the copper network; somebody actually [leases] it from them. Unbelievable! How many other carriers around the world have somebody [pay for] a dying asset? That's a big positive for them as well," said Gartner analyst Geoff Johnson.

Johnson said Gartner's take-away from the announcement was that Telstra would now get a "war chest" of cash to go and market its retail service offering.

As for the government's side of the deal, he said it got the political response it wanted.

Apart from the potential $11 billion Telstra could get from the deal, it is also getting more certainty, according to Ovum analyst David Kennedy. The company now knows what compensation it will receive for retiring its copper network and has an idea of its migration strategy to the next-generation fibre network, he said.

"The benefits that Telstra has been able to achieve are considerable," Kennedy said.

The "big achievement" for the Federal Government, Kennedy said, was that "Telstra would not, under this agreement, be a competitor to the NBN Co in the future", which he said was a "very important" achievement.

Had Telstra decided it wanted to compete, Kennedy believed the telco could have "quite effectively" done that for a long time. "And what this means for NBN Co is that they won't have to face that scenario," he said.

As a result, NBN Co would now be able to break even "significantly earlier" if the deal goes through.

IDC analyst David Cannon said the deal would allow Telstra to consolidate its operational back-end. "There'll be huge cost savings and efficiencies from an operational perspective as the [old] networks get decommissioned," Cannon said.

"But at the same time, they've got a great price on what they're agreeing to do and they also get regulatory certainty in a long-term sense as a result as well, which was probably the biggest inhibitor of Telstra's share price."

He believed the deal would be "a great opportunity" for Telstra's share price to "get up to those highs that we saw about 10 years ago", but said this was a long way off yet.

Topics: Telcos, Telstra

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  • Quigley is absolutely right to keep the capex and opex figures separate. Here's an example to make the point clearer.

    The cost of building the Sydney Opera House was about $102 million (I'm told). That's the cost of doing all the designing, excavation, concrete pouring, scaffold wielding and fitting out the whole structure. That was the expenditure in getting it to completion of all site works - the capex. But! you might argue, the Opera House has cost a lot more than that over the years - hefty power bills, maintenance, repairs, staffing, and so on. Many more millions of dollars. So since you had to pay out all that too, shouldn't you add that to the "cost" of the building? After all, a dollar's a dollar, right?

    Well, that's what is being proposed with the Telstra $13 billion dollar payments. Oh, and interest too! Oh, and staffing and depreciation and anything else people can think of, to generate the $50-60 billion figures that are being wielded about with gay abandon.

    Problem is, neither approach makes sense. Because in neither case is there any provision made for the operational income generated along the way. The Opera House generates a return - all the tickets sold, the tourist groups paying to be shown around, the big artists and orchestras and ballet companies and visiting motivational mugwumps who all hire out the hall. So it's madness to lump in every dollar spent on the place, from building it to changing the lightbulbs to cleaning the shiny white tiles, as one great undifferentiated "cost" without also taking into account the income that is earned along the way.

    The tickets pay for the new lightbulbs, so to speak. The tourists pay for the upholstery on the chairs. And so on. It's all opex - operational expense - where you are spending money and receiving it in, all at the same time, all in the normal course of doing business. And the difference between the income and outgoings is the operating profit or loss.

    Now back to the NBN. The Business Case Summary makes clear that the capital cost - the cost of building the physical assets, laying the cable, all the labour and digging and trenching and so forth - is estimated as $34.4 billion to bring it to day 1 of operation. What's that figure? Haven't seen that one, you say! Yes, I'm actually quoting the build cost, not the total "capex" because there is also an allowance of $1.3 billion for maintenance and repairs up to 2020. That then gives us the headline figure of $35.7 billion, the total capex amount, staggered over a 10 year period; and the more responsible figure to use, because it does contain that early maintenance allowance.

    Bringing us finally to the Telstra payments. These are operational expenditure, because they are quite separate from the cost of building and laying cable. They don't pay for the physical asset. They are, instead, part of a wider business deal with Telstra to do two main things:
    - lease Telstra sites and assets (including locations to place FAN and POI physical assets - which would cost money to lease elsewhere even if Telstra didn't make the deal)
    - migrate customers from copper and HFC to fibre (thus maintaining a substantial customer base for NBN - important for cashflow and long-term viability)

    They are, therefore, part of the expenditure that you pay (structured in this case over 10 years or so) in return for normal costs of doing business (ie leases) and gathering a customer base. Think, if you will, of the alternate outcome - if there were no Telstra deal. As I've said, NBN Co would still have to lease premises somewhere to locate its physical assets, but would not have the advantage of the existing integration of the Telstra exchanges, conduits, ducts and pits. And NBN Co would have to work harder (and at greater cost) to move over customers from Telstra's copper network to its fibre, with lower customer base and therefore lower cashflow over the early period (10-15 years). Now, I don't know all the terms of the deal, but the big ones are clear enough; and it was clearly good enough for both sides to benefit. That's what business deals are. Will NBN Co make other deals with other telcos or other enterprises for that matter? I'm sure they will, and they will generate further opex - further operational expenditure, but with the clear purpose of improving the eventual bottom line.

    And that, in a nutshell, is why you can't just roll together the capex and opex figures.