FCC fail casts doubts on Libs’ NBN subsidy plan

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.
Written by David Braue, Contributor

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?

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