Retail plans reveal NBN Co hypocrisy

The wording of the draft NBN legislation, now up for public comment, revealed the surprising possibility that NBN Co could become a telecommunications retailer under certain circumstances, suggesting massive government hypocrisy that could upset the tenuous balance of Australia's telecommunications market.
Written by David Braue, Contributor

No matter how inured you have become to political backflipping, the wording of the draft National Broadband Network (NBN) legislation gives pause for thought.

Although many of its goals seem consistent with the government's stated NBN policy, its allowance for NBN Co to operate as a retail provider is the height of hypocrisy.

On the one hand, we have the legislation designed, as the explanatory notes (PDF) repeatedly assert, for an NBN Co that offers only wholesale services.

This has always been the stated and logical structure for NBN Co: any other structure, such as creating a vertically-integrated wholesaler and retailer like was done with Telecom all those years ago, would dramatically change the nature and direction of a market that has been regulated for competition for 13 years.

Stephen Conroy

Stephen Conroy
(Credit: Liam Tung/ZDNet.com.au)

Yet the legislation (read it here) introduces a complete policy reversal with the revelation that the minister can, on his whim, authorise NBN Co to provide services directly to certain end users, for example, government agencies.

In other words, NBN Co is exclusively a provider of wholesale telecommunications services, unless the minister decides it's not exclusively a provider of wholesale telecommunications services. How's that for commitment? In as-yet-unspecified circumstances, the company will apparently be able to provide government departments and other, as-yet-unspecified parties, with the very retail services for which telecommunications providers were supposed to pay good money to be able to provide.

There may theoretically be logical reasons for this: in far-flung government departments, for example, it may be necessary to get high-speed coverage in areas where suitable competitive alternatives have yet to eventuate. The entire NBN Co model, after all, is built on the assumption that reasonably-priced backhaul will naturally attract a raft of new service providers, but this assumption has not been tested in the field. To date, after all, service providers have mainly become interested in expanding into rural markets when there's government funding — via the Australian Broadband Guarantee subsidy program — to make it worth their while.

Yet any retail-and-wholesale structure is a dangerous tangent to NBN Co's real mission. How can the government justify banning Telstra from providing both retail and wholesale services, then hand NBN Co a ubiquitous network and let it do exactly the same thing? That the legislation has not only left open the possibility for NBN Co to provide retail services, but has singled out government services as a potential customer, suggests there has been a fair bit of back-door dealing across the length and breadth of the Commonwealth Government.

How can the government justify banning Telstra from providing both retail and wholesale services, then hand NBN Co a ubiquitous network and let it do exactly the same thing?

You don't just make this stuff up, and it's probably safe to guess that Conroy has been approached by other departments sensing an opportunity to source lower-cost data services from NBN Co at wholesale prices — because, of course, the legislation requires consistent pricing for all customers to reduce infrastructure costs and meet ever-present budget pressures.

But what effect would this have on the rest of the telecommunications market? Government providers currently source their services from third-party providers — most from Telstra, but many from Optus, AAPT, or other parties depending on their requirements. All provide extensive implementation, consulting, support, service guarantees and ancillary services. These ongoing, quite significant revenues — government communications costs are measured in the millions, not thousands — are most certainly cross-subsidising other customers across the country, both in consumer and small-business spaces. Give the sugar daddies a way to buy their sweets straight from the wholesaler, and the rest of these companies' customers are going to be left to make up the difference. Prices rise, and everybody loses.

I am reminded of an effort by computer maker Compaq (now owned by HP), about a decade ago, to break into the retail market by opening its own branded stores that would avoid its losing margins to those pesky resellers. It was good in theory — no, let's be honest, it was disastrous in theory — and imploded on itself as quickly as the company could terminate its leases. Many very large and influential channel partners raised hell about the move, and some stopped distributing Compaq products altogether. The move from wholesale to retail was an unmitigated disaster.

This is what can happen when you don't stick to your knitting.

We can, perhaps, take some consolation from the insertion of the requirement that the minister got the OK from the ACCC that retail services wouldn't be provided without assurances that such a move wouldn't be anti-competitive. Yet can we trust this system of checks and balances to deliver a pro-consumer and pro-small business outcome? Or is it just another smokescreen designed to disguise a policy whose ultimate result will be to use tens of billions of taxpayer dollars to build a network that will marginalise competitive providers through some sort of tit-for-tat political arrangement?

Being a retailer isn't just about hanging out a shingle and calling one's self a retailer. There are systems to be put in place, both technological and procedural.

There are practical considerations, as well: being a retailer isn't just about hanging out a shingle and calling one's self a retailer. There are systems to be put in place, both technological and procedural. There are service guarantees to be met, and penalties to be worn if those guarantees are not met. There are profit margins to be decided, and distribution of those profits to be clarified; marketing to be done; customer support to be provided, requiring a massive on-the-ground force of technical and customer relationship managers.

Like Pandora, Conroy is cracking the lid on a box of potential disasters. For all his success in delivering actual, tangible draft legislation, leaving the door open to retail services will open Conroy to significant criticism. He is accepting feedback on the legislation for the next two weeks, and it will be interesting to see what the telecoms world thinks of the proposal. After dropping such a massive bomb on the market, failure to spell out precisely why this option has been flagged, could well leave a poisonous fallout that would last well past the upcoming election.

What do you think? Is there a valid case for NBN Co to offer retail services?

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