TPG should outbid NBN Co to buy the Optus HFC network

The decision to build the National Broadband Network (NBN) as an infrastructure monopoly may have been controversial, but the original plan to build it using future-proof fibre left few options for opportunistic carriers to compromise its business case through competition. Now that NBN Co has well and truly shifted towards a multi-technology mix (MTM), however, such protections are off — as evidenced by the Australian government's uncomfortable stoush with upstart infrastructure provider TPG Telecom.

Now, Communications Minister Malcolm Turnbull is moving to introduce new telecommunications licence requirements that will pre-empt the drawn-out process through which the ACCC will declare in-building broadband services. This move is designed specifically to nullify any advantage to TPG by forcing it to wholesale whatever last-mile services it builds — but a look at the longer game suggests that if this is how the broadband game is now to be played, TPG would be smart to move quickly to buy up SingTel Optus' long-neglected hybrid fibre-coaxial (HFC) broadband network.

Such a move would give TPG an extensive backbone and access network assets that pass well over 1 million homes and businesses, complementing its growing network and helping it rapidly increase its broadband subscriber numbers and revenues.

Strategically, however, the HFC network would play a significant role because it represents Australia's last possible high-volume infrastructure buy that would be capable of allowing TPG to continue exploiting the 1km exemption introduced by the former Labor government.

That exemption, which TPG is already exploiting to great effect in its effort to link its PIPE Networks-built backbone to key multi-dwelling units (MDUs), would also seemingly apply to the Optus HFC network assets — built, as they were, before the 2011 cut-off date specified for the 1km exemption.

Rather than simply cutting off the Optus HFC network — depriving the country of its largest non-Telstra-owned mass-market infrastructure — TPG could buy that network, modernise it with a big capital injection of the type that Simon Hackett has assured us will soon happen over the government's favoured Telstra HFC network, and use it to secure large numbers of customers while the NBN rollout continues to stall on the back of endless Telstra negotiations and the many months of Australian Competition and Consumer Commission (ACCC) negotiations that will follow.

Importantly, the Optus HFC network may well be safe from Turnbull's moves to mandate wholesale-access clauses into telecommunications licence T&Cs. While there is a case for declaring such services in MDUs where technological limitations could otherwise prevent real infrastructure competition, the massive overlap between the Telstra HFC network — which will be upgraded and utilised in the MTM model — and the Optus HFC network, which is smaller, but almost universally duplicates the Telstra network, would prevent the declaration of such services, because competitive suppliers are available.

Turnbull would therefore be loathe to press the point on the HFC front, because entirely different competitive forces are at play and — given the big things he has planned for Telstra's HFC network — there is no risk of NBN lockout from areas where Optus cable has been run.

And what of the existing contract that commits Optus to closing down its network and handing over its customers to the government? Well, as Telstra is proving, even the most definitive of agreements is open to renegotiation — and, barring clauses explicitly preventing Optus from accepting other bids, the board of Optus would seem to be obligated to consider any legitimate acquisition offer that would better the government's AU$800 million price tag.

What would happen, then, if TPG — or, for that matter, Verizon, BT, AT&T, or any of the other overseas giants that have largely business-focused presences in Australia — were to approach Optus and offer AU$900 million in a straight infrastructure acquisition?

Certainly, it would endanger the NBN business model by creating a new competitor capable of offering the same HFC-based broadband services as NBN Co will offer over Telstra's HFC network.

But it would also deliver the kind of competition that the Coalition has long clamoured for — and whose absence formed a significant part of the Coalition's long-running indictment of the NBN's necessary monopoly status. Healthy competition between a TPG-owned HFC network and the NBN's HFC leg would offer perhaps the best chance of improving services all around, because it would prevent both companies from allowing their HFC networks to coast with minimal investment and languishing performance.

There's no telling whether it will actually happen, but it's clear that the alternative direction posed by NBN Co's new strategy — based, as it is, on technologies that can be bettered by a rival operator offering fibre infrastructure — is opening the company to new threats that could pay off in very interesting ways.

TPG waited until it was clear that the Coalition government was going to cripple its NBN vision, then jumped on the MDU opportunity with both hands; can it then be long before it or other rivals draw more blood by exploiting the soft spots that the MTM has exposed?

What do you think? Would it ever work? Could TPG make it happen? Will HFC ever get the boost we've been promised? Or is the Optus HFC network's fate already too far gone to rescue it now?