Is the NBN shaping up to be a white elephant?
The National Broadband Network is a huge undertaking, with expected costs north of $40b. While the vision is admirable, the reality is starting to look very untidy.
Competitors such as TPG Telecom (ASX: TPM) and iiNet (ASX: IIN) would like to compete to offer services to high-value customers in metropolitan areas, and the current legislation gives them some scope to be able to do so.
Unfortunately, when it drafted the legislation, the government of the day didn’t appreciate the ability of nimble commercial operators to spot an opportunity and respond to it. TPG for example acquired PIPE Networks in December 2010, and intends to use this network to extend its reach into some of the most attractive parts of the market. The problem is that the NBN needs these highly profitable customers to subsidise the highly unprofitable regional areas it will also serve.
The government must now decide to either change the rules and stifle competition, or allow commercial operators to compete. Allowing competition seems like the “correct” thing to do, but at what cost to the economics of the NBN?
There will no doubt be many more headaches between now and expected completion of the NBN in 2021.
The Montgomery Fund owns shares in both TPM and IIN.
Tim joined Montgomery in July 2012 and is a senior member of the investment team. Prior to this, Tim was an Executive Director in the corporate advisory division of Gresham Partners, where he worked for 17 years. Tim focuses on quant investing and market-neutral strategies.
This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.
john oshea
:
It isn’t their nimbleness or competitive advantages that would enable IIN or TPM to cherry pick locations where they could roll out a NBN for less than the government. It is the higher density, network costs reduce with increased density, this is one of the reasons smaller ISPs are able to have lower DSLAM costs than telstra under current regulation. If it was an open slather then it would be reasonable to assume telstra would win the cherry picking battle given they have the largest infrastructure division, access to the most capital and no commitment to invest in unprofitable infrastructure as they are currently required.
Not much point in only deploying the NBN in cheap to serve areas just because it is cheap to deploy. Many of the NBN benefits are received from synergies with other government businesses and subsidiaries that could potentially reduce remote staffing levels and travel costs under an NBN such as health, welfare and education services. It is a bit foolish to look at the NBN as a singular business given it directly influences the economics of many other government businesses that are funded from the same purse.
Roger Montgomery
:
Thank you John for your considered comments.
Roger Montgomery
:
History repeats….
Kurt atherton
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Vocus seem to be in a very good space. I think being smaller with cash they are waiting for further expansion and there prospects are bright. To me it seems to be rush to get the best buildings an instal as much cable, which will generate future recurring income.