Malcolm Turnbull's Asian roadtrip fails to land a punch on the NBN

By Tony Brown

For those people reading this column unfamiliar with Australian domestic politics let me introduce the Rt. Hon. Malcolm Turnbull, Federal MP for Wentworth.

There is little doubt that Turnbull is by far one of the most impressive people in Australian politics, quite clearly a cut above the trade union apparatchiks that dominate the Labor Party and the plethora of suburban solicitors, accountants and small businessmen that dominate the conservative Liberal Party.

In contrast to so many of his parliamentary peers Turnbull has had one hell of a life out there in the real world beyond the artificialities of political life in Canberra. Formerly right-hand man to legendary billionaire Kerry Packer and also a successful barrister and businessman in his own right he entered parliament in 2004 and rose to leader of the Liberal Party of Australia four years later only to lose the leadership within 15 months.

After losing the Liberal Party leadership to hard-line right-winger Tony Abbott – whose views on a range of issues are anathema to the moderate Turnbull – he was given the portfolio of shadow minister for communications and broadband by Abbott who had already gone on record as saying he wanted to “destroy” the National Broadband Network project and handed that very role to Turnbull.

Getting down to business

After getting the communications portfolio Turnbull tamped down on Abbott’s savage anti-NBN rhetoric and began arguing instead that universal broadband could be better deployed with a mix of technologies rather than a wholesale FTTH/B rollout – although he has so far stopped short of issuing a detailed broadband policy of his own.

The problem for Turnbull though has been the fact that the NBN is popular with regional voters – whose independent MP’s hold the balance of power in ensuring the government’s parliamentary majority – making it very hard for the opposition to stop the rollout of the network.

In his latest attempt to demonstrate the folly of the government’s NBN plan Turnbull has been on a whistle-stop tour of the Asia Pacific region meeting up with regulators, operators and vendors, primarily in South Korea and China, to learn about broadband deployments in the region.

So, what did the shadow minister for communications manage to dig up from his road trip? Well, early reports are limited but he does not really seem to have picked up anything that I could not have told him myself over a coffee at a café in his Wentworth electorate.

All we have heard so far from Turnbull from his regularly updated Twitter account and in the local press is his claim that one of the core reasons for South Korea’s mass deployment and take-up of high-speed broadband is that the government allowed unfettered competition between network operators.

“One of their high priorities is ensuring wherever they can facilities-based competition so that you’ve got a choice between providers of broadband services who have got their own hardware, their own cables if you like, into the basement of your apartment building,” Turnbull said on a Sydney radio broadcast.

Well, with all due respect to the multi-millionaire Turnbull, the first thing I would of ask of him would be to stop cutting in on my turf as an Asia Pacific telecoms analyst, how am I supposed to make a quid when he is giving this stuff out for free?

The second thing I would say is that his analysis of the South Korean broadband market is not necessarily incorrect, there is clearly evidence that the low-pricing engendered by ferocious competition has helped to create consumer demand, but that his analysis fails to address the massive legacy problems caused by South Korea’s network overlay.

Would you like a Toaster or a Microwave?

South Korea effectively has four near nationwide separate broadband networks in place, with networks being run by KT, SK Broadband, LGU+ and the cable MSO’s – all in a market of just 16 million homes and 45 million people.

I don’t know if Turnbull popped into downtown Seoul to see the top-brass at KT, SKB or LGU+ during his trip but if he had done so I am sure they would have told him in no uncertain terms that life in a multi-network operator world sure isn’t what it is cracked up to be.

Indeed, Turnbull, a devoted lover of all things online, need only have done a quick Google search for “Korea telecoms marketing costs” to find out that South Korean operators are locked in a perpetual marketing war for subscribers – in both the mobile and broadband sectors – that is costing them a fortune and has already prompted the government to try and step in and curb operators marketing excesses.

As Turnbull correctly pointed out there are many residential buildings in Seoul where subscribers can indeed access broadband services from four different network operators. That is great news for the lucky subscriber but bad news for the telco which is then forced to slash prices and offer “incentives” to subscribers to take their service.

Not only is the marketing war costing operators tens of millions of dollars in crazy subscriber acquisition costs as they battle for high-speed broadband subscribers but the hyper-competition is starting to threaten Korean operators position as the leading lights in the regional broadband market.

For example, broadband operator SKB spent a quite staggering KRW328 billion on marketing costs in 2010 – representing 15.6% of its total annual revenues – down from an even more eye watering KRW413 billion in 2009.

As a result, senior executives at SKB and even KT have told me that they see little point in upgrading their broadband networks to new technologies such as WDM-PON that will deliver ubiquitous 1Gbps services because the crazy and relentless marketing wars make it very difficult for them to make a return on their investment in upgrading their networks.

What’s more, South Korean operator executives say that they are now so busy fighting to hold or win market share that they are not able to focus as much as they would like on deploying the new services and applications that will help deliver new revenue growth.

Network operators versus service providers

The key argument here – albeit a slightly disingenuous one by Turnbull – is that the South Korean model provides competition which in turn sparks take-up of services whereas the NBN provides a monopolistic approach that should not be welcomed in the free market.

The key point of difference here is that the South Korean model provides competition on a network operator level only – not on the service provider level – so there really are only four operators offering services in the South Korean market.

By contrast, the NBN is indeed going to be monopoly network operator once Telstra and Optus close down their DSL and HFC networks but – and here is the crucial factor – the NBN will be an open access network that is open to any retail service provider that wants to offer services and the early signs are that there will be plenty of service providers on the network.

Therefore, does it make more strategic sense for a country to have four private companies roll out separate high-speed broadband networks using FTTH/HFC/DSL and then spend most of their time and energy under-cutting each others’ prices and luring subscribers with toasters, microwaves and cash-back deals or does a single NBN approach make more sense?

The NBN plan may have its faults but it will certainly allow for far more service providers to enter the market than is the case in South Korea where unless you have the funds to rollout your own network then you are not going to be offering services to anybody because none of the operators are ever going to allow independent service providers access to their networks – for pretty obvious reasons.

In the Australian context Turnbull appears to be arguing that in the absence of the NBN – and it is hard to tell his exact position in the absence of a clearly outlined broadband policy – local operators should be allowed to follow the South Korean example and rollout networks where and when they please, purely in the name of diversity and competition.

The problem with that, of course, is that there are only two Australian telcos with enough financial muscle to deploy significant fixed-line infrastructure – Telstra and Optus – and neither would be willing to build out new networks unless the government could guarantee them that they would not be forced to open up the new networks to third-party players – a guarantee that government’s have been unwilling to give.

What’s more, even if other network operators came into the market then they would almost certainly roll out networks in the upscale inner-city areas of the major cities, leaving the outer suburban and regional areas at whom the NBN is primarily aimed out in the cold with either Telstra’s existing DSL services or dependent on unreliable wireless broadband.

The future is never easy to predict in the telecoms market given the fast-moving pace of change but there are a couple of things I can predict for certain, firstly, as a telecoms analyst Malcolm Turnbull makes an excellent politician and secondly if we ever see NBN retail service providers handing out free toasters and microwaves to attract subscribers then we are all in real trouble.