Second tier ISPs may find themselves dominated by Telstra and Optus under the National Broadband Network (NBN).
Yet, if the smaller ISPs thought that Government and regulatory involvement would compensate them on wholesale pricing to even the playing field, they’re in for a cold shower, according to telco analysts.
At the Communications Day Summit in Melbourne recently, Primus Telecom CEO, Tom Mazerski, claimed bigger ISPs that play under Telstra and Optus – what he calls the tier twos - have been sold short when it comes to the NBN.
While Telstra and Optus are walking away with lucrative deals for decommissioning of their copper assets and customer migrations to the NBN, smaller players have yet to be greeted with similar types of compensation, he said.
Telstra’s deal with NBN is worth $11 billion while Optus scored an $800 million agreement.
“There really needs to be a recognition of how tier twos can somehow be compensated for all the good work they have done in this market to bring competition to the level that it is at today,” Mazerski said. “It appears to me that the NBN Co model is this; 'I have to deal with the two Tier ones because they own everything'.”
With so much money lining their pockets, Telstra and Optus have more advantageous market positions which may result in the return of a monopoly or a duopoly in an NBN environment, according to Mazerski.
One of the solutions he proposed to combat the market dominance of the big two is to provide massive NBN wholesale pricing discounts to tier two ISPs.
“That then gives at least the marketing dollars, the redeployment dollars, the capital incentives to keep the tier two providers in the game and get more of them in the game,” Mazerksi said.
No doubt that would be fantastic for tier two ISPs – who can argue with a discount? But that outcome appears unlikely, according to Ovum research director and telco analyst, David Kennedy.
He cited difficulties associated with NBN pricing discounts, including determining how big the discount should be and for how long. Then there’s the hurdle in the form of the Australian Competition and Consumers Commission (ACCC).
The regulator would be very strict on discrimination on certain operators and a discount which excludes the big ISPs can be interpreted as so.
Buddecom telco analyst and director, Paul Budde, agreed it would be difficult to get these kinds of discounts past the ACCC.
“There is a definite threat the new situation could result in yet another heavily dominating Telstra but the regulator will be worried about pre-empting that and regulating prices and so on,” he said. “The ACCC are very much aware of that and what they want to do – which I agree with – is to wait and see what happens.
“If there is too much concentration or dominance of certain players on the NBN then the ACCC has the power to actually make steps and change that and maybe then you will see discounts to wholesale pricing.”
A more productive route for tier two ISPs, according to Kennedy is to strive for compensation for their network investments but even that has some associated challenges.
Once the fibre network comes into play, there will be very little use for existing copper assets.
“DSL assets depreciate quickly so Government would be able to argue compensation wouldn’t be appropriate because of that,” he said. “More fundamentally, the real problem for ISPs is the whole basis of operation is changing – they’re going from a DSL model, which has been profitable to a resale model where the margins are thinner.”
In that kind of environment, scale becomes an important factor. It is one that can determine whether an ISP makes it through the NBN transition phase since it would be hard to maintain a level of profitability without a big customer base.
Internode and iiNet have made a number of acquisitions to boost their customer numbers for this reason, according to Kennedy.
“It is not the Government’s objective to make sure ISPs in the current environment successfully makes the transition to the NBN environment,” Kennedy said. “We should expect to see some operators that will not survive this transition and that’s always the case when there’s a big structural change in the industry.”
- There is a chance of Telstra and Optus retaining their huge market dominance in an NBN environment but the ACCC will unlikely enforce any pre-emptive measures such as wholesale pricing discounts
- Tier two ISPs might find it more effective to push for compensation for their networks but the difficulty lies in the fact DSL assets depreciate quickly
- Some of the smaller ISPs may not make it through the NBN transition phase