A recent report on the impact of the national broadband network on the broader communications sector makes interesting reading after yesterday’s announcement detailing the complex merger of Seven Media Group with West Australian Newspapers.
International law firm Allen & Overy and telecommunications and media strategist Venture Consulting make it very clear that the NBN is going to be highly disruptive for existing participants in the telecommunications and media sectors, saying the NBN “changes everything”.
While the tone of the report, issued without much recognition last week, is generally highly supportive of the NBN, the authors make it plain that there are some downsides to the creation of a new government-owned wholesale monopoly that displaces existing infrastructure and investment.
Apart from the billions of dollars being paid to decommission existing networks the NBN involves metropolitan-to-regional Australian cross-subsidies, regional broadband service costs embedded in the overall economics of the industry, and access prices and potentially a “cherry picking” levy to deter competition in urban areas.
The report says the NBN will result in a much higher cost per subscriber than previous upgrades to broadband access.
It is obvious that the NBN will gradually render other fixed-line networks, other than fibre backhaul, redundant over time along with the competitive infrastructure that the regulatory regime has encouraged on Telstra’s network.
The NBN will create an opportunity for smaller players and new entrants – like retailers and banks – to enter the sector and aggressively acquire customer bases.
The report says it is likely that the next generation of mobile networks – long-term evolution networks – is likely to be more integrated with the NBN than current technologies and handsets are likely to be configured, allowing consumers to migrate seamlessly from local area networks in their homes supported by the NBN to cellular networks outside.
Mobile operators are likely to bundle re-sold NBN fixed line services, removing the advantages of horizontal integration. The NBN, of course, demolishes the benefits of vertical integration.
Perhaps the most interesting aspect of the report is its discussion about the impact of the NBN on the media.
It makes the point that in the initial phase at least the NBN will be fundamentally a consumer network – with business, schools and other organisations that need fibre connectivity already having it or able to have it if they wanted it.
The report says the prospect of applications for telemedicine, e-health, education and the like operating at a scale that drives NBN capacity usage is very low and that remote metering doesn’t require an NBN.
That means high-definition video for residential applications is going to be the main driver of applications that are incremental as a result of the NBN – applications not supported by current networks. The $43 billion being spent on the NBN is, in the first instance at least, going to be used mainly to allow households to download more and higher quality videos faster.
The report says consumers will need a reason to adopt the high-bandwidth services that are essential to the NBN’s economics and the only mass market service that provides that reason in the mid-term is video entertainment.
It says there may be consumer resistance to a significant increase in average revenues per user NBN Co will need from those new mass market services, which could undermine the viability of the usage-based pricing element of its business model. NBN Co will also generate income through access charges.
It argues that NBN Co will need to bring all existing video services on-net, including free-to-air and pay TV and encourage the shutdown of their transmission networks, otherwise it will be reliant on video-on-demand services.
Traditional broadcast media are already facing some competition from internet-delivered services. The availability and appeal of IPTV and video-on-demand is likely to surge as the NBN is rolled out.
The report believes the economics of the existing networks will remain strong for a long time and it foresees their current transmission networks becoming less relevant over time and eventually being displaced by the NBN.
It also sees the rise of content producers and aggregators directly distributing content to the home, by-passing existing media operators, particularly in the regions.
Foxtel, of course, is already moving towards online delivery of its content through a range of devices. Sporting rights owners, Hollywood movie studios or print media groups could also enter the television space and compete with current players by distributing content via NBN.
If content, particularly video content, is going to be a major determinant of success or at least survival in the longer term in a post-NBN future then WAN’s proposed purchase of Seven Media makes a certain kind sense for both groups.
Today the “old media” – TV and print – relies on distribution oligopolies to protect its economics, although the internet is steadily breaking down the effectiveness of those barriers to entry. In an NBN world it will be NBN Co that monopolises distribution.
Newspaper groups, which have the ability to generate uniquely local content, are already under extreme pressure from internet-based competitors and the free-to-air networks are starting to see similar threats emerging.
Combining to diversify income streams and strengthen ability to generate content could give both kinds of media better prospects for long-term survival as they transition towards a completely digital future.
The other interesting aspect of the report is that the authors have reverse-engineered NBN Co’s business case and its forecast 7.04 per cent internal rate of return over a 309-year period to conclude that by the end of that period NBN Co (if it meets its forecasts) would have an earnings before interest tax and depreciation margin of 79 per cent and a return on equity of 19.5 per cent.
There would, as the report concluded, be a lot of pressure on the government and regulators of the day if it looked like NBN Co was going to achieve anything like those kinds of rents from its monopoly, even if that meant its modest 7.04 per cent IRR target was missed.
This article first appeared on Business Spectator
James was the editor and publisher of SmartCompany and LeadingCompany for five years. He is now the Australian Financial Review‘s companies & markets editor, and a former BRW editor.
