The Australian government reached a deal yesterday with the nation's two largest telecommunications companies, Telstra and Optus, bringing the government's rollout of the National Broadband Network closer.

The National Broadband Network (NBN) is a 10-year project spearheaded by the Australian government to replace the increasingly obsolete copper network with a new network that will provide connection of up to one gigabit per second to premises in Australia.

The NBN is wholesale-only open-access data network under construction in Australia by NBN Co. The network will use a combination of fibre to the premises (FTTP), fixed wireless and satellite technologies. NBN Co. aims to roll out fibre to 93 per cent of Australian premises, with the rest to be served by a mix of fixed wireless and satellite.

NBN Co. will wholesale connections on its network to retail service providers (RSP), who will then sell Internet access and other services to consumers.

The project was first announced by the Rudd Government and the continued by the present Labour government led by Julia Gillard.

The project is due to be finished in 2021-22.

Money involved?

Telstra will receive $11 billion in "post-tax net present value" to shut its copper network over the next decade, shift customers to the NBN, and allow access to its cable ducts. This value will not be in the form of an upfront payment, but is the present value of payments to be received over many years. This value is also subject to a range of dependencies and assumptions over the life of the agreements.

Telstra will receive a $500 million break-up fee if the agreement is terminated by the Australian government, which could be possible if the opposition wins in the next federal elections.

Optus, the nation's second largest telecom firm, will receive $800 million in "post-tax net present value" for dismantling its cable network and moving 500,000 people to the network. Payment will be received progressively on migration.

The network is estimated to cost $35.9 billion over its 10-year construction, with the Australian Government investing $27.5 billion.

Fate at hands of shareholders?

Telstra chairwoman Catherine Livingstone said the definitive agreements require approval of a majority of shareholders, with the vote scheduled for the Company's annual general meeting on Oct. 18 in Sydney.

The agreements are also conditional on the Australian Competition and Consumer Commission's approval and satisfactory rulings from the Australian Taxation Office. The agreements also contain various termination rights, including rights relating to agreeing an implementation plan and the market environment in which the NBN is expected to operate.

The deals and the NBN project itself could still be scrapped if the Coalition party wins at the federal elections in 2013. The Coalition has been objecting to the NBN, saying that the government would save $18 billion if it scraps the project.

What's in for Telstra?

Telstra said the agreement will provide replacement revenue, through disconnection payments as the rollout of the NBN occurs, and new revenues, through access payments for the use of Telstra's infrastructure over an assumed average 30 year period.
Among other things, Telstra has agreed to disconnect, progressively, copper-based services, and will migrate its services onto NBN-based services, over the expected 10-year build period of the NBN. Telstra will provide NBN Co with large scale access lead-in-conduits and ducts and other infrastructure. The term of the infrastructure agreement will be between 35 and 40 years from commencement, plus two 10 year options to extend exercisable by NBN Co. The infrastructure will be taken over the course of the NBN rollout and payments made for an assumed average period of 30 years.

Telstra said it expects to incur these cash expenditures: $0.9 billion for necessary work on infrastructure and customer migration costs; $0.6 billion for necessary work on infrastructure and maintenance activities; and $0.5 billion incremental operational expenses, spread over 10 years.

Given the projected phasing of the NBN rollout plan, the impact of the agreements on Telstra's financial profile in FY12 is not expected to be material.

"The decision to participate was made on the basis that the proposed transaction is expected to provide us with the ability to recover more value for the business than the available alternatives, given the loss of value after the NBN policy announcements, Telstra's chairwoman said.

Market reaction to Telstra's $11 billion agreement with NBN Co was mixed. According to The Wall Street Journal, some investors welcomed the revelation that major access payments would come early, while others remained wary of the hurdles yet to be cleared and the inevitable shrinking of Telstra's earnings profile.Shares fell after the deal. Some analysts said this could be attributed to new information that Telstra would be required to spend $2 billion to support the NBN agreement. While some said that the weakness reflected concern over major hurdles that still needed to be cleared for the deal to be closed.

Moody's Ratings Services put Telstra's ratings on review for a possible downgrade. "The move to put Telstra's rating on review reflects concerns about the extent of margin compression after the company loses its monopoly operating position", says Ian Lewis a Moody's Vice President and Senior Credit Officer.

"If the deal proceeds as currently outlined, the company will start operating on the same footing as other alternate network providers, substantially lessening its current fully integrated nature, dominant market position and leading to progressive material margin compression to the extent that the NBN is rolled out", Lewis adds.

Level playing field for Opus?

Optus will begin the progressive migration of its customers to the NBN once the network is rolled out in an area and is ready to provide services to customers currently served by Optus' HFC network.

Optus and NBN Co expect that the initial migration of customers to NBN infrastructure will commence in 2014. The program is expected to take up to four years to be completed across Optus' entire HFC footprint. Optus will continue to supply services to customers using its HFC network until the NBN is built and customers have been migrated.

Paul O'Sullivan, Optus Chief Executive said, "Optus was born in competition. This deal supports the NBN to create a level playing field for all telcos. Australian consumers will be the winners.

"This agreement represents a fair deal for Optus. We intend to use the NBN to turbo-charge competition and to deliver the full potential of a 21st century digital life to customers," O'Sullivan said.

Monopoly gone, another monopoly emerges?

Mike Quigley, NBN Co. Chief Executive, believes that the NBN will provide a true level playing field for retail broadband services.

The Prime Minister, Julia Gillard, says the Telstra deal was as a landmark economic change as it would lead to lower prices due to competition. She said, "We've also achieved the structural separation of Telstra, a major microeconomic reform which eluded the former government and which means that we will be able to have proper competition so that consumers of broadband will be able to see the benefits of more choice, cheaper prices and faster services," Ms Gillard said. "Wherever you look in our economy, wherever you look around the world, competitive markets are markets that give consumers more options, more choice and cheaper prices."
Though the deals with the two telcos would be a great leap for the NBN project, the opposition and other parties voiced opposition to the deals, noting that it will stifle other internet technologies.

Under the deal, Telstra has agreed not to promote wireless internet services as a direct substitute for fibre for two decades.
Malcolm Turnbull, the Opposition communications spokesman, called the deals "extraordinarily reckless". While the deal loosened, Telstra's monopoly, it hampered competition between different types of technology, he said.

Tony Abbott, leader of the Opposition in the Australian House of Representatives, says the government is throwing about $12 billion not to improve services but to take out telecommunications infrastructure, according to reporting by The Australian's Jennifer Hewett. Abbott added, "As a result of this deal, perfectly good HFC cable is no longer going to be used," he says. "And I just think that's a very bad thing. What the government is doing, it's analogous to closing down a free road to make Australians use a toll road."
The nation's third-biggest telco, AAPT, and other ISPs, are also worried that they may not obtain the same deals for transferring customers onto the NBN.

According to The Australian, former Telstra chairman Bob Mansfield noted of a risk of "traditional monopolistic behaviour" by NBN Co, although there should be competition between retailers. Former Telstra executive Bill Scales said the deal would put a huge burden on the competition watchdog to scrutinise the NBN Co's pricing.