Telco Deja-vu? Is 5G on the same destructive path as NBN?

Speech delivered by Rene Sugo at CommsDay Congress, Melbourne

Here we are again, almost 10 years after the creation of the NBN concept, on the verge of the next generation of technological change for our industry.

When I started my career in telecoms, I was designing motherboards for 14.4kbps modems. Within a couple of years that had evolved to 56kbps modems and everyone was saying that was the theoretical limit for a pair of copper wires… Here we are today discussing the prospects of the next generation of technology which is capable of delivering multi-Gigabit speeds with sub-millisecond latency – wirelessly. (source)

What a fantastic journey it has been.

Although in my view, we as an industry have not always taken the shortest path between two points on the technological path to enlightenment. NBN being the most recent example. I don’t want to stand here and complain about the NBN, other than to say that while the intention was the best, the combination of politics, industry agendas, mis-information and uncertainty has no doubt taken the NBN journey to the verge of calamity, and it will take our industry another 10 years to recover from its impact.

What I want to talk about today is 5G. Which may be a surprise to many of you that a company like MNF, who specialises in good old-fashioned voice communications, would even have an opinion. Well we do. Not only do we have an opinion, but we have a desire to be a significant participant in the 5G era.

I believe that industry has already taken a wrong turn on the 5G journey, and I would like us to stop and re-asses before it is too late. It appears that the same combination of politics, industry agendas, mis-information and uncertainty has already clouded the path to 5G enlightenment in this country.

If we don’t course correct quickly, then Australian families and businesses will be missing out on the best capabilities that this exciting new mobile technology has to offer. How do I know this? Because they are already missing out massively in the current generation. This is fundamentally because the owners of the mobile networks today lock up key capabilities that would allow broader industry to innovate and compete.

In today’s generation this is justified by the mobile networks because they paid billions for spectrum and network, and thereby they are entitled to lock up those capabilities and limit competition to those that have made similar investments. In a traditional capitalist mindset that is totally normal behaviour. However, from a social, economic, and national interest perspective this is massively limiting Australia’s future potential.

I would like us to delay and even cancel the planned 5G spectrum auction until we have collectively had a chance to reset the compass and plot a journey that is un-encumbered of politics and big corporate agendas.

I believe that we as an industry must use the 5G revolution to empower ourselves to redefine competition and innovation in a way that makes Australia a leader in this space, in a way that provides a true level playing field for all participants, and at the same time makes good the legacy of the NBN. There is a solution, and it is in plain sight, but nobody is talking about it.

The Problem with the Mobile ecosystem today

So, how exactly is the mobile competitive landscape in Australia a problem?

We currently have 3 viable national mobile networks. In the past we have had 4, and more recently it appeared we would have 4 again, but as fate would have it, we seem to be heading back to having 3… and that is not a comment or prediction on the upcoming regulatory outcome for the TPG and VHA merger.

Three networks certainly sound like plenty – that breaks the duopoly concept, provides choice of product, price and coverage. What more could we want?

We also have a bunch of Mobile Virtual Network Operators (or MVNOs), of which MNF is one. These are operators who partner with host networks to implement a diverse group of second tier brands which cater for various demographics and niche markets. All three host networks in Australia have several MVNOs or agency brands operating currently. Once again – it appears that competition is healthy and active, right?

To a large extent yes… the MVNOs in Australia have indeed pioneered many important benefits to consumers. For example:

·     Innovations in customer service – given the need for MVNOs to operate in a low margin environment, they create unique and innovative customer service practices – such as online distribution, self-service portals and apps, and simplified and streamlines signup processes.

·     Innovations in pricing – MVNOs typically operate at a lower price point than their host networks, but they also develop new pricing methods, such as the first pre-paid offerings, voice and data bundles. We would not have these innovations today if it were not for pioneering MVNOs of the past.

·     Innovations in marketing – by focussing on niche customer segments, such as youth and ethnic groups, professional associations and other interesting angles.

And hearing me talk about these things I’m sure you are all familiar with various MVNOs in Australia who have adopted one or more of these approaches to be successful. However, this is only the tip of the iceberg of what is possible within the realms of MVNOs globally. In fact, the Australian mobile market is extremely limiting for MVNOs to innovate due to the way the network operators provide access to their infrastructure. As I mentioned earlier, the network operators are protecting their investments. They do this by only allowing limited access to the mobile technology stack, what we call “thin-MVNO”.

The diagram here shows the different levels at which mobile networks can allow MVNOs to integrate. The more levels of the technology stack the MVNOs have access to, the more creative they can be in terms of product innovation.

Australian network operators provide some of the thinnest access to MVNOs when compared to other deregulated markets such as the USA and Europe. In Australia it is typical that the network operators only allow limited access to customer service, billing & collections, and sales and marketing. 

Why thin is bad

Some common practices of Australian network operators to limit access and competition from MVNOs include:

·     Agency agreements – where an MVNO brand is limited to being a “sales channel” only for the host network. So, customers may think they are buying a different brand, and thereby feel they are exercising choice, but in fact it is just a sales and marketing arrangement and the contract is still with the host network.

For example, you sign up to what you think is a new competitive brand, and only if you look at the fine print do you realise its really the same-old, same-old.

·     Rate plan management – most commonly in Australia, the host networks provide the billing and rating system, allowing them to dictate rate plans and tariffs, thereby constraining what the competitive MVNOs can do in the market.

Data is king, if you own rate plan management you can do creative things. It would enable true customer flexibility so consumers don’t need to pay more than they need to. For example, letting consumers build their own plans, parental data and screen-time controls, to birthday bonus data like Circles.Life in Singapore. And yes, it might be great to have free data to watch the Bledisloe, but how about having free calls and SMS to NZ for an hour after the game and so on.

·     Sandboxing – another interesting strategy where host networks have the requirement to approve all marketing materials, thereby allowing them to constrain competitive MVNOs within a target demographic or region. In turn they effectively sub-segment their MVNOs there by exercising market control.

·     Network clipping – where the host network reduces the effective coverage to the competitive MVNOs so they can maintain a superior service for their direct customers.

This combined with the artificial constraints MNOs place makes it impossible to for MVNOs provide advancements in IOT which could empower smart cities, smarts cars and more importantly giving farmers a choice and access to advancements in tech-agriculture.

·     Functionality reduction – where the host network simply withdraws functionality from the competitive MVNOs so their service remains basic and limited.

Just imagine – You buy your partner new Apple watch for Christmas, and when you go to activate it you realise you have to switch mobile provider back to one of the big 3 as only they can provide servie twinning functionality!

These strategies are all possible because of the “thin-MVNO” concept, where the host networks provide the bulk of the technology stack, and thereby control that stack and what it can do for the competitive MVNO.

This is the mobile market competition you have when you don’t really have competition.

So why does Australia suffer from the thin-MVNO problem?

Simply because there is no regulation forcing the host networks to open up their networks. This is different to for example Europe, where MVNO competition is encouraged by regulators, and MVNOs can get access all the way to the cell towers.

The result is many more MVNOs, and much more market penetration. For example, in 2014 the Netherlands reported 38% MVNO market share, Germany 35%, the UK 18% and Spain 16%. In Australia MVNO market share sits currently at just 11%.

How much more market share could MVNOs take if they had greater access to the technology stack? I guess we might never find out.

Industry in Turmoil

The focus over the last several years for government, regulators and the media, has been on the NBN. It was huge, expensive & disruptive. The problem that for a long time we have lost all focus on the mobile market – much to the satisfaction of the three host mobile networks.

It is interesting now that the NBN process is reaching maturity, there is a sudden flurry of significant activity effecting what appears to be a rapid industry transformation, with mobility at its center of gravity. It is as if industry, government and regulators have accepted that NBN is doomed to its own destiny, and it is time for the next new play thing to distract us all.

And it is all making great headlines - kicked off by TPG acquiring mobile spectrum and commencing a mobile network build, which has now morphed into a potential merger with VHA. It also appears the TPG has decided to protect its crown jewels and withdraw dark fibre wholesale access going forward…?

Another major event is the structural separation of Telstra into retail and InfraCo, and the news it will shed 9,500 staff in an effort to re-invent itself as an innovative software company. Interestingly retail kept the Telstra crown jewels – mobile spectrum, network, and most importantly the cell-site backhaul network.

Similarly Optus seems to be well under way into transforming itself into a sports media company with an integrated mobile access play. It is also undergoing a continuous restructure where it is quietly shedding staff from the “old world” and focussing on the new. Most recently shedding a large proportion of its wholesale business.

And with a backdrop of vendor lead press releases about 5G trials all around the world we are now fast approaching an auction for 5G spectrum, where the government is hoping to pocket $3B of handy budget revenue…

The problem I see here is that once again, this next new play thing, the technology which will dominate our industry for the next 20 years, 5G, is being handed to the big operators without any consideration for a broader and impartial consideration for our social, economic, and national interest needs. Just like what happened when NBN was being created. Enter the Telco Deja-vu!

If we continue on the current path with 5G, we will end up with the same limitations as we have in today’s mobile market – a thin stack for competitive MVNOs to cling to, whilst trying to survive at the whim of the three host mobile networks! It is not a viable and sustainable industry model!

Road to redemption

So, how can MNF, and the rest of the industry participate in the 5G era?

·     There is limited spectrum, and certainly not enough to go around for more than just a few operators, not to mention the affordability for all but a few.

·     We have a huge country where cell-site backhaul is prohibitly expensive. And 5G is a technology where cell-site density will need to be higher than ever to achieve the technical outcomes desired.

How can anyone but the big 3 host mobile networks participate?

Well, there are ways and there are ways.

Firstly, we need to redefine what a mobile service is. The current definition of MTAS is out of step with todays technology, and limits innovative operators in delivering mobile-like services unless they own spectrum and towers. This is limiting Over-The-Top services from providing any-to-any connectivity, and a whole new swag of services from being created.

Secondly, there is no declaration of wholesale MVNO access. So, there is no level playing field when it comes the mobile world. And I would encourage any future declaration of MVNO access to consider the thickest possible level of unbundling of the mobile technology stack – all the way to the cell-site if possible.

So, we can try and massage what we have today through regulations and declarations… But… there is another way… a bolder and more creative way, where we can all work together as an industry to build a national capability for the benefit of all – large and small operators alike. 

Putting the puzzle together

So before I reveal this bold approach, let me circle back on the NBN. The NBN and 5G are intrinsically linked in so many ways we really must not talk about one in the absence of the other. Let us explore these linkages for a minute.

First linkage – the 5G evolution poses a clear and present danger to the NBN business case – in terms of ARPU and in terms of adoption rate. A really successful 5G implementation will definitely cannibalise the NBN. There are no doubts the big three mobile guys are banking on it.

Second linkage – debt v’s revenue – the NBN has amassed a $50B odd liability. There is debate weather that will need to be written down, and who knows a new government may make such a brash move to enliven the NBN. On the other hand, the government is seeking a $3B odd revenue hit from the sale of 5G spectrum. There will no doubt be more 5G spectrum auctions over time as higher bandwidths are released… however I doubt that even over time spectrum will recover sufficient revenue to fill the NBN hole. So, we are now in a net deficit balance sheet for our industry as a whole, and consumers will pick up the tab!

Third linkage – and probably the most pertinent – is that NBN and 5G are technically linked. For this I’ll quote Nokia head of Fixed Networks Federico Guillen who said to ZDNet in February “The deployment of 5G, this is something curious, [it] will depend on the quality of the fixed network in the country. At the end, the 5G network is a fixed network with a little bit of tail of wireless at the end, because you need fibre in every single base station to support the speeds that 5G is committing... So only the countries with good fibre networks, and that could be fibre to the node or fibre to the premises, are going to be able to provide a 5G service. So, all of a sudden NBN is in a fantastic position, because they can provide the residential service, and with the same assets they can provide the wireless service.” (source)

And finally the Fourth linkage – is simply summarizing what I’ve said earlier – that without a level playing field in both fixed and wireless for wholesale access, our competitive service providers will continue to cling for existence to the underbellies of the big three mobile capable telcos.

So, there you have it – the NBN and 5G are the future of our industry for the next 20 years. What we decide over the next 12 months will dictate the future of the NBN, the future of competition, the choices consumers will receive, and the economic and social benefits to our nation.

It is time for us to embrace this reality.

Now let me be clear here – I am dead against the NBN providing cell-site backhaul to the big mobile providers! That is the easy answer. However, that would be the final straw for the competitive telcos and hand the keys to the kingdom to the big three mobile operators. This would not just be Telco Deja-vu, but would also be Banking Deja-vu, and [insert favorite Oligopoly here] Deja-vu.

I am also dead against allowing Telstra’s newly formed InfraCo to merge with NBN. That would take away any skerik of independence that NBN may pretend to have.

However, if NBN were to be transformed into an open access fixed and mobile wholesale network… where all industry participants could get equal access both fixed and mobile handoff, then we have created a new future for ourselves – for the industry, for innovation, and for the nation.

How would it work?

This would be a challenging construct and would take a government with real “conviction” to make it happen, because it would break the mold of what has been done for time immemorial (or at least since de-regulation). It would require us to look past short-term politics and big corporate agendas.

The time to do this is right now – Right now before the big mobile operators spend hard cash on spectrum and network. Right now, that our industry valuations are recovering from the NBN re-price. Right now, before any future NBN refinancing decisions are made. And most importantly, right now, before our country falls further behind in global rankings.

Specifically, it could be as simple as allocating all future 5G spectrum to the NBN, and increasing the NBN’s mandate to provide fixed and mobile wholesale access – at the layer 2 bit-steam level. After all, it’s just another flavour added to the Multi-Technology-Mix right?

The government would forgo its short term $3B revenue hit, and effectively invest that into NBN. The outcome of which will be a higher ROI from the annuity earned over time from all those 5G endpoints. This would provide certainty on the eventual payback or possible future listing of the NBN in order to recover its $50B sunk investment. It would also eliminate any cross-technology cannibalization.

The big three mobile operators could keep their current spectrum allocations and continue to provide 3G and 4G services, and even deploy 5G services within their current allocations. However, for any additional capacity or reach, they would have to rely on the NBN. This would solve the coverage issues faced by TPG, VHA and to a lesser extent Optus. Imagine if every NBN NTU and CPE became a 5G micro-cell? The NBN would take over the black spots funding program and build towers and infrastructure to benefit all of industry, not just one or two players.

I’m sure there are many more details that need to be worked out, and much devil’s advocating to do. So this decision is not to be made lightly, nor quickly. But ignoring this possibility is in my mind folly.

What I propose is that we immediately delay the spectrum auction until we collectively explore what is the best deal for consumers, and the nation.

I propose we give Australia a better telecoms industry for the future – that we break the spectrum oligopoly and unlock the NBNs real potential.