Telco private networks could make the NBN unprofitable

Thanks to a terribly slow NBN rollout, telcos are considering making their own networks in highly profitable areas to cash in on the demand for high speed internet. However, market heavyweight Telstra (ASX: TLS) believes they’ll undermine the NBN’s purpose.

Stuart Lee, Telstra’s head of wholesale, believes the recent attempts by TPG Telecom (ASX: TPM) to build its own fibre-to-the-basement network in Australia’s urban areas and CBDs, will make the NBN Co’s network unprofitable. TPG’s network would be rolled out quicker and give customers an alternative to the NBN.

The NBN’s purpose under both governments was to make a profit. It was created to provide the infrastructure necessary for all telcos to offer their services on a level playing field. The network would remove Telstra’s control and ability to offer lower prices by making the government the sole beneficiary of all wholesale rates.

TPG recently said it will go ahead with its competitively priced packages for areas in Melbourne, Sydney, Brisbane, Adelaide and Perth. Ovum research director David Kennedy told the Australian Financial Review TPG’s network will adversely affect the NBN: “It will have a revenue impact and… NBN Co will need to be able to respond competitively to this.”

TPG’s strategy to target only the most profitable users will result in the NBN footing the bill for more costly rural customers. However the previous Labor government put in place laws that forced private networks to be more expensive than the NBN’s.

Mr Lee has raised concerns about using multiple networks, such as those from TPG and Vocus Communications (ASX: VOC), “If you’ve got the expectation that [it is] a wholesale access-type model, which is sort of OK, if they’re all using a different [connection system] and I have to make bi-lateral interconnects with 123 different providers of access networks, then I’m not going to be very thrilled.”

Foolish takeaway

The primary concern for Telstra is that it will have no control over its infrastructure and the ability to provide access to other companies for wholesale rates. However, Telstra is being compensated for the decommissioning of its copper network and enjoys the largest share of the mobile and fixed internet markets, giving it a head start over their rivals. TPG is simply looking to create a competitive advantage by connecting populated areas to speeds of up to 100mbps before the NBN is rolled out nationwide.

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Motley Fool contributor Owen Raskiewicz does not own shares in the companies mentioned here.

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