Why is broadband an issue in Australia's election?

WELLINGTON: Australia's conservative opposition pledged on Tuesday to scrap the Labor government's planned $38 billion high-speed broadband network in favour of a cheaper and smaller private scheme, if it is elected.

With polls predicting a close vote on Aug. 21, the pledge throws doubt on a $10 billion deal by dominant phone company Telstra Corp to provide its infrastructure to the government's broadband scheme, and could shake up Australia's telecoms industry.

Why does Australia need a fast internet plan?

Australia has a slow and expensive Internet service by international standards, and this has often frustrated voters, especially those isolated by the country's vast distances and rugged terrain.

Labor made its pledge to bring high-speed Internet to more than 90 percent of Australian homes a key plank of its 2007 election campaign.

The planned A$43 billion National Broadband Network (NBN) would be a boost to the government and would also help business investment, directly supporting economic growth during the rollout.

The government and Telstra had been at loggerheads over the plan, even leading to threats of a government-enforced breakup of the company if it failed to cooperate, before a deal was struck in June.

But with an estimated 1.5 million Australians holding Telstra shares and the government's Future Fund, set up to help meet the cost of future pension payments, holding another 11 percent, the government was also under pressure to strike a deal.

What are the two parties offering?

Labor's A$43 billion plan involves a state-owned National Broadband Company overseeing the network build, before the government's stake is sold down five years after completion.

The NBN will be a mostly fibre-optic based wholesale network, providing services on the same basis to Telstra as to smaller rivals such as Singtel's Optus, iiNet and TPG Telecom.

NBN Co has begun designing and testing the network, and has asked for tenders from some of the country's largest infrastructure players, including Telstra, Downer EDI , UGLand Leighton Holdings.

Telstra agreed to provide its fixed-line network as a basis for the NBN in exchange for A$11 billion in long-term payments.

The opposition has opposed the NBN from the outset as too costly and inefficient, and pledged to scrap both the NBN and the Telstra deal.

It said its own plan will cost a maximum A$6.3 billion over seven years and will rely on private companies to roll out a mix of satellite, fibre-optic and wireless technology across the country.

What do the options mean for Telstra and the industry?

Analysts said an opposition victory would be the best outcome for Telstra and its shareholders. While Telstra's earnings from its fixed line phone network have been steadily falling, it is still the dominant player in the market.

Assuming no other changes to government regulation, Telstra can still use its size and "vertically integrated" structure to be a major player in network, wholesale and retail services.

"The A$11 billion of compensation that is currently on the table from the Labor side is not enough to compensate for loss of future profitability," said Theo Maas, an investment analyst at Arnhem Investment Management.

"The (opposition) plan would be a better alternative from Telstra's stock price perspective."

However, if the deal was scrapped, the firm would not be entitled to compensation as its deal with the government was only preliminary.

If Labor wins, Telstra faces life as a smaller company without the network arm. However, the company has said it will use some of the A$11 billion windfall to make acquisitions and analysts fully expect Telstra to remain a major force in the market.

Telstra aside, the remainder of the telecommunications market is likely to be backing Labor in the election.

If the NBN is built and Optus, iiNet and TPG Telecom compete with Telstra on the same basis for network services, then the retail market will come down to pricing and product innovation.

The challengers believe they will be more nimble and able to adapt to the new marketplace, as opposed to Telstra which will likely be burdened for many years with the complicated splitting out of the network.