MARK GREGORY
September 26, 2016

NBN business model falling apart

NBN Pricing

NBN business model falling apart

This is a node: An FTTN cabinet

The telecommunications industry has delivered the Coalition Government and NBN Co a sharp rebuke over the current business model for the National Broadband Network (NBN).

The NBN is a nation building project that has been hijacked by politics and the fallout is slowly gaining momentum. Aspiration is a key to the potential for success or failure and there has been a constant undermining of the aspirational factors underpinning the original concept for the NBN.

For the telecommunications industry the NBN was supposed to provide a level playing field with reasonably priced wholesale bitstream products delivered over first rate access network infrastructure that was not owned or operated by the incumbent telco, Telstra.

Under this model the NBN would precipitate a new digital era for residential and business consumers by delivering access to government and business services and applications over world leading future proof technologies at reasonable prices, underpinned by a national uniform wholesale pricing regime.

Australia would become a leader in the global digital economy and everyone would want to be a part of this digital revolution.

It could be argued that the NBN was a mistake, but that circumstances made it an imperative. We don’t have to look further than New Zealand, where the network infrastructure part of Telecom NZ was split off as Chorus, to see what should have happened in Australia.

Telstra did not split into two separate companies, even though both Coalition and Labor Governments, in the mid-to-late 2000s, were advised that this was the best option available. The UK Government is similarly torn today with indecision about whether or not to split BT and Openreach into two separate companies.

For Australia, building the NBN was the next best option, and NBN Co was tasked with building the NBN whilst achieving aspirational objectives that would encourage consumers to connect and the telecommunications industry to build an NBN centric product offering.

The Coalition Government has done nearly everything possible to undermine the NBN. This is understandable given that its pre-2010 policy was for the NBN to be halted at the first opportunity. The fact that the Coalition Government has put forward no viable alternative approach highlights the malaise into which the telecommunications industry finds itself.

As the responsible Minister at the time, the Prime Minister Malcolm Turnbull put in place a number of expectations that NBN Co would struggle to meet. To date NBN Co has not achieved any of the Government’s early demands for cost savings and an increase in the speed of the rollout. It is now apparent that Australia will end up with a second rate NBN at higher cost and similar delivery date as the original first class NBN.

By hitching his wagon to FTTN and sticking to the furphy that all we need is 25/5 Mbps, Mr Turnbull commenced the unwinding of NBN Co’s business model. As a result it will be increasingly difficult for NBN Co to meet future revenue targets without further government intervention. The introduction of FTTN and HFC has also undermined one of the NBN principles, which was to remove the future revenue that Telstra received for infrastructure operations and maintenance.

The potential competition issues that might lead to Telstra gaining an unfair advantage were highlighted recently by the Australian Competition and Consumer Commission (ACCC) Chairman Rod Sims when he said: “NBN Co and Telstra have said that one of the benefits of these commercial agreements [FTTN and HFC remediation] is that it will facilitate a faster rollout of the NBN, which the ACCC acknowledges, but we also recognise that there are potential competition implications and the effect of these on end users is just as important.”

A uniform all fibre access network providing a guaranteed 100/40 Mbps to 93 per cent of premises is an easy sell. It is truly aspirational and it is unsurprising that more than 70 per cent of Australians continue to support FTTP.

NBN Co’s pricing model includes an Access Virtual Circuit (AVC) monthly charge that is best equated to a speed tier connection fee and a Connectivity Virtual Circuit (CVC) charge that is equivalent to a usage fee. Based on the decision to adopt the speed tier and consumption pricing model, NBN Co introduced five speed tiers ranging from 12/1 Mbps to 100/40 Mbps.

In keeping with Australia’s existing telecommunications pricing regimes the speed tier and consumption based pricing model adopted by NBN Co means that if you want faster speeds and more data then you pay more.

The problem with this pricing model is NBN Co is trying to emulate a retailer. The result is the potential for the pricing model to be overly complex and easily unbalanced. NBN Co set AVC and CVC speed tier and usage charges too high initially, resulting in a majority of consumers opting for 12/1 or 25/5 Mbps.
The CVC charge has been reduced twice and is now $15.75 per Mbps per month, and the telecommunications industry has taken aim at the CVC charge with a concerted effort to have it substantially lowered.

An NBN spokeswoman told Fairfax that the pricing model was designed to permit CVC charges to be reduced as demand for bandwidth grows. "We continue to review our pricing structure to ensure it supports uptake and usage, and meets our obligation of providing broadband at affordable prices," she said.

For smaller retail service providers that offer “unlimited” usage plans, NBN Co’s pricing model leaves no wriggle room and very small margins. It is unlikely that NBN Co’s pricing model is the only reason behind just three companies taking 83 per cent of the existing NBN market, but it must in some way be contributing to this uncompetitive outcome.

Telecommunications executive Bevan Slattery told Fairfax on 21 September that "Australia will have not only the most expensive broadband in the developed world but also the least utilised as users will not be able afford to use its potential.”

For NBN Co, access seekers and retail service providers to achieve reasonable revenue based on the existing AVC and CVC charges there is a need for consumers to move to higher speed tiers and usage.

But this is not going to occur because consumers have become concerned that their being asked to pay for a service that they will not receive. By introducing FTTN into the NBN, about 20 per cent or more of the 11.9 million premises will not receive 50/20 Mbps and for the remainder there is a reluctance to pay for the 100/40 Mbps speed tier when they might only receive a small increase over the 50/20 Mbps speed tier. Add to this the poor reliability and congestion problems faced on FTTN and the outlook is bleak.

Speaking to Fairfax on 22 September, Vocus Communications CEO Geoff Horth said that “NBN Co should adopt the flat rate broadband access charges used in New Zealand by the country's provider of fibre to the premises, Chorus.”

In New Zealand, Chorus, the wholesale company formed as a result of the Telecom NZ split in 2012, is rolling out FTTP to about 70 per cent of premises and charges a flat wholesale fee of NZ$40 per month per connection with no usage charge. As a result of the reduced pricing complexity and removal of the usage charge about 70 per cent of premises have connected at 100/40 Mbps. A key difference between Australia and New Zealand is the increased New Zealand Government contribution to the rollout, whereas here the Australian Government contribution has been capped at $29.5 billion with the current rollout expecting to cost about $64 billion.

For the NBN to be considered a success in 2020 there is a need for 80 per cent of premises to be connected and more than 60 per cent of premises connected at 100/40 Mbps or higher. For this outcome to be achieved there is a need for the Coalition Government, NBN Co and the ACCC to work together to implement a New Zealand style approach.

Dr Mark Gregory is a Senior Lecturer in the School of Engineering at RMIT University.

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