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NBN Co’s gain is the retailer's loss

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Australia is still waiting on a broadband network that can match speeds boasted by many other countries (Image via Flickr)

Changes in marketing have led to a profit for NBN Co, but there are still plenty of economical and technical bugs to iron out, writes Paul Budde.

NBN CO HAS MADE its maiden profit and obviously, the company was very pleased with this achievement, since some of it was due to lesser payments to Telstra and Optus and some changes in accounting standards. Also, in order to properly measure the jubilations, it is good to remind ourselves that over the years, the bar for the revenue targets has been lowered several times. So the target that has now been crossed is significantly lower than the original projections. Nevertheless, let’s congratulate the company with this achievement.

However, as we have heard now for over a year, this has been at the costs of the margins of the retail service providers. NBN Co’s high wholesale prices have squeezed margins for some of them to close to 10%. Companies such as Telstra were used to margins of 30-40%. Without any wholesale infrastructure competition, NBN Co can simply force these players through its monopolistic system to pay higher prices. As we all know, in this way monopolies can be used to print money — there is no escape.

So it is not coming as a surprise that Telstra’s shocking results of a nearly 40% slide in net profit and a nearly 4% slide in revenues for FY2019 are blamed on the actions of NBN Co.

Let’s have look at some of the underlying reasons for all of these developments.

We have heard a lot about the fact that the NBN is often classified as second-rate. Obviously, an important reason is that when the NBN was launched in 2009, we were promised a full fibre optic network and everything less can’t, of course, be as good.

But there are also other measurements that we can use to make judgements about the quality of the NBN.

In a previous article, I crossed swords with the founder of PIPE Networks, Steve Baxter. However, this time we are on the same side of the argument when he told the recent Conservative Political Action Conference (CPAC) in Sydney that the NBN – in comparison with overseas networks – is slow, that it is costing too much and that it in its current format is undermining competition. Yes, you are right, you did hear this correctly — this time it was the ultra-conservative Government supporters who booed the NBN. This has, as far as I know, never happened before.

Steve mentioned that this development is rather counterintuitive as the NBN costs more, but, at the same time, the speeds that you are getting are lower than in most comparable economies.

In its ACCC submission, Vodafone’s Matthew Lobb came to a similar conclusion. He stated that it is hard to believe that after spending $50 billion the company offers its basic service at the speed of a meagre 12 Mb/s. While this might have sounded acceptable a decade ago when the NBN was launched, at today's standard you can hardly call this a broadband service anymore.

This roughly happened at the same time as the Government’s own Infrastructure Australia criticised the NBN as one of the weakest elements of Australia’s infrastructure projects because of its high costs and low speeds.

And all still in the same week, NBN Co CEO Stephen Rue lamented the industry criticism and mentioned that NBN Co needs strong revenue streams.

I think we are now getting to the core. The NBN is costing far too much for the quality it is delivering, the revenues are now needed for both paying for those extraordinary high costs and, on the top of that, for the next level of investments needed to bring the NBN up to global standards.

NBN Co, being a monopoly, tries to get customers to pay as much as possible for their NBN service in order to create these revenues. It looks like the way they think is “let's start with a really crappy service so people will be forced to spend more for a real broadband service”. The problem is that the low entry service is already expensive in comparison to international products based on what you get for it. 

International entry-level services are now typically being around 25 Mb/s and in the leading broadband countries, this is already standing at 50 Mb/s. Furthermore, the higher speed levels in those countries are often priced at incremental rates rather than something like double the price in Australia. Having said this, it was good to hear from NBN Co that despite the costs more Australians are now starting to take up the 50 Mb/s service.

Because of the precarious financial situation of the NBN, providing infrastructure-based competition has been made increasingly more difficult through Government regulation. This varies from outright banning infrastructure-based competition for fixed retail services to charging broadband taxes to competitors who are using alternative infrastructure. There is a real conflict of interest between the Government being the owner who should look after the national interest and the regulator of the NBN trying to maximise its financial outcomes.

Some of the early infrastructure regulatory decision could be warranted if, indeed, the Government had implemented the FttH network. It doesn’t make sense to have competing retail-based FttH networks. However, with a second-rate NBN and others willing to build better alternatives, those regulations should not apply. This is hampering the developments of better quality infrastructure in Australia, how silly is that?

At the time, the Government also refused to take a holistic approach to the telecoms market taking all technologies into account. They decided to leave mobile out, but then put conditions on it that it can’t compete with the NBN.

Looking at the way the NBN has been kicked around as a political football, it is no wonder that we ended up with a second-rate network. Because of the high costs and the financial problems, the NBN is facing, consumers are punished by either getting affordable second-rate speeds or they are slashed with high prices if they want to use real broadband. None of this was ever the intention of the people who envisaged Australia’s broadband future at the start of the NBN, now more than a decade ago.

Listen to Paul Budde discuss the NBN fiasco on ABC AM with Sabra Lane here:

Paul Budde is managing director of Paul Budde Consulting, an independent telecommunications research and consultancy organisation. You can follow Paul on Twitter @PaulBudde.

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