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Telstra and the second rate NBN: The gloves are off

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Telstra CEO Andy Penn has come out fighting against NBN Co (Screenshots via YouTube)

It is becoming clear that the Coalition Government and NBN Co are struggling to save the NBN from a financial disaster, writes Paul Budde. 

AFTER NEARLY a year of diplomatic comments on the need to change the wholesale price of the NBN, it looks like Telstra has had enough.

On a media tour, CEO Andy Penn has made it now overly clear that the wholesale pricing structure of the NBN needs to be changed, in particular in the area known as Connectivity Virtual Circuit (CVC). This is a fee levied by NBN Co for the bandwidth required by the retail service provider to service their customers.

This fee increases dramatically when more customers are added to the network and when they are using more data. This has, of course, been the trend for many years and data use will only increase in the coming years.

This is making the service commercially unviable. The result is that the retail service providers (RSPs) do have to increase their subscription rates to their end users and this will make high-speed broadband use in Australia simply too expensive.

The reality is that customers are only prepared to pay so much and according to Mr Penn, this will force the RSPs to look at alternative infrastructure technologies — such as wireless technologies, including 5G.

As a consequence, Australia now has one of the highest wholesale broadband prices in the world.

However, none of these alternative technologies are well suited for mass market broadband. Good quality fixed broadband is far more efficient for such markets. However, the RSPs will be forced to look at those alternatives if NBN Co doesn’t make structural changes to their wholesale pricing.

The problem the NBN company is facing is that it has spent far too much money on a second rate NBN. Under the requirements of delivering a six to seven per cent return on investment, if the CVC is abandoned, NBN Co will now be unable to deliver true high-speed services in an economically viable way. 

Infrastructure based on fibre optic technologies is far more suited, as the costs of extra capacity needed during data use growth are incremental and, therefore, operators would be able to continue to offer high-speed services at affordable prices.

Furthermore, because the NBN is a monopoly it can simply charge whatever it sees fit and if the company is not budging. A Federal Government decision is needed to lower wholesale prices. The Government will have to accept a lower rate of return and this will create havoc for the NBN financial budget. As discussed in a recent article, this is something the Australian National Audit Office (ANAO) eluded to in its criticism on the Government’s handling of the NBN.

The CVC can thus be seen as an extra NBN tax needed to make the NBN financially viable. Then there is the other broadband tax. The Government is set to introduce a broadband tax of $7.10 per month for users of NBN equivalent services (basically its competition). Furthermore,  another "tax" was suggested: known as the Netflix tax, it is based on extra usage charges for video streaming services.

Looking at all of these constructions, it becomes clear that the company and the Government are struggling to save the NBN from a financial disaster.

A typical tool used by monopolists is to create very complex structures. This is exactly what NBN Co has done with its wholesale pricing. There are a range of different CVC fees for different situations and this makes it impossible for RSPs to optimise their end-user services. This built-in complexity will always lead to a situation where they will have to overpay NBN Co in order to deliver an acceptable service for the user. I am not aware of any other broadband service around the globe that is using this CVC construct. As a consequence, Australia now has one of the highest wholesale broadband prices in the world.

The CVC has been a contentious issue ever since it was "invented" by the company (dating back to the initial NBN initiative under the Labor Government). But as predicted at that time it would really start to hurt the RSPs once data usage started to increase. This clearly is now the case. Over the last decade, the wholesale price has now doubled.

Last week, Optus, Vocus and Aussie BB called for the abolishing of the CVC. Interestingly, a day later, Telstra started its media campaign aimed at forcing NBN Co and the Government to change the volume-based CVC charge. Telstra has also been a long-term critic of the pricing structure of the NBN. However, such a deliberate campaign is unheard of and is a clear sign that after a lot of diplomatic manoeuvring aimed at getting NBN Co and the Government to change the pricing regime, all gloves are now off.

It will be interesting to see if Minister Fletcher will be able to maintain his stand that the Government will not intervene in NBN Co’s pricing. But something will have to give. Either the Government sticks to their demand for 6-7% return on investment, which will force NBN Co to ensure they charge high fees. Or, alternatively, the Government will have to give in and accept a lower ROI, which would allow the company to lower its prices but force a write-down of its NBN investment.

Another worrying development is NBN Co’s mission creep of moving into the business market. At the start of the NBN, it was envisaged that the company would only operate in the residential market. However, in order to satisfy the Government's outlined return on investment, it might need to move into other markets.

The problem for all parties involved – the RSPs, NBN Co and the Government – is that the only real solution is a structural change to the pricing system. everything else is fiddling in the margin and will not deliver the outcome that is needed.

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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