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The NBN monopoly attempts to defend itself

This is another post in a series of posts on the ACCC telecommunications Market Study.

Your can read previous ones here and here.

In this post I will finish off commenting on NBN Co’s supplementary submission which I covered in my previous post.

This supplementary submission was lodged after the ACCC hosted a stakeholder forum to hear views from the industry on the issues facing the telecommunications sector. A summary of the stakeholder session produced by the ACCC is available here.

In its supplementary submission, NBN Co re-inforced many of its points from its earlier submission in November 2016.

NBN Co still does not believe it has substantial market power

NBN Co continues to claim a range of substitutes threaten NBN Co’s business. Fixed wireless networks from Spirit Telecom and Superloop along with users relying totally on mobile broadband services are already constraining NBN Co. 4G and 5G improvements are likely to increase this trend.

A range of non NBN Co fibre operators (TPG, Vocus, LBN Co, Opticomm, OPENetworks and Spirit are listed) are constraining NBN Co with predictions of 380,000 active connections by 2022.

Despite the nascent and small natures of these constraints (380,000 active connections is less than 5% of NBN Co expected total active connections), NBN Co wants the ACCC to protect it further by extending the existing monopoly protection regulations the ACCC put in place to infrastructure providers with less than 12,000 end users and bring fixed wireless and mobile operators into the Regional Broadband Scheme to help fund NBN Co’s loss making networks.

RSPs are not playing ball in retail markets

NBN Co again has a shot at Telstra, Optus, TPG and Vocus for having significant pricing advantages in retail markets because of their self-owned backhaul networks to NBN Co’s PoIs. As in its earlier submission, NBN Co raises the potential of these “vertically integrated retail providers” creating a margin squeeze on their “non-vertically integrated” competitors. Again the implication is that the four major RSPs are extracting economic rents from their self-owned backhaul networks (rather than suffering their own margin squeeze).

Not surprisingly, the old chestnut of allowing NBN Co to enter this market and provide aggregation services to smaller RSPs to a smaller number of capital city PoIs is raised to enable more competition.

The RSP “land grab” and focus on simply shifting ADSL and cable customers rather than upselling the NBN gets another expected run.

Response to concerns raised in industry forum mainly focus on CVC pricing

However, the majority of the submission is reserved for responding to concerns raised during the Market Study Forum hosted by the ACCC and in particular the controversy over the CVC pricing.

My previous blog covered part of this as well.

NBN Co lays out a detailed 7 point list of reasons why the CVC pricing approach it is taking is justified.

1.NBN Co is incented to set CVC prices efficiently of its own accord

NBN Co argues that the limitations placed on it by the Special Access Undertaking ensure that it will price the CVC effectively. It is in NBN Co’s interests to set the price so as to ensure adequate demand for its services. NBN Co “should not be subject to intervention” as it will be motivated “to set a fair price ensuring adequate demand and cost recovery”.

In particular NBN Co states (emphasis added) :

nbn‘s incentives to price appropriately to achieve its permitted returns through its CVC pricing are clearly already operating effectively, especially during this current loss accumulation phase.

Or in other words – “everything is going to plan just trust us!”

2. NBN is pricing efficiently

NBN Co highlights examples of such effectiveness. Firstly, it has made recent changes to the CVC pricing structure via the “access seeker-specific dimension based discount model”. It is too early to assess the long-term impact of this new model but initial indications are that it is having the desired effect with increases in CVC capacity per service of 10% on average.

Secondly, more pricing reviews are being undertaken through the Product Development Forum with rebalancing of AVC and CVC charges being considered. Interestingly an increase in the CIR component is being considered to ensure the quality of retail experiences.

The CIR consideration may involve video services being handled like voice services with a higher quality of service traffic class than normal broadband. There are special considerations in the current NBN product model that allows RSPs to bundle voice services with broadband services and ensure that the voice data packets have priority over normal broadband data packets (ie. each AVC has 150kbps of TC-1 bundled for voice).

For video NBN Co is probably looking at bundling an amount of TC-2 traffic with each AVC. This may need to be as high as 5 Mbps for High Definition over the top video. RSPs would need to mark these traffic streams appropriately which may be difficult if they don’t have relationships with the content provider that allow them to identify the traffic (eg. Content Delivery Network dedicated links).

To avoid cannibalising some of its future business revenue it would probably need to do some tricks such as making the TC-2 highly asymmetric or even just one-way.

However, this will not reduce the cost of the CVC paid by RSPs as TC-2 CVCs cost the same as TC-4 CVCs. It actually may increase the overall cost because RSPs will need to dimension separate headroom for TC-2 and TC-4 traffic in their CVC planning which means more bandwidth in total is required than if just the current TC-4 CVC is used.

A rebate on CVC charges for video TC-2 traffic linked to AVCs (like that used for TC-1 voice traffic) would likely just detract from ARPU and be the same as discounting CVCs overall. Why go to all the cost and pain of these design changes if a straight forward CVC discount would achieve the same goals?

A move to CIR for video traffic may increase the quality (especially where the NBN has access technologies subject to congestion such as HFC, Fixed Wireless and Satellite) but it would not reduce the cost without a reduction in the CVC charges.

NBN Co says it is willing to experiment with pricing and “will continue to look for ways to align its interests with access seekers’ interests”.

So while everything is “operating effectively” we have got more ideas that will help everyone coming soon.

3. Countervailing power of customers

NBN Co, echoing previous points, claims that the concentration of buyers of its services (ie. Telstra, Optus, TPG and Vocus) puts it at a disadvantage in negotiations and that this should “obviate the need for concern” regarding CVC pricing.

Competition from existing and potentially new infrastructure providers also constrains NBN Co’s ability to price the CVC in a non-efficient manner.

The ACCC is again being asked to consider that NBN Co does not have substantial market power due to competitors and the market power of its customers. It is hard to feel any sympathy for NBN Co in this line of argument, however it continues to make it over and over again.

4. Consequences of undue attention on NBN pricing

Its’s not all our fault – blame the RSPs!

NBN Co highlights it has only two levers to pull in order to meet its shareholders (ie. the Australian Government and by extension taxpayers) objective to avoid losses on its investment.

RSPs who are seeking lower prices are simply looking to increase their profits at the cost of the Australian taxpayer. This argument seems to rely on the dominant RSPs acting as a cartel and refusing to pass on these lower costs to their own customers. A big claim for NBN Co to make about the Australian industry.

NBN Co asserts that RSPs are looking for it to fund a “race to the bottom” in retail broadband pricing while the RSPs focus on “aggressive marketing campaigns to retain and attain market share”.

These two claims appear to be totally contradictory. One one hand RSPs are looking to boost their profits by not lowering their retail prices and on the other hand there is a “race to the bottom” through marketing campaigns that are too aggressive.

Only one of the above claims can be correct – but NBN Co throws in both just in case.

5. Willingness to pay and margin squeezes

This is the point I covered previously about margin squeezes which you can read in detail here.

6. Common misunderstandings about the effect of CVC pricing

NBN Co discounts criticism that the multi-technology mix (MTM), with its lower speeds, justifies the lowering or removal of CVC pricing compared to the original setting under the FTTP technology model.

Interestingly, in this argument, NBN Co does recognise that “slower speeds can result in lower usage”.

The recognition that slower speeds result in lower usage does imply the reverse is also true – higher speeds can result in higher usage. Of course, the opposite its also true – higher usage results in higher speeds.  These factors work both ways. It is unclear to me what point NBN Co is try to make here.

But NBN Co highlights that :

“[A]ny speed issues on MTM are likely to be far more short-lived than the period over which it will need to recover its initial losses through a CVC charge”.

Or perhaps to paraphrase, if there are “speed issues on the MTM” that warrant a reduction in the CVC, this is just transitory. Speeds will improve at the end of the legacy co-existance period and NBN Co is also looking to deploy G.Fast technology on FTTC, FTTB and FTTN networks which will speed things up to justify the price of the CVC.

This last point gives credence to the point it was trying to disprove – that the slower speeds of the MTM do make it harder to justify the current CVC model. It all seems very circular!

7. Inappropriate benchmarks for pricing constructs

NBN Co takes umbrage at the comparisons with Singapore and New Zealand wholesale access networks where CVCs are not part of the pricing structure.

NBN Co is facing higher initial financial losses that need to be recovered than these other markets due to its mandate to cover all Australians. In particular the costs of the fixed wireless and satellite networks are key drivers of these initial losses.

Singapore and New Zealand do not have the same extent of “non-commercial” services as Australia’s NBN Co and hence the CVC is in some way a response to earning higher revenues to cover this requirement.

This places an interesting slant on the CVC – it links it directly to the extra costs and on-going provision of non-commercial services on the satellite and fixed wireless networks.

The levy proposed under the Regional Broadband Scheme of $7.10 per month on non-NBN Co infrastructure providers was calculated to compensate NBN Co for these same “non-commercial” services. The CVC is on average raising $15 per month per service.

If there is a direct link between the CVC and paying for the fixed wireless and satellite networks then the cost of the CVC should be reduced by about half. It should also not increase over time which is NBN Co’s plan to get to its target ARPU of $52 per month.

Perhaps Australia’s taxpayers would be willing to support the cost of broadband to regional and remote areas directly through general taxpayer obligations like they do with roads, health, education and other services. A write-off of NBN Co’s losses on these “non-commercial” services would achieve this goal and allow a reduction or even a removal of the CVC cost.

Recovery of the costs for these  “non-commercial” through industry specific levies and higher CVC costs drive up the cost of broadband services for everyone. This is leading to a new network that is already “congested” and not being used to its full advantage. The hidden cross-subsidy at the heart of the NBN is not a smart approach to creating national infrastructure for the 21st digital century.

Summary

The fact that NBN Co had to provide a supplementary submission to the ACCC market study after the forum in July 2017 highlights some of the dissatisfaction that exists in the industry with a number of NBN Co positions and the overall NBN policy framework.

The CVC pricing issue is clearly the most contentious and seems to be the lightning rod for most of the protest.

However, the other bigger take-away may be that NBN Co seems to be all alone in the industry with little, if any, support from other participants. This position was previously occupied by Telstra as the wholesale infrastructure monopoly supplier. Now it is NBN Co that is the subject of industry pressure.

The monopoly has moved from one player to another but the industry problems seem to be all too familiar. Complaints over margin squeezes, abuse of market power, costs of subsidising regional services have long been a part of Australia’s telecommunications industry and the NBN appears to have changed very little.

The big test is whether the ACCC will take up the challenge to get to the root cause of these issues (i.e the national infrastructure monopoly) in its review or will the problems of the last 20 years continue to retard Australia digital infrastructure development.

NBN Co points finger at Telstra on CVC “margin squeeze”

This is the second in a series of blogs on the ACCC telecommunications Market Study.

The first blog post covered NBN Co’s initial submission to the the ACCC’s market study back in November 2016.

In this post I look at NBN Co’s recent supplementary submission to the market study in which, amongst other things, it attempts to defend its CVC pricing.

One part of this defence (see section 3.3.5) relates to the claim by some RSPs that the CVC pricing is causing a “margin squeeze”.

With some justification, NBN Co asserts that such a “squeeze” would require NBN Co to be active in the retail market. How can NBN Co squeeze the market when it is just a supplier?

Instead it points the figure at the RSPs who have retail market power which allows them to price profitably at lower prices than others.

Telstra is singled out as having reduced its retail price by 20% on NBN Co’s most popular plan over the last 6 months. By implication, it is Telstra, the “dominant access seeker” who is causing the margin squeeze not NBN Co.

This must induce some rye smiles from some of the employees of Telstra who were continually accused of causing margin squeezes on their competitors during the early days of ADSL broadband in Australia when Telstra dominated the wholesale and retail broadband markets.

The smiles might break into laughter when they remember that some of the same executives involved in the claims and counter-claims are current and former directors of NBN Co.

As CEOs of iiNet and Internode respectively, Simon Hackett (a former NBN Co director) and Michael Malone (a current NBN Co director), had numerous run ins with Telstra on the question of fair pricing for ADSL broadband.

In the 2010 “price squeeze” episode Hackett summed up the problem for IT News as follows :

There is no doubt that this ‘price squeeze’ is due to intentional inaction – as this is the third time (at least) that this has happened since the year 2000, its not appropriate for Telstra to claim this to be either surprising nor hard to understand.

The reason why this matters is that Telstra is, and remains, the unique holder of Substantial Market Power as a monopoly provider of voice and ADSL2+ services for at least half of the entire Australian population. Because of its monopoly status, its activities fall under provisions of the Trade Practices Act through which Telstra has seen ACCC enforcement action via Competition Notices in the past.

It is, however, a clear demonstration that when Telstra speaks of competing ‘fairly’, they are using a different definition of ‘fair’ than I would use.

This is the sort of anti-competitive behaviour that underscores how vital it is that there is ultimately either structural separation of Telstra or the completion of the level playing field of the NBN – or preferably both.

The last paragraph is particularly ironic. Hackett sees Telstra’s structural separation and implementation of the NBN as the ultimate solution.

Malone, in the same article, said :

In our opinion, they are misusing their market power in wholesale ADSL to give themselves an unfair advantage in retail.

That’s one more reason why we need structural reform for the industry.

Hackett and Malone’s previous statements highlight that despite industry reform, we are still seeing allegations of Telstra having substantial market power.

What is even more ironic is that some of the architect’s of Telstra’s original broadband strategies are also on the board of NBN Co – namely Ziggy Switkowski and Justin Milne.

In a recent interview ($$$) for the Australian Financial Review, Milne waxed lyrical about the “fun” he had in the good old days at Telstra when he woke the giant up to the benefits of the internet.


The NBN Co boardroom knows these old industry games all too well.

The easy way out for NBN Co is to continue to blame the old foe – Telstra.

There is no acknowledgement that the squeeze may be a result of an increase in costs to RSPs on the NBN compared to previous ADSL networks. In the large migration from one network to another there is a naturally a need to keep retail prices constant to avoid market share loss by RSPs. The only way to do this, if input costs are rising, is for RSPs to reduce margins and also skimp on CVC bandwidth to reduce their costs somewhat. Customers suffer through lower quality services and RSPs through reduced margins. 

NBN Co seems to be in denial over its affect on retail prices and quality of the service just like it is in denial that it is in fact a monopoly with substantial market power (see previous post).

But whether it is Telstra or NBN Co causing the squeeze, what is clear is that the NBN industry reforms seem to have failed to address the long standing complaints of price / margin squeezes.

May be the same complaints are caused by the same fundamental feature of the market both pre and post NBN – an infrastructure monopoly. This monopoly may have shifted from one company to another but the core problem is the monopoly itself rather than who is the owner or manager of it.

NBN Co’s “demands” to ACCC in telco industry market review

Many readers may not be aware, but behind the noise and drama of the NBN in the daily mainstream media headlines, the ACCC is quietly running a wide ranging Market Study on the telecommunications sector .

The study commenced in 2016 and is likely to be finalised in 2018. It is now coming to the pointy end with a draft paper expected from the ACCC over the next few months. So I thought I would see what has transpired over the last 12 months in anticipation of what could be next.

Industry participants have contributed to this study by written submissions and attending an ACCC hosted stakeholder forum in July 2017.

I was intrigued to see some of the positions being put forward by NBN Co for the ACCC to accept. No wonder the rest of the industry, the industry NBN Co relies on as customers for its wholesale services, is sounding more and more annoyed about a future dominated by NBN Co.

This blog entry covers NBN Co’s initial submission from November 2016. There will be further blogs covering NBN Co’s supplementary submission from August 2017 and subsequent developments.

Here is what I was surprised to find.

Is NBN Co a monopoly with a substantial degree of market power?

NBN Co apparently thinks not.

To quote directly :

nbn faces direct competition from existing network operators that are extending and upgrading their networks with the fixed line footprint and from new entrants. In new developments, nbn faces competition for the market (ie. contestability) for the build and operation of superfast broadband networks.

[NBN Co] faces direct competition from a range of other networks (including fixed and fixed wireless) which provide a degree of competitive constraint. As a result, in many areas and facets of behaviour nbn would not be considered to have a substantial degree of market power.”

In particular NBN Co claims that mobile and fixed wireless broadband operators (of the latter in particular Superloop through its acquisition of BigAir) are competitors that will provide “competitive constraint”.

The message is clear. NBN Co says it is not able to act as a monopolist that will charge high prices and ignore customer demands. It has sufficient infrastructure competitors that will keep it in check and ensure it acts efficiently and effectively.

Given the recent publicity about high prices and customer service problems it seems the RSPs and end users should stop their complaining and just shop around for a better deal! I am not sure they would agree it is all so simple.

Are RSPs competing vigourously in downstream (ie. retail) markets?

Again NBN Co thinks not!

To quote NBN Co again :

“It is worth noting that despite claims of reduced margins there are no instances of failed firms or firms that are unprofitable. This suggests that existing downstream RSPs were previously earning economic rents and have capacity (at least in the short term) to absorb reduced margins.

The present market structure is suggestive of market power being held by the large RSPs and this current market structure is likely to be of material concern to new entrants and smaller RSPs, whose commercial operations could be adversely affected by the behaviour of the large RSPs.”

NBN Co also highlights that :

“Australia’s entire competitive backhaul infrastructure is controlled by vertically integrated firms which compete in downstream retail fixed line broadband markets. This market structure… raises the potential for margin squeeze, in which vertically integrated upstream firms with market power seek to earn abnormal profits by raising their upstream prices”.

In effect, NBN Co is saying that the shareholders of Telstra, Optus, TPG and Vocus should not be complaining about the NBN squeezing their margins (the cause of recent share price falls), rather these four “backhaul oligopolists” are raising prices to the detriment of new entrants and bolstering their profits through economic rents.

Does NBN Co need more degrees of freedom to operate?

You betcha!

Rather than being constrained by its non-discrimination obligations, NBN Co expresses a strong desire to “maximise demand via differential pricing and service offerings that best meet their customer needs”.

“Under the existing regulatory framework, different RSPs face different incentives and have varying abilities to duplicate and bypass the nbn network. To the extent that duplication of natural monopoly infrastructure may be privately profitably but socially inefficient, it is not in the long term interest of end-users that nbn be restricted, by its regulatory framework, from being able to respond to the threat of duplication of its network.

An efficient and commercially rational network operator needs to be able to price its services to create efficient build/buy decisions for relevant industry players. This is particularly important in nbn‘s case, where competing infrastructure is owned by vertically integrated operators who can leverage their presence in the retail market”

Clearly NBN Co is not satisfied with the regulatory interventions made by the ACCC after the advent of the Multi Technology Model that seeks to level the playing field between NBN Co and alternative infrastructure builders. It wants to be able to discount its pricing as well in certain areas and to certain RSPs in order to respond to the “threat of duplication of its network”.

But pricing is not the only lever on NBN Co wish list. It also wants to broaden its product portfolio.

“In this regard, there is simply no justification for ‘legacy’ thinking that contends that nbn should be precluded from competing with private investments, developing products other than last mile connectivity services or seeking the custom of parties other than traditional RSPs. As nbn faces direct competition and is required to operate as a commercial entity, nbn must be able to respond accordingly within appropriate regulatory settings.”

In the market for business services NBN Co says :

“[it] faces competition from vertically integrated unregulated service providers, [and] is placed at a significant disadvantage. This detracts from the long term interest of end-users and reduces social welfare in various respects, including that it :

  • encourages potentially inefficient duplication of natural monopoly infrastructure; and
  • dampens nbn‘s commercial incentives to invest in, and develop, business services.”

Inefficient duplication of natural monopoly infrastructure in the market for business services? This takes the cake! In most cases NBN Co is competing against existing well-established fibre infrastructure deployed by the private operators (Telstra, Optus, TPG and Vocus) over the last 20 years. NBN Co is actually the company doing the duplicating here!

NBN presumably wants the monopoly protection regulations the ACCC has implemented on its behalf in the residential and small business markets to be extended so that it can use these protections to change an efficient functioning market into one more suited to NBN Co’s wholesale market monopoly preferences.

To put it all together, it seems NBN Co is wanting the ACCC to accept the following :

  1. NBN Co does not have monopoly powers, rather it is constrained by competitive wholesale infrastructure providers.
  2. The larger RSPs have been rent seekers all along and they are now not suffering a margin squeeze but expanding their margins by raising the prices of wholesale backhaul services sold to smaller RSPs.
  3. NBN Co needs to be given more freedom to compete with the RSPs in terms of more products and discriminatory pricing against RSP infrastructure builders.
  4. RSPs with established networks servicing business customers directly should be regulated like NBN Co so that NBN Co can build its own duplicating infrastructure to compete more effectively with these established networks.

These are amazing positions to take in a submission to the ACCC on the industry’s future.

Clearly it seems to be a future with NBN Co at the centre of everything.

NBN speeds throttled by business model

The Australian Financial Review published a piece today going into the core issues of the NBN business model and the CVC dramas.

There are a couple of quotes and opinions from me on the fact that this is an economics problem rather than a technology problem.

But NBN Co’s pre-occupation with fighting political battles saying Australians don’t need higher download speeds is conflicting with the necessity of promoting higher speeds to achieve there revenue targets.

This week I published two blogs to cover this topic in more detail.

These blogs are available here and here.

Making the best out of the NBN CVC predicament

Yesterday I posted about NBN Co’s conflict between promoting higher quality broadband (ie. higher speeds and higher downloads) to help it achieve its revenue targets and its political mandate to say Australians don’t really need the higher speeds possible under a FTTP network.

This underlying conflict is making it hard to solve the CVC pricing problem that is now threatening to force NBN Co to write off a large part of its investment in the network.

NBN Co needs to start fully promoting the speed of its network rather than shy away from this issue.

The first step would be to release the database it apparently has on the “theoretical” maximum speeds available to all consumers.

Currently, customers have to rely on their RSPs to obtain information about the maximum speed available. Obviously most people don’t trust this information, especially when it comes from someone who is trying to sell them something. The ACCC has been lax in following up behaviour in this area for years but is now trying to claw this back. It is probably too late and NBN Co needs to get on the front foot.

NBN Co could inform customers of their “theoretical” maximum speeds with the address search tool on its website. NBN Co  is also able to prevent RSPs ordering speeds higher than this “theoretical” maximum speed.

Being more transparent on speeds and making sure customers are not oversold is a no brainer first step for NBN Co to win back some trust from the customer. It would stop more embarrassing situations arising such as Telstra’s forced downgrading of speeds to 8000 customers after they were oversold.

The next step would be for NBN Co to publicly release information about the amount of CVC bandwidth RSPs are purchasing. A relatively straight forward “contention” or “quality” index could be used to benchmark RSPs in different areas.

This could also be made available on NBN Co’s website with the address tool so that a customer can see which RSPs are serious about quality broadband and which are just looking to sell the cheapest low quality plan.

NBN Co must re-orient itself towards consumer protection when it comes to information that is shared with the consumer. The ACCC should support this and any issues around confidentiality and commercial issues should be debunked as soon as possible. NBN Co needs to be more aggressive in standing up for customers and ensure transparency in network dimensioning. Relying on the ACCC’s broadband speed benchmarking exercise will not be enough as this will inevitably be a national result rather than a local outcome related to the customer’s service area.

Thirdly, NBN Co should publicise its plan to reduce the CVC price in line with the increase in average monthly downloads across the network. NBN Co should not be seen to be “gouging”customers because of increased usage due to media streaming consumption or other applications.

Usage increases have minimal impact on NBN Co’s FTTP and FTTN cost structures (but do impact HFC, Fixed Wireless and Satellite networks), so increasing consumption should be broadly revenue neutral.

The whole point of the CVC is not to make more money as usage grows, rather it is the way that RSPs can offer cheaper plans to lower usage customers compared to higher usage customers.

We should remember that customers have no effective choice for their fixed broadband network. If NBN Co has a flat price regardless of usage then low usage customers will move to the only other alternative – mobile broadband. Mobile operators will see this as an extra revenue opportunity and seek out lower usage customers to bring to their networks.

This is not in NBN Co’s interest and will result in mobile networks being congested as they chase the low usage fixed customers.

If NBN Co cannot make the CVC revenue neutral over time and achieve its ARPU projections it should write-off the necessary part of its investment to make this happen. Relying on more revenue as usage increases is a fallacy. The revenue won’t come and the users will find alternatives. The whole point of the NBN hinges on this fundamental issue.

NBN Co’s CEO Bill Morrow has announced ($$$) a review of its pricing structure as part of its image problem fix. But changes to pricing are difficult and will require involvement of the ACCC if drastic changes are contemplated.

The above steps can be done without the ACCC’s sign-off. In fact the ACCC should actually encourage NBN Co to do all of the above to help with its role of protecting consumers.

It will be interesting to see whether NBN Co grasps this opportunity to lead with speed, quality and transparency rather than fight old political battles.

 

 

 

 

 

Is speed NBN Co’s enemy or friend?

NBN Co have got themselves into a bit of a pickle lately with complaints over the cost of the CVC charge becoming louder and louder.

At the heart of this issue is the need for NBN Co to achieve its revenue objective of $52 per month per connection which will give them total revenues of around $5 billion in 2020.

In its last half year results NBN Co’s CEO Bill Morrow highlighted the need to sell higher speed services to increase the average revenue per user (ARPU).

But all the focus is on the cost of the CVC with RSPs complaining that the high cost is causing them to provision less bandwidth resulting in congestion during peak periods.

At the core of this problem is NBN Co’s need for retail broadband plans to have higher prices for higher quality broadband (ie. higher speeds and higher usage limits). NBN Co is expecting the ARPU to rise over time as more applications and services require higher quality broadband. Without this increase in ARPU for higher quality services it is unlikely that the revenue targets set by NBN Co will be achieved.

However, NBN Co has also been messaging to the market that higher speeds are not that important. After the change in the technology mix to FTTN and HFC (as opposed to FTTP), NBN Co has been very loud in saying that higher speeds are not in demand. It has for instance made it very clear that Australians do not have a need for Gigabit services. Of course politics is behind this “no need for speed” messaging so as to justify the move from FTTP to FTTN and HFC.

NBN Co wants higher speeds to increase revenue but is also saying that speed is not really important.

Naturally the market is confused!

Higher speeds are also linked to higher downloads. If customers pay for higher speeds it stands to reason they will also consume more data and hence NBN Co will also achieve higher revenues.

At the moment RSPs are focussed only on selling broadband at the lowest price point they can sustain. This comes from the need to manage a transition from previous ADSL and cable broadband services in a way that minimises risks of market share loss.

Naturally consumers don’t want to pay more at the best of times. The confusion, controversy and contradictory messages from NBN Co makes it even harder for the RSPs to sell higher quality broadband.

The result is most customers going for lower plans. Why lock yourself into a 24 month contract for a higher speed plan when there is no clear guarantee you will get the higher speeds because of technology, congestion and political uncertainties?

NBN Co needs to re-assess its whole message to the market. Does it want to provide a high quality network that drives higher quality applications and services that RSPs can sell at higher prices?

If not then NBN Co will have to be satisfied with lower ARPUs as RSPs demand lower prices (eg. CVC) as they compete with each other on price alone.

The end result of the latter scenario is that Australia will have spent billions of dollars building a network that is reduced to a lowest common denominator marketing message that promotes basic broadband at the cheapest price.

Of course it doesn’t have to be this way.

The first step is for NBN Co to recognise that speed is its friend not its enemy.

 

NBN Co clarifies larger Satellite downloads come from extra spending

NBN Co has clarified, in a response to questions raised by CommsDay ($$$) following my blog post, that the 2nd SkyMuster satellite was not originally intended as a “dormant backup” as per the original NBN Co press release.

Source : CommsDay 12 July 2017

Source : NBN Co

According to CommsDay the NBN Co spokesperson said :

“NBN had planned to adopt a one-to-one load balancing between the two satellites in terms of offering redundancy although the second satellite capability would have also provided some extra capacity in some of the more heavily utilised spot beams. However, in December 2015 we were able to modify our plans to invest around $300 million to extend the fixed wireless and fixed broadband networks, which enabled us to reduce the number of premises to be served in the more heavily populated Sky Muster spot beams.” (Emphasis added)

“This in turn allowed NBN to use our second satellite to primarily deliver additional capacity rather than redundancy and NBN was able to launch commercial Sky Muster services in April 2016 with a fair usage policy that enabled 30GB/month average peak downloads for end-users. With over a year of operations under our belt and some key optimisation processes in place NBN has now been able to further increase the overall capacity available on the Sky Muster platform which has in turn allowed us to increase average peak downloads for end users to 45GB/month,” the company explained.

UPDATE : You can now access the full CommsDay article which has been released on Twitter :

So, based on these statements from NBN Co, the recent increase in average peak downloads from 30GB/month to 45GB/month was primarily as a result of an extra investment of $300 million in the fixed wireless and fixed broadband networks. This has enabled some users to be moved from the satellite footprint to the fixed wireless or fixed broadband footprint.

This contrasts with the original reported comments of Bill Morrow in May 2016 where he said, “It doesn’t make much sense to have a $200-to- $300 million insurance policy up in the sky. So we have repurposed it for capacity.”

In short, the extra capacity is from NBN Co spending more ($300million) rather than the “repurposing” of an under-utilised resource (i.e. the 2nd satellite) costing at least $300 million.

All we need now is for NBN Co to make sure the politicians get this message as well and we don’t have a continuation of the following misleading comments :

Source : Press interview by Minister for Local Government and Territories, Fiona Nash on 10 July 2017 Courtesy : Seven Network

 

Setting the record straight on NBN Co’s 2nd satellite

NBN Co have made some recent announcements about increases to the wholesale data limits available on the SkyMuster satellite service. This is good news for those Australians located in remote areas unable to take advantage of other NBN technologies (ie. FTTx or Fixed Wireless).

Source : NBN Co

NBN Co is justifying this increase on the back of some recent re-engineering to bring into use the second SkyMuster satellite for this extra capacity rather than keep it as a “dormant backup” satellite.

In particular, the NBN Co press release of 27 June 2017 quotes Bill Morrow as follows:

“Late last year we made the decision to re-purpose our second satellite, previously slated as a dormant backup service to actively share the load in delivering more data to customers on the Sky Muster™ service. After spending the last year reviewing and testing the capabilities of the service, we are now comfortable that we have the capacity to offer increased data packages to retailers.” (Emphasis added)

As I was the CTO of NBN Co during the period in which the planning, design and procurement of the satellites for this services was undertaken I would like to put the record straight.

It was always NBN Co’s plan to use both satellites, once successfully launched and commissioned, to provide services to remotely located Australians in a load sharing configuration.

This was not the first time Mr Morrow publicly stated that the second satellite (launched in October 2016) had originally been “slated” as a backup satellite to be used only in the case of failure of the first NBN Co satellite (launched 12 months earlier in October 2015).

I was actually in the audience at the CommunicAsia conference in Singapore on 31 May 2016 when Mr Morrow made a similar statement. The SpaceNews website reported Mr Morrow’s speech as follows :

“That second satellite was originally intended to be there for reliability and redundancy,” Morrow said. “As the satellite people will know, the probability of something going awry after a certain period of time drops down to almost nothing. It doesn’t make much sense to have a $200-to- $300 million insurance policy up in the sky. So we have repurposed it for capacity.” (Emphasis added).

These statements imply that the original NBN plan involved spending a substantial amount of taxpayer’s money as insurance only for a catastrophic failure of the first satellite and that the current NBN team has just worked out that the second satellite can be put to good use.

The most obvious proof point is the fact that NBN Co from the start pursued multiple orbital locations (or “slots”)  in geosynchronous orbit from which to operate the two satellites. This was a hot political issue back in 2012 when the Shadow Minister of the time raised questions regarding NBN Co’s ability to secure the orbital slots.

In fact NBN Co pursued four orbital slots in order to ensure two suitable slots were obtained. In a response to Senate Estimates question on notice NBN Co clarified this in May 2012.

Source : Senate Estimates Broadband, Communications and the Digital Economy portfolio Budget Estimates May 2012 NBN Co Question on Notice No. 333 (http://www.aph.gov.au/~/media/Estimates/Live/ec_ctte/estimates/bud_1213/bcde/nbn_288-345.ashx)

If NBN Co was planning on using the 2nd satellite as a backup then only one orbital slot would have been required. Both the active and backup satellites would have occupied this one orbital slot. If the active satellite failed then the backup would have been in the right position to take over operations. Importantly all of the operating satellite dishes installed on rooftops around Australia would not have to be re-pointed to a different location in the sky.

But with two satellites in two separate orbital slots NBN Co would be able to use both satellites to deliver services in a load sharing configuration.

But further proof comes also from various public documents from both Quigley and Morrow NBN eras.

Firstly, there was the 2011-2015 NBN Corporate Plan which clearly states that “To meet this requirement [of 200,000 users], NBN Co will need to launch two 80Gbps Ka-Band … satellites”

Source : NBN Co 2011-2013 Corporate Plan released on 20 December 2010 page 71 (http://www.nbnco.com.au/content/dam/nbnco/documents/nbn-co-3-year-gbe-corporate-plan-final-17-dec-10.pdf)

Secondly there was NBN Co’s SAU submission to the ACCC with its original SAU in December 2011 which included a document on NBN Co Network Design Rules. This document provides an overview of the NBN Co’s technologies and includes the following in terms of the satellite design :

Source : NBN Co Network Design Rules (provided to the ACCC in support of NBN Co’s Special Access Undertaking dated 19 December 2011 page 27 (https://www.accc.gov.au/system/files/NBN%20Co%20Network%20Design%20Rules%20%28public%20version%29%20%2819%20December%202011%29.pdf)

There is no mention of the 2nd satellite being used as a “dormant backup” for the 1st satellite. Both satellites are required in order to provide the necessary capacity to users.

Thirdly, NBN Co engaged consultants from Boston Consulting Group to conduct an independent review of the Fixed Wireless and Satellite projects in 2014. After Bill Morrow joined NBN Co as CEO in April 2014, a report was issued on 7 May 2014 that covers covers the satellite project in significant detail.

The report confirms the need for 2 satellites to provide broadband services to regional users in a number of places. There is no mention of the 2nd satellite being deployed as a backup.

Source : NBN Co Fixed Wireless and Satellite Review – Final Report release 7 May 2014  page 26 (http://www.nbnco.com.au/content/dam/nbnco/documents/nbnco-fixed-wireless-and-satellite-review-07052014.pdf)

In  “Section 4.4 Proposed Actions”of the report recommends a delay to the launch of the 2nd satellite for operational reasons but highlights that “This timing [ie. delay] should also not impact the end-user rollout as the additional satellite capacity [of the 2nd satellite] should not be needed until this time given the speed with which the industry can connect end-users” [See page 40 of the report].

And if these statements were not proof enough, NBN Co commissioned the consultancy firm Ovum to do a global satellite comparison in April 2016. This report clearly states that NBN Co is using two satellites to deliver the capacity for 200,000 homes and businesses.

Source : Ovum Satellite Broadband : A Global Comparison 27 dated 28 April 2016 page 3  (http://www.nbnco.com.au/content/dam/nbnco2/documents/Satellite%20Broadband%20-%20A%20Global%20Comparison%20-%20FINAL.pdf)

The NBN Co Satellite program was always controversial and highly political. The orbital slots were a point of controversy as mentioned earlier. Private satellite operators that subsequently collapsed ran campaigns slamming NBN Co’s satellite engineers and overall program.

Despite all these distractions the NBN Co satellite’s have been launched successfully and are delivering what was always intended from two load-sharing satellites.

Let’s hope NBN Co are not continuing to play these political games by making misleading statements of the original purpose, designs and plans for NBN Co’s two SkyMuster satellites to be used to deliver broadband to remotely located Australians.

TPG Telecom turns to mobile after fixed broadband investment blocked

TPG Telecom has acquired 2x10MHz of national 700MHz spectrum in Australia for $A1.26 billion. The unit price is approximately twice that paid by Telstra and Optus to acquire similar spectrum in 2013. TPG Telecom have announced they will spend an additional $A600 million to build a mobile broadband network to cover 80% of Australia’s population.

This development is no surprise. I wrote back in August 2016 that TPG Telecom, after being blocked by the Coalition’s crack down on competitive fixed infrastructure to NBN Co, would consider moving to wireless broadband. This would avoid the regulatory imposition to split wholesale and retail operations and also the NBN tax of approximately $7 per month flagged by the government.

The cost of this has been significant to TPG Telecom and in-directly to Australia’s telco consumers. The planned $A1.86 billion investment in wireless broadband will likely still only achieve relatively slow speeds compared to a fixed network investment. TPG will have effectively 40MHz of spectrum in capital city areas (20MHz in 700MHz band and 20MHz in 2.5GHz from an earlier auction). This will be sufficient to provide good mobile broadband speeds. More competition in mobile is a good thing for consumers but Australians already receive some of the best mobile broadband services in the world.

 

 

 

 

 

 

 

 

 

 

 

However, this new investment comes at the expense of investment in fixed broadband due to the Government’s desire to protect NBN Co from competition.

Australian fixed broadband customers will continue to rely on NBN Co which has steep financial mountains to climb in order to pay back the Government’s equity and debt investment. This is leading to higher prices for fixed broadband at slower speeds.

The Government has achieved a windfall price for the spectrum it has sold to TPG Telecom. But a win for the Government coffers is a loss for consumers and taxpayers who have missed an opportunity for private investment in fixed broadband.

This is all while Australia slips further down the international broadband rankings.

 

 

Australia’s Broadband Experience – A Case Study in how Government Broadband Policy can go horribly wrong

I was given the opportunity at Broadband World Forum Asia (in Hong Kong on 11-12 April) to present some of my views on Australia’s Broadband Policy disaster.

It seemed to provoke lots of good questions and interaction from the audience.

Telecom Times published the piece below – the full article is available here.

The presentation is available below.