The NBN Implementation Study is an impressively detailed document – indeed, probably the most extensive public domain exercise yet in a global sense in terms of outlining the processes and obstacles to deploying a multi-platform high speed access network.
As befits the writers—KPMG and McKinsey—it is also suitably commercial and realistic in perspective, eschewing the usual platitudes about the positive externalities of broadband for the community in favour of plotting a roadmap for how the NBN can eventually achieve financial independence. Indeed, unlike the government and the broadband rah-rah crowd, it actually acknowledges and even accepts the criticisms of the NBN—specifically the chicken and egg issue regarding the current lack of applications to drive the ‘above-average’ revenues over fibre that will be required to justify its replacement of copper.
But that road isn’t cheap—indeed, it will require $26 billion of government funding before the NBN is judged to be generating sufficient cash flows to be able to raise debt or equity in its own right.
What’s more, the study’s overall positive projections rests on two forecasts that I believe are not so inevitable.
The first is its assumption about wholesale pricing. The study, rightly, identifies that retail service providers will not happily migrate from ULL and LSS based services to fibre unless there is an economic advantage for them in doing so. As a result, it makes great play on preserving current copper pricing for entry-level pricing, but it also makes the heroic assumption that overall retail “conditioning” costs for such elements as active equipment and backhaul will fall in the NBN environment. Indeed, it quantifies this so-called “indifference” premium between copper and fibre at around $12-24 per month. I’m not so sure.
The study explicitly models a wholesale ARPU for NBN Co at $35-38 – a blend of such varying tariffs as a $25-30 “voice only” tariff, a $33-38 tariff for voice, “basic broadband” and IPTV, and, intriguingly, a $60 tariff for small business.
$38 NBN ARPU: Given the NBN is explicitly designed as a replacement to the Telstra Wholesale “network” business, I note that, today, Telstra Wholesale’s average monthly ARPU for broadband services is $24.12, its monthly ARPU for voice services is just under $22—this includes the gamut from fully conditioned “ready for resale” services through to $2.50 LSS and $16 ULL offerings. Of course, not all access providers are equal. One of the largest ones I know of is believed to spend as little as $8 per service to Telstra for network provision, largely because it is geared towards LSS-derived broadband services in its product mix. Wholesale prices for HSPA services are less competitive, but come in at between $12 and $40 or so depending on data usage.
The study recommends all variety of incentives to induce RSPs to migrate across such as discount offers, free connections and the like, but of course these add to overall project cost and need to run the gamut of competition law. And most significantly it recommends that NBN Co should be able to discriminate on the basis of the type of end user such as a mobile base station, a school or a business. Should that eventuate that would certainly provide ATUG with a new crusade!
At the end of the day, I’m not so sure that the NBN study’s proposed “entry-level” pricing is entry level enough, nor that the small business market will take enthusiastically to $60 wholesale buy prices for services that are today “end-user” agnostic.
The second shaky assumption regards take-up. The study undertakes a great deal of examination of various scenarios for rates of return and the like, but provides little clarity on how many activations it thinks the NBN will gain. One chart models three scenarios – low demand at 70% take-up of “fixed broadband”, 80% “mid level” and 90% “high demand” but it isn’t clear if this applies to NBN or the entire fixed market. Another chart is more detailed, implying that by 2015, there will be just 31-35% takeup among the homes passed (about half), rising to 54-63% by its completion date and then 75-90% by 2035. 6-12% increases in takeup on an annual basis are projected in another section.
But confusingly, other references in the document provide a slightly contradictory tone – for example, a detailed explanation on the relative merits of fibre and wireless costs makes the startling observation that NBN takeup is expected to be lower in the wireless areas because of competition from DSL and 3G!
Elsewhere the report also assumes that NBN Co will be able to increase wholesale prices by between 0-2% a year throughout the project, a highly contentious assumption given that prices have generally been decreasing by greater amounts in recent times.
The study seems to believe that the advent of fibre will stimulate fixed network usage because of its greater functionalities, and also because it will clearly provide speed and competition advantages in markets with a lack of DSLAM deployment or with low speeds because of loop lengths and pairgain.
But some of its supporting arguments are dubious to say the least, for example it believes the NBN will gain take-up advantages over comparable projects overseas because of the “pride” Australians will feel in it. Hmmm.
PSTN DECLINES, THE UNCONNECTED: The bullish estimates of uptakeare also belied by a few other inconvenient truths: overall PSTN revenues are declining by over 7% a year and at an accelerating rate, even fixed Internet revenue is flat. Some 30% of internet connections are now wireless and increasing at a double digit annual rate, while at the other end, 28% of households don’t have Internet access. Don’t expect that latter figure to change too fast, some 22% of households don’t have a computer either! Overall household expenditure on communications as a percentage of income has remained incredibly stable across decades and the wireless sector is becoming more and more adroit at staking its claim on it.
The report adopts another contradictory tone on the wireless front: it predicts that wireless broadband growth will slow down partly because providers will not be willing to invest in additional backhaul capacity. At the same time it says that backhaul capacity will become cheaper for fixed carriers, assisting the decision to migrate to fibre, even though both would seem to face exactly the same growth issues! Similar leaps of logic are detectable in the report’s consideration of video – it rightly considers at some length the difficulty of monetising the NBN through video services as a result of the sunk cost advantages of incumbent broadcast networks, but then elsewhere drops a gratuitous reference to the advantage of fibre over wireless in providing next generation HDTV!
So when interpreting the government spin about affordability and seven year break-even points and the like, it’s worth remembering these forecasts are far from inevitable and derived from some contentious beliefs and assumptions.