Correcting an NBN Co disconnect

At one level NBN Co’s third-quarter results are meaningless but at another what’s occurring within NBN Co only two weeks after its new chief executive took up his post is encouraging.

The financial results for the quarter and the first nine months of this financial year simply confirm what we already knew.

Five years after Kevin Rudd and Stephen Conroy announced their ambitious plan for a high-speed fibre network NBN Co has spent a lot of money -- $8.4 billion, with $7.3 billion of contributed equity from taxpayers – with not that much to show for it.

That’s not surprising. The NBN is a massive decade-long project where the investment in building the network is up-front and revenues from end-users build slowly.

The modest number of end-users on the network to date and the meagre revenues, however, underscore why Malcolm Turnbull has radically re-designed the core of the roll-out from a fibre-to-the-premises network to one using whatever technology best suits. For the nine months to end-March NBN Co lost $1.2 billion on revenues of only $69.8 million.

While the NBN’s transit network – which has absorbed about 46 per cent of the capital expenditures to date -- is now 80 per cent complete and the network has now passed more than 500,000 fixed line and fixed wireless premises, there are only 166,642 premises with an active service and only 111,035 fibre users.

That’s why NBN Co’s new CEO, Bill Morrow, while making the point that NBN Co is a “young start-up company,” has shifted the emphasis of management from measuring progress by the number of premises passed (which generated more impressive statistics) to the more meaningful objective of actually connecting customers to the NBN and generating revenue from them.

As he said, more than a third of the brownfields premises passed by NBN fibre are unable to order a service. NBN Co has now instructed its contractors to install lead-ins and connection boxes at the same time as they are laying fibre in the street. NBN Co needed to both build the network and connect families and businesses and needed to do both better, he said.

Within NBN Co’s results there were some encouraging trends, albeit off very low bases.

The number of premises passed increased 23 per cent relative to the December quarter; telecommunications revenue grew 32 per cent to $17 million in the quarter; the number of active users rose by about 36,000 and average monthly revenues per user edged up from $36.60 to $37.55.

The trends are positive but the dollar numbers inconsequential at this point because of the paucity of users actually connected to the network.

Interestingly, on the fibre network, more than 80 per cent of the active users are opting for services with download speeds of 25 Mbps or less and upload speeds of 5 Mbps or less, confirming the view that most users today don’t require the very fast speeds – 100 Mbps – the network offers and buttressing Turnbull’s view that a multi-technology roll-out that delivers “fast enough” speeds will both meet most end-users’ needs in the medium term while costing the taxpayer a lot less.

Morrow himself said that, after receiving a revised statement of expectations from the government, NBN Co now had greater flexibility and was “technology agnostic”. He also talked about building a network using the most appropriate technologies but ensuring that there is an “upgrade path” within the network that would allow it to deliver higher speeds in future if they were required.

NBN Co said today that it had conducted a successful fibre-to-the-node trial on the NSW coast using a Telstra copper pair over 100 metres between the node and the premise and delivered raw download speeds of 105 Mbps and upload speeds of 45 Mbps. Morrow said the trial demonstrated that existing technologies were capable of playing a vital role in delivering high-speed broadband.

To pursue the multi-technology roll-out NBN Co will need significant changes to its model, its skill base and its processes.

It will also need to complete the renegotiation of its contracts with Telstra and others and it needs to see what the Vertigan Committee might recommend, particularly in relation to infrastructure competition. Morrow has made it clear he can’t actually sign a new deal with Telstra until the Vertigan report has been tabled and digested.

Morrow has already moved decisively to respond to the threat posed by TPG Telecom’s cherry-picking roll-out of fibre-to-the-basement to NBN Co’s model, which incorporates a major cross-subsidy from urban to rural and regional users, by announcing that it, too, would begin offering fibre-to-the-basement for apartments and offices.

He’s also raised the possibility of the government imposing a levy on competitive infrastructure to, in effect, contribute to the cross-subsidy or a direct taxpayer subsidy to sub-economic elements of the network that would raise its cost to taxpayers and has hinted at the possibility of taking legal action under the existing telecommunications legislation. The simplest course would be for the government to close the loophole TPG is seeking to exploit.