Is the NBN business model fatally flawed?

A business model in which the financial future of NBN Co relies on traditional telecoms income is unsound and the real economic benefits of the NBN are not being taken into account.

NBN Co’s 2012 annual report has once again highlighted the issues that I have been alluding to since the very first NBN plans were announced between 2007 and 2009. The report highlights the peculiar financial situation of NBN Co, especially in relation to the uncertainty of costs and early uptakes of the service. Analysts have continuously warned of significant budget blowouts.

The key reason that this is an issue, and will increasingly become a bigger one – if those analysts are right – is that the NBN Co business model is a flawed one. All of this could have been prevented if the NBN Co business model was based on sound economic foundations.

The government continually talks about the national interests of the NBN in relation to, for example, the economy, healthcare, education and so on, but in reality it has based NBN Co on a traditional telecoms model, on traditional telecoms revenues. The company’s current business model does not take those other benefits into account.

Since the NBN was started the UN, OECD, World Bank and 119 countries around the world have now embraced policies based on the fact that broadband infrastructure will have a significant positive economic effect, and that it is essential in addressing some of the complex problems that their societies are facing in environment and energy management, economic revival, new job creation, healthcare, education and so on.

Also, since that time a development that had been lingering in the background for years started to emerged, this time known as ‘big data’. This concept relates to the fact that, in order to manage the many complex issues in our society, large amounts of data need to be collected from very large and diverse sources (M2M) – we are talking about billions of devices and sensors.

This will require networks that can handle large capacities, are robust and reliable, have a low latency, and provide high levels of security and privacy protection. Residential internet access remains another important element of this infrastructure, but, longer-term, far more important elements need to be taken into consideration.

Increasingly a much smaller part of the NBN will be linked to old-fashioned telecoms income, on which the NBN Co business model is based. This, of course, is asking for trouble now and in the future. In the end NBN access income will be less than 10 per cent of the cost of the services that are going to be available over this infrastructure. This makes the narrow definition of telecoms income as the basis of the business case for NBN Co rather weak and potentially politically explosive.

None of those social and economic benefits are taken into account in the business models of the NBN, and unless that is changed the government and NBN Co will forever be chasing their tails and – rightly so – will forever be attacked by the financial analysts.

It needs to be recognised in NBN Co’s business model that future developments have significantly less to do with telecoms and much more to do with national infrastructure.

The real ROI

And so I stand by my view that the business model in which the financial future of NBN Co relies on traditional telecoms income is unsound – that the ROI of the NBN has far more to do with social and economic benefits, and that significant productivity gains in other sectors that can only be achieved if this national broadband infrastructure is operated on a trans-sectoral basis. The real economic value of the NBN comes from other sectors using the infrastructure and many of these benefits will not show up on NBN Co’s balance sheet.

As important organisations such as the OECD have indicated, if measured solely in terms of telecoms output the productivity gains of high-speed broadband are rather low. At the same time this global economic organisation also maintains that the real economic gains of broadband are in the development of new markets, lower transaction costs, improved supply chain efficiencies and facilitated research. Key sectors mentioned by the OECD include the health, education, energy and transportation sectors.

While the NBN Co plan could, in principle, be changed with the stroke of a pen, the reality is that the NBN is a political football, so the current government will be very reluctant to make any changes to their NBN Co legislation. Behind the scenes both the Department of Broadband and the Digital Economy and NBN Co are directing significantly more effort into the development of those trans-sector services, so it is not that these social and economic benefits are not recognised or are being ignored. They are most certainly being pursued, and they are also politically supported by the government’s National Digital Economy Strategy. The problem is that they are not taken into account in the business model.

What about the Coalition?

The Opposition could obviously use this to make changes to the NBN if they were to come into power. However, so far they have not made any announcements regarding their digital economy policies, and in their comments about the NBN they have, to date, totally ignored the social and economic benefits. The problem for them is that if they recognise those social and economic benefits they will have to change their stand on their NBN policies, and so, like the government, they also have painted themselves into a political corner.

One would hope that somebody in the not-too-distant future will have enough courage to make the right decision for the country and be prepared to rise above political posturing.

Isn’t that what government is all about, the national interest?

Paul Budde is the managing director of BuddeComm, an independent telecommunications research and consultancy company, which includes 45 national and international researchers in 15 countries. 

InvestSMART FORUM: Come and meet the team

We're loading up the van and going on tour from April to June, with events on the NSW central & north coast, the QLD mid-north coast and in Perth, Adelaide, Melbourne, Sydney and Canberra. Come and meet the team and take home simple strategies that you can use to build an investment portfolio to weather any storm. Book your spot here.

Want access to our latest research and new buy ideas?

Start a free 15 day trial and gain access to our research, recommendations and market-beating model portfolios.

Sign up for free

Related Articles