NBN economics come down to the wire

If the current rapidly accelerating take-up of wireless broadband continues, the NBN, which is concentrated on final connections to premises, will have scant prospect of reaching its expected returns.

NBN Co’s admission that the national broadband network faces increasing competition from increasingly sophisticated wireless networks places yet another query over the economics of the NBN and provides another strand to Malcolm Turnbull’s advocacy of a lower-cost NBN using a mix of technologies.

The admission was made in response to a request for more information on its demand forecasts from the Australian Competition and Consumer Commission. That response has been published on the ACCC website.

‘’NBN Co faces competition from wireless networks that are increasing in capability over time, subject to significant economies of scale and scope (and therefore decreasing cost per gigabyte delivered) and are expected to offer a potential substitute for NBN Co’s voice-only and entry-level voice and broadband services,’’ Richard Home, NBN Co’s general manager for NBN’s engagement and group co-ordination branch said in the letter.

He said that in the group’s corporate plan pricing scenario growth in wireless-only substitution was projected to be held to moderate levels, starting at 10 per cent and rising to 13 per cent by 2039-40 on the assumption that NBN Co’s pricing would fall over time in both real and nominal terms and maintain a similar relative value proposition to wireless services.

In NBN Co’s ‘’maximum pricing scenario’’ however, it had modelled an increase in wireless-only premises to about 30 per cent by 2039-40. It should be noted that NBN Co has consistently said that it has no intention of increasing pricing to the maximum levels envisaged in its special access undertaking and, indeed, that doing so would have a counter-productive impact on the economics of the NBN, partly because it would make wireless even more competitive.

A concern for NBN Co would be that the number of wireless-only households in Australia is already rising rapidly.  Last financial year the number of wireless-only premises rose from 12 per cent to 14 per cent and that was before Telstra, Optus and Vodafone had developed any real momentum in the rollouts of their 4G or Long Term Evolution networks.

With Telstra already planning to introduce LTE-advanced technology later this year the introduction of new and faster wireless technologies continues to accelerate.

While it has consistently declared that its fibre-to-the-premises network and wireless networks are complementary rather than competing technologies, NBN Co has shown considerable sensitivity to the threat posed by wireless to its fragile economics. It was prevented by the ACCC from inserting a prohibition against the marketing of wireless as a substitute to the NBN in its agreements with Telstra and Optus.

Fibre and wireless are complementary technologies. Indeed, wireless networks need fibre backbones. Congestion on wireless networks, which reduces available speeds, also means they can be unsuitable for applications requiring the high and consistent speeds that the fibre-to-the-premises network proffers.

Nevertheless, for entry level services like voice and most consumer broadband applications, there is no doubt that wireless is a substitute for fixed line broadband. There is also no doubt that consumers increasingly value, and place a premium on, mobility.

The problem for NBN Co if the rise and rise of wireless-only households continues is that the core of its network and the larger element of its $40 billion-plus cost lie in the final connections to individual premises.

If consumers value mobility and fast-enough wireless broadband sufficiently to continue to drive mobile-only penetration and more generally divergence of potential revenue from the NBN to the wireless carriers it would undermine NBN Co’s economics.

It would also support Turnbull’s argument that a mix of technologies including the existing HFC cables in the capital cities, the existing copper-based ADSL network and wireless would provide fast-enough broadband for most urban consumers at a dramatically lower cost to taxpayers.

Even NBN Co itself has mused aloud about whether there should be a fresh look at the costs and benefits of considering a mix of technologies.

Even in the relatively brief period since Kevin Rudd and Stephen Conroy announced, out of the blue, their plan to build a fibre network (and smash Telstra in the process) the wireless technologies available in this market have developed dramatically, as has the rate of growth in mobile users and the take-up of mobile broadband.

It would be disconcerting for NBN Co and Conroy that the latest data from the Centre for Disease Control in the US (which has been researching mobiles usage in the US for a decade) announced late last year that almost 36 per cent of US households didn’t have a fixed line and about 16 per cent that did have a fixed line didn’t use it, preferring to make and receive calls on their mobiles. About 60 per cent of those aged between 25 and 29 years were wireless-only.

That trend is despite the rollouts of new fibre networks in the US, including Verizon’s fibre-to-the-premises network and Google’s experiment with ultra-high-speed (a gigabit per second) fibre, which tends to underscore the willingness of ordinary consumers to sacrifice speed for mobility.

If that pattern were to be replicated in this market, the prospects of NBN Co ever generating the optimistic 7.1 per cent return it is targeting (and which enables the Gillard government to keep the funding of the NBN off-budget) would be remote.