The myth of NBN profits
Evidence is mounting that the commercial viability of the National Broadband Network is shaky, with the project not expected to return its cost of capital even with aggressive pricing and take up.
Questioning the economic viability of the National Broadband Network is a dangerous game judging from the reaction to comments made by AAPT chief executive Paul Broad.
Reliable sources say that Broad's trenchant criticism of the NBN, including its lack of a business case, has prompted a third party claiming to speak on behalf of the government to tell him to shut up.
The word out of AAPT is that Broad won't be silenced even if it affects the few federal government contracts on the AAPT books.
There are very few who have raised doubts about the economic viability of the NBN apart from Opposition spokesman Nick Minchin and Business Spectator's Stephen Bartholomeusz.
Southern Cross Equities analyst Daniel Blair this month told the Senate Committee NBN inquiry that an NBN earning a 10 per cent return and winning 50 per cent of available customers would need to charge a wholesale access of $110 a month and set a retail price of $200 to $220 a month.
Blair's scenario analysis assumes that both wholesale and retail broadband suppliers would maintain the profit margins that they are earning at the moment on the copper network.
Another influential study of the commercial viability of the NBN obtained by Business Spectator says that the project will not return its cost of capital even under aggressive pricing and take up scenarios.
The study was prepared by a global investment bank and has been used in a series of presentations to CEOs in the telco sector. It was not prepared for public release so its findings are less likely to be coloured by concerns about upsetting Canberra.
It says that the commercial viability of the NBN depends on two factors: the take up rate and the pricing. A take up rate of 70 per cent or 9 million lines would achieve critical mass. Wholesale costs would have to be at least $60 a month.
The study uses the Optus Fusion bundled broadband and phone service product as a case study for looking at the viability of the NBN.
The Optus Fusion product, which relies on unbundled local loop access to Telstra's network, has an average revenue per user of $89 a month. The study says the product has total costs of $41 including ULL access of $16 and other costs of sales of $25.
This gives a gross margin of $39.10 or 48.8 per cent. Subtract other costs for marketing, customer acquisition and administration of about $12 and the EBITDA margin is $27.10 or 33.8 per cent.
Under NBN with retail prices remaining the same and wholesale access rising from $16 to $60, the Optus Fusion product would lose about $16.90 a month or negative margin of 21 per cent.
The Optus Fusion product would be profitable on the NBN if the average revenue per user was raised from $89 to $128 or $115 before GST. However, the EBITDA margin would slump to $18.10 or 15.8 per cent.
The scenario suggests a 32 per cent decline in margins for re-sellers and a 43 per cent increase in internet access charges for retail customers.
The investment bank concludes that with a $60 wholesale access charge and a take up rate of 50 per cent by 2018, the NBN project will achieve a return on invested capital (ROIC) of about 1.5 per cent.
The ROIC will increase to 4.9 per cent by 2022 with a take up rate of 70 per cent.
The ROIC hits 10 per cent only if the wholesale access charge rises to $70 and the take up rate rises to 90 per cent.
The study says Australians currently paying for a DSL or cable service as well as a separate fixed line will probably accept a retail pricing of $110 a month for a bundled product.
But it warns that potential substitution of fixed voice and internet with wireless undermines NBN's underlying demand.
The investment bank concludes that telco players will hold off on making strategic decisions until the economics of the NBN are confirmed.
It says that players will exploit their strategic optionality given that both DSLAM and HFC cable assets will not be stranded. As well the more favourable economics of ULL will serve to reduce the roll over to NBN and asset-for-equity swaps.
Reliable sources say that Broad's trenchant criticism of the NBN, including its lack of a business case, has prompted a third party claiming to speak on behalf of the government to tell him to shut up.
The word out of AAPT is that Broad won't be silenced even if it affects the few federal government contracts on the AAPT books.
There are very few who have raised doubts about the economic viability of the NBN apart from Opposition spokesman Nick Minchin and Business Spectator's Stephen Bartholomeusz.
Southern Cross Equities analyst Daniel Blair this month told the Senate Committee NBN inquiry that an NBN earning a 10 per cent return and winning 50 per cent of available customers would need to charge a wholesale access of $110 a month and set a retail price of $200 to $220 a month.
Blair's scenario analysis assumes that both wholesale and retail broadband suppliers would maintain the profit margins that they are earning at the moment on the copper network.
Another influential study of the commercial viability of the NBN obtained by Business Spectator says that the project will not return its cost of capital even under aggressive pricing and take up scenarios.
The study was prepared by a global investment bank and has been used in a series of presentations to CEOs in the telco sector. It was not prepared for public release so its findings are less likely to be coloured by concerns about upsetting Canberra.
It says that the commercial viability of the NBN depends on two factors: the take up rate and the pricing. A take up rate of 70 per cent or 9 million lines would achieve critical mass. Wholesale costs would have to be at least $60 a month.
The study uses the Optus Fusion bundled broadband and phone service product as a case study for looking at the viability of the NBN.
The Optus Fusion product, which relies on unbundled local loop access to Telstra's network, has an average revenue per user of $89 a month. The study says the product has total costs of $41 including ULL access of $16 and other costs of sales of $25.
This gives a gross margin of $39.10 or 48.8 per cent. Subtract other costs for marketing, customer acquisition and administration of about $12 and the EBITDA margin is $27.10 or 33.8 per cent.
Under NBN with retail prices remaining the same and wholesale access rising from $16 to $60, the Optus Fusion product would lose about $16.90 a month or negative margin of 21 per cent.
The Optus Fusion product would be profitable on the NBN if the average revenue per user was raised from $89 to $128 or $115 before GST. However, the EBITDA margin would slump to $18.10 or 15.8 per cent.
The scenario suggests a 32 per cent decline in margins for re-sellers and a 43 per cent increase in internet access charges for retail customers.
The investment bank concludes that with a $60 wholesale access charge and a take up rate of 50 per cent by 2018, the NBN project will achieve a return on invested capital (ROIC) of about 1.5 per cent.
The ROIC will increase to 4.9 per cent by 2022 with a take up rate of 70 per cent.
The ROIC hits 10 per cent only if the wholesale access charge rises to $70 and the take up rate rises to 90 per cent.
The study says Australians currently paying for a DSL or cable service as well as a separate fixed line will probably accept a retail pricing of $110 a month for a bundled product.
But it warns that potential substitution of fixed voice and internet with wireless undermines NBN's underlying demand.
The investment bank concludes that telco players will hold off on making strategic decisions until the economics of the NBN are confirmed.
It says that players will exploit their strategic optionality given that both DSLAM and HFC cable assets will not be stranded. As well the more favourable economics of ULL will serve to reduce the roll over to NBN and asset-for-equity swaps.
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