Turnbull's NBN warning to telcos

The national broadband network's already fragile economics are under pressure as the project falls behind schedule, and if Malcolm Turnbull is right it's telcos and their customers that will be paying the price for three shaky government pledges.

Within Malcolm Turnbull’s scathing critique of the national broadband network today is an interesting piece of analysis which, if proven correct, would have unpleasant implications for telecommunications service providers and their customers.

Speaking at Commsday’s conference in Sydney, Turnbull referred to three pledges by the Federal Government that, he said, appeared incapable of being simultaneously realised.

The first was the decision to extend fibre-to-the-premises (FTTP) to 93 per cent of premises, a ‘’vastly’’ wider coverage than next-generation networks in comparable countries that had made the NBN the most expensive broadband project in the world.

The second was that it had promised that prices for entry-level packages on the network would be comparable to current ADSL2 pricing, which he said would be the most popular service rung for the NBN’s first decade or so. That promise, he said, was an implicit cap on potential revenue.

The third was that it had said taxpayer funds invested in the NBN – $37.3 billion within overall spending that will reach almost $41 billion if NBN Co is able to meet its forecasts – would deliver a return of 7 per cent. (It has to generate at least that if it is to earn something more than the government bond rate and remain off-budget).

‘’It is the combination of these commitments that is motivating the more totalitarian aspects of Labor’s NBN, such as the determination to utterly stamp out rival infrastructure, the pressure on the ACCC to sign off on investment plans and pricing ‘flexibility’ and the ham-fisted attempts to stop Telstra and Optus marketing 4G/LTE (wireless broadband services) to departing fixed line customers, ‘’ he said.

The more interesting conclusion he drew from that analysis was that if the pledge to maintain entry prices for the basic package of NBN services wasn’t to be broken then either the design of the NBN would have to be changed to reduce capital expenditures or a large chunk of the capital spending would have to be written off as a social investment.

There would be many NBN proponents who would argue that isn’t an issue – that the NBN will deliver such significant (but currently not identifiable) social benefits that it doesn’t matter what it costs or earns.

It could, however, matter to consumers and their retail service providers because NBN Co will do whatever it can to meet the business case it built around those pledges.

According to Turnbull fixed line voice and broadband revenues per customer are steady or falling in nominal terms in most advanced economies, but NBN Co’s corporate plan has projections of sustained real growth, predicated on increasing average revenues per user from $37 a month this year to $64 a month in 2023, with its controversial CVC or usage charges driving that increase.

Since 2000, however, the cost of services over Telstra’s copper network have fallen 7 per cent a year in real terms, he said – customers used to telecommunications costs falling would now find themselves paying more. Turnbull links the NBN projections of rising average revenues per user to NBN Co’s monopoly power.

The NBN, in terms of its core costs, will be a consumer-centric network. Those core costs are in connecting individual premises with fibre. A key premise of Turnbull’s speech is that the costs of upgrading telecommunications networks to fibre-to-the-premises substantially exceeds the value that consumers place on them. For most households the primary benefit of the NBN will be faster downloads of videos.

If demand for services delivered over the NBN doesn’t meet NBN Co’s forecasts – if consumers aren’t prepared to pay increasing amounts for whatever they have delivered over the NBN -- then someone will ultimately have to fund the shortfall.

Turnbull’s conclusion is that the government and NBN Co’s determination to ensure there are no fixed line alternatives creates the option of using NBN Co’s market power to raise prices and recoup costs if its financial sustainability were at stake.

It is, of course, conceivable that it would be taxpayers who made good any shortfall but it's Turnbull’s contention that, because of the politics, it will be consumers who will be in the front line if NBN Co’s financial performance stutters – that it is politically easier to allow NBN Co to lift its prices.

That’s something Telstra, Optus and the other big prospective retailers over the NBN have been concerned about because of its potential impact, not just on their margins, but on take-up rates for their services.

Telstra and Optus (and Vodafone), of course, would benefit from a leakage of broadband customers from the fixed NBN to their wireless networks. By the time the NBN has been rolled out, those networks will be 4G networks capable of very significant speeds.

The NBN concept was announced two years ago and so far the progress of the NBN hasn’t been smooth, although that’s because of several issues – the long delays in getting ACCC approval for the agreement between Telstra and NBN Co, the ACCC’s insistence on 121 points of interconnection to the network, a government policy in relation to greenfields housing developments and changes to the tender process for the construction of the network – largely beyond NBN Co’s control.

Nevertheless, the NBN is a long way behind schedule, which will have implications for the costs of the roll-out and the profile of its cash flows. Its already fragile economics will be under pressure even though NBN Co’s Mike Quigley has said it can make up some of the lost ground.

According to Turnbull, however, NBN Co passed only three premises per working day between last July and March this year but needs to accelerate to 6000 premises a day to deliver the network on schedule.

In the next few years, however, it is obvious that the NBN will be very significantly behind the schedule and that will have implications for its already fragile economics and the ability of federal governments to keep the project off their budgets, which is a political imperative for Labor.

Turnbull, of course, would scrap the fibre-to-the-premises network and replace it with a mix of fibre-to-the-node (FTTN) or curb and make more use of existing HFC cables and alternate technologies and there’s quite a lot of detail in his speech about the relative costs (capital and operating) of FTTP versus FTTN.

Turnbull cites the US and European experiences to say that FTTP costs three or four times more per premise than FTTN and that deployment of fibre in most OECD markets has slowed since 2009 because there is no killer app for FTTP other than video and therefore consumers haven’t been prepared to pay a premium for super-fast broadband, resulting in carriers pursuing less capital-intensive approaches.

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