NBN at war with telcos over wholesale pricing

Another war is brewing between NBN Co and Aussie telecommunications companies over the exorbitant wholesale prices charged, which retailers then pass onto customers.

NBN Co released a pricing review paper yesterday whereby it proposed a 10% discount to its extra capacity charge, which is officially known as ‘connectivity virtual circuit’ (CVC).

Telcos have previously compared the CVC to an excess data charge and have called for it to be scrapped. Telstra CEO Andy Penn said last week that it was time for NBN Co to come up with a new pricing structure, however NBN Co claimed in its review paper that any decrease in CVC would result in a corresponding increase in the fixed component of its pricing.

“We want to continue to see increases in customer satisfaction [and] we do have financial commitments as this is a user-pays model, so we need to generate enough revenue to reinvest in the network to provide better service into the future. Outside of that, we are open to alternative models” [NBN Co chief customer officer Brad Whitcomb said]…

These proposed changes to wholesale prices amount to tinkering at the edges and won’t fix the fundamental structural factors behind the exorbitant prices charged to broadband retailers by NBN Co.

NBN’s wholesale prices are high because the former federal Labor Government classified the project as an “investment”. This required NBN Co to deliver a commercial return to the government and meant the NBN needed to cover its costs as well as earn a margin. In turn, NBN Co was forced to charge ISPs high wholesale prices, which they then passed onto Australian consumers.

Ultimately, the solution to the NBN’s pricing issue is for the federal government to write down the project’s value to reflect its true worth.

The Parliamentary Budget Office reported that the “fair value” (or saleable value) of the NBN was just $8.7 billion, which is less than one-third of the government’s equity investment. Therefore, the NBN probably requires a write down of around $20 billion.

Doing so would reduce the required rate of return and enable NBN Co to cut wholesale prices for ISPs and by extension consumers.

A reform of this nature would also require the federal government to treat the NBN like an essential utility service, instead of a commercial project seeking a commercial return.

In short, Australians will continue to be overcharged for broadband unless the federal government writes the NBN’s value down to reflect its actual true value.

Unconventional Economist
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Comments

  1. Arnold Worchester

    The NBNco business plan calls for infinitely inflationary wholesale pricing which is unheard of for Telecommunication services – which have been deflationary for the past decades.

    Particularly silly when much of the population is limited to 100mbps copper.

    Might as well just sell it to Telstra in exchange for equity.

  2. ” “fair value” (or saleable value) of the NBN was just $8.7 billion”
    That’s the same as what the NBN paid Telstra for their copper network.

    How good are governments at destroying value?
    NBN Co chief executive officer, Stephen Rue makes over $3.1 million a year.

  3. alwaysanonMEMBER

    They are at least investing into the network of late. We moved into our new (to us – it is 120 years old) house in October that has HFC/Coax NBN. They just notified me that they’d upgraded the network and I was eligible for 1000/50 “NBN Ultrafast” from my 100/40. It is $140/month vs. the $95/month I was paying (ouch) but with us both working from home I figured f-it at least it is a tax deduction etc. My early speed tests are showing 700/47 so I am pretty happy with that. Other than it being too expensive (my wife gawked at $140) I am pretty happy with their improvements/investments in the network. If writing it down lets them lower the wholesale and get my monthly down to ~$100 I’d have no complaints…

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