NBN business model “badly broken”

Professor Mark Gregory, a telecommunications expert from RMIT University, has labelled the National Broadband Network’s (NBN) business model as “badly broken” and is calling for regulatory change:

New Zealand had rolled out fibre as its preferred broadband infrastructure from the beginning and as a result “they’re offering gigabit speeds at prices that make me want to cry,” Professor Gregory said.

A quick internet search revealed that a 500mbps package is available in New Zealand for $NZ85 ($81.70) per month.

In Australia a number of providers were offering 100mbps, a far lower speed package, at between $89 and $110 a month…

High priced internet in Australia needs to be addressed by regulatory change, Professor Gregory said.

“Our business model is badly broken,” he said.

We are waiting for the ACCC to make its determination of the new fee pricing model for the NBN, Professor Gregory said.

The regulator, he said, “has a very bad record over the past 10 years with telecommunications”.

The ACCC needed to get rid of the ‘connectivity virtual charge’ which is essentially “charging for data usage,” Professor Gregory said.

NBN service providers have called for the change that would allow a “flat service charge”. The current regime means service providers have to charge customers more or restrict data usage at peak times…

Getting rid of the CVC would mean “there’s a set price per connection per month and the service providers can base their business model around that,” Professor Gregory said.

Although the industry had called for the move “it’s almost guaranteed that the ACCC won’t do that,” Professor Gregory said.

“That’s what New Zealand has, and many people there enjoy a far better experience because of it,” he said.

The use of a hybrid model by Australia has brought in a range of higher costs that would have been avoided if fibre to the home was adopted from the word go.

The problems with the NBN date back decades and spans both Labor and Liberal governments.

First and foremost, the Howard Government’s privatisation of Telstra in the late-1990s gave it control of both the wholesale and retail networks. This made it a vertical integrated monopoly, meaning that competitors were forced to rent the fixed line telephone network for access.

The NBN was initially designed by the Rudd Labor Government, in part, to remedy this structural mess. But it came with a huge taxpayer bill, with the Gillard Government in 2011 agreeing to pay Telstra $9 billion in instalments for its fixed line customers to migrate to the NBN.

By contrast, New Zealand did not face these issues.

Unlike Telstra, Telecom NZ was split into a wholesale operator, Chorus, and a retailer, Spark.

Chorus won the vast majority of the work to build Fibre-to-the-Premises (FTTP) networks, which meant it could use all of its existing legacy assets to build their new FTTP network. This obviously reduced duplication, dramatically lowering the cost of the build.

Moreover, unlike NBN Co, which was created as a start-up Government Business Enterprise, Chorus also had the embedded technical expertise to get the job done.

Malcolm Turnbull added to the NBN’s woes by abandoning Labor’s plans to build FTTP across most of the country. Instead Turnbull replaced it with a multi-technology mix (MTM) that included previously retired copper cabling.

This change to MTM was marketed as a cost-saving move by Turnbull. But, the massive amount of rectification works required quickly saw the price tag for the NBN jump from $30 billion to more than $50 billion.

The problems have also been compounded by the former Labor Government’s decision to classify the NBN as an “investment”. This decision 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 has been forced to charge ISPs high wholesale prices, which they then passed onto Australian consumers.

One possible solution to the NBN’s pricing issues 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.

Hopefully, Labor will remedy the situation should it win the upcoming federal election. It has already committed to expanding fibre coverage across Australia.

Unconventional Economist
Latest posts by Unconventional Economist (see all)

Comments

    • UpperWestsideMEMBER

      Depreciation on kit is pretty high in US internet providers ( but they do actually compete and offer actual broadband)
      At 800 mm EBITDA its worth maybe 24Bn (30X EBITDA) this assumes they have room to grow and that competition from 5G doesn’t slaughter them in the population dense marketplace
      Remind me how much did they spend?

      What odds they knock it down to some foreign investment group at a bargain basement price.

  1. Display NameMEMBER

    What happened to a public good? Yes things have to make commercial sense, in that we have to get value for money but insisting on a commercial return at the current hurdle rate on these sort of projects kills what might be a bunch of sensible choices.

  2. Can anyone tell me what exactly an average Aussie household does with a 100mbps bandwidth internet connection, that they find this insufficient?
    Sure I’ve sat there during the pandemic and wondered why my internet was so slow and laggy only to discover that the kids were all watching 4K video streams on their laptops. But in truth even that extreme load didn’t come anywhere near saturating the 50mbps speed of my physical link. So the lag problems that I was seeing were introduced elsewhere in the network.
    In my particular case the primary source of lag was Australia’s international link , or more specifically the international bandwidth allocated by my service providers / NBN.
    I ran some experiments where I changed the kids over to local video streams from VPN streams and suddenly the problems just disappeared. I checked and the total data bandwidth remained the same all that changed was the source of the data.
    Sometimes when searching for solutions to real world problems, I find it useful to understand the actual root cause of the problem …just saying.

    • Less about sustaining 100mb 24/7, more about having it to burst into when downloading large amounts of data.

      Plus, almost every ISP ties a decent upload speed to their high download speed plans.

      People have been using the “well what does anyone need Xmb for” since (at least) 28.8k modems were fast.

      • I’m sure that you do work at home which requires manipulating large data sets with fast upload/downloads, but are you seriously suggesting that this is the data bandwidth bottleneck that a typical Aussie family is dealing with?
        Honestly?
        In my case the kids eyeballs were still fully saturated all that changed was the physical source of data stream. So my problem was not last link bandwidth (which for technologies up to ADSL was usually the weak point). These days (from my personal experience sample size one) the real limit problems lie elsewhere in the network but your average punter is still blaming the “last mile” link bandwidth and/ therefore believes 100mbps is somehow insufficient like wtf.

        • For people bursting a large amount of data from a local source (typically a CDN, as would have happened when you turned off your VPN) then they will often bottleneck at the receiving end.

          Which is my point, it’s less about being able to saturate 100mb 24/7, it’s about being able to get that latest OS X update (or whatever) ASAP.

          The larger point is about having infrastructure capable of scaling up without needing to be completely replaced (ie: fibre). Because eventually today’s 100mb is going to look like yesterday’s 28k modem.

  3. NBN is down and broken in Brighton today. They can’t advise when might be up and running again. …. seemingly becoming more regular than when it in fact does work

Leave a reply

You must be logged in to post a comment. Log in now