Build it, but can they afford it?

Build it, but can they afford it?

Summary: There’s a long-held belief that price is the only thing stopping more broadband uptake in Australia. That’s still the case, but it’s also a lot to do with availability.

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TOPICS: Broadband, Australia
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I know from my days of dreaming up broadband plans that if you want to sell more, drop the price. It's not rocket science. In those days — a decade ago — people would compromise speed to spend less, and choose the internet service provider (ISP) with the lowest entry-level price. Remember Telstra's AU$29.95 broadband deal?

So it's natural to assume that when fixed broadband sales plateaued, it was because it was costing too much to appeal to the remaining section of the population. That seems unlikely, though, when we compare Australia to the rest of the world. We've got an internet penetration rate of just 24 fixed subscriptions per 100 inhabitants — well below most major economies that have continued to show growth in adoption rates.

Fixed (Wired) broadband subscriptions per 100 inhabitants
(Image: Phil Dobbie/ZDNet)

In fact, compared to most OECD countries, we've seen one of the lowest growth rates over the last few years; just 2 percent growth between 2008 and 2011. With virtually no change in subscriber numbers, it would be easy to assume that the market has reached saturation point — yet, why would we level off at 24 percent when places like Korea, France, and Germany are in the thirties and still going up? Why would their saturation point be so much higher than Australia's?

It can't be down to affordability. After all, our gross domestic product (GDP) per capita is one of the highest in the world, and whilst our adoption of fixed broadband has been going nowhere, our economy has been blossoming. We've also got a narrower rich-poor gap than most. In the US, I suspect that many people don't have broadband because they don't have a house to put it in. Aussies have no such excuse.

buildit02
(Image: Phil Dobbie/ZDNet)

As the above graph shows, there is absolutely no relationship between the growth of an economy and the growth of broadband.

That means it must come down to availability — after all, DSL is not everywhere. There's a heap of exchanges with no broadband coverage, or where there's no extra rack space to extend the current number of connections. Then there's the Remote Integrated Multiplexer (RIM) issue, helped in part by 1,850 "Top Hats".

Of course, irrespective of our economic health, price is a big factor, too. Broadband is expensive here, and we have artificial limits on usage based on how much you're prepared to pay. Perhaps that's the main reason why Cisco's Virtual Networking Index predicts that Aussie consumers will download 13.3 Petabytes of data this year, less than 1 percent of the US total. Or, to put it another way, they are downloading 20 times more per fixed broadband connection than we are.

buildit03
(Image: Phil Dobbie/ZDNet)

I know the figures seem low in this graph, but the same methodology was applied in each case, so the comparison is valid. I simply took the ITU penetration rate, applied it to the population to get a total number of connections, and divided it into Cisco's total download figure. Forget the absolutes; just look at where Australia sits.

If we had greater availability of fixed broadband, would we see take-up increase? Almost certainly, but price would still be a factor. If we had faster broadband, would our usage increase? Well, that's what NBN Co is reporting — in houses that have been connected to its new network for more than a year, consumption is twice the national average. You could argue that this is because they are early adopters, but the take-up rate is 35 percent — too many to be geeks alone.

This is all great news if the NBN carries on as planned. We'll have ubiquity, which will increase broadband penetration, and the faster speeds will increase usage. The bad news, of course, is that it'll be expensive, and getting more expensive the farther we head down NBN Co's corporate plan. That could put the kibosh on the whole thing and keep us where we are now: Somewhere quite embarrassing in the league table of broadband usage.

That's why Malcolm Turnbull was spot on when he said that we need to reduce the subscriber cost — an AU$66 per month retail price in 2021 is better than AU$90 under the NBN plan, but is it low enough to bring on board all those who think broadband is too expensive?

Topics: Broadband, Australia

About

Phil Dobbie has a wealth of radio and business experience. He started his career in commercial radio in the UK and, since coming to Australia in 1991, has held senior marketing and management roles with Telstra, OzEmail, the British Tourist Authority and other telecommunications, media, travel and advertising businesses.

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13 comments
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  • Question for Phil

    I caught the backend of someone talking on a radio show a couple of days ago. The particular issue mentioned was that there is a 0.3% increase in GDP for each doubling of Internet speed. The person speaking, who was supposedly an authority on the matter, gave no indication of the source of the information.

    Phil, have you heard of such as relationship between Internet speed and GDP growth?
    Wakemewhentrollsgone
    • GDP and internet speeds

      I've hard it said, but I think it would be difficult to prove in the current economic climate. Case in point, our speeds are slow and we have one of the fastest growing GDPs. Kinda puts paid to that argument in the short term - but it is, of course, a long term benefit.
      phildobbie
      • Turnbull's Facts are a Joke.

        Phil quotes Turnbull's figures as though they were honest.
        The same Turnbull that stated the current NBN will cost 100Billion in order to cover his "one third the cost" BS
        The same Turnbull that just the week before his NBN launch was in complete agreement on air with A Jones' rant that we don't need an NBN as wireless is all that's required.
        The same Turnbull that invests his money in FTTP in France & Spain but claims FTTN is good enough for us.
        Turnbull's many claims don't even match a used car salesman's credibility standards.

        My present (ADSL1 only option) "BB" service cost me $40+$30 line rental= $70/mth for 100GB on a crappy line that maxes out at 1.2/0.1Mbps in dry weather.
        I see current NBN plans advertised that offer 25/5Mbps with Unlimited data presently on offer at $54/mth which would let me dump my $30 line rental & have a decent BB service for just $24/mth, a saving of $46.
        grump3
  • Build it, but can they afford it?

    You're quite right. I've lived in the same house for 10 years, in a densely populated inner Gold Coast suburb. Telstra's cable passes my front gate and I've tried repeatedly to have a cable connection installed. Telstra's service people have visited several times, but say they cannot get their cable past my 1 metre wide concrete path, but that I could have ADSL, if I were prepared to pay for a wired phone that I don't want.
    For 10 years, I've managed on various slow and expensive wireless connections and can't wait until the NBN arrives (in 10 years? - I'm in a safe Liberal seat) to tell me that they can't pass a 1 metre concrete path, either.
    In Australia, we need smart people who can run an overhead wire, cut a groove in a concrete path, or pass a cable under it with a hose and running water. We need more of those controversial visas to allow somebody smart from overseas to do that for us dumb Aussies.
    paleoflatus
  • Retail prices?

    Your article quotes a retail price of $90/month in 2021, which is a long way down the track. Currently users are paying far less than that. I suspect the reason for the high takeup rates is simply that it makes good economic sense to do so.

    My home is due to be connected to NBN Fibre in the next few months. I'm happy to report that when I switch to an NBN connection, I will be getting a connection that is twice the speed, and with 4 times the amount of included data, for $10/month LESS than what I'm currently paying for a sometimes-sketchy ADSL connection. A better connection and extra money in my pocket is a huge win!

    The savings for those stuck on 3G services is far more dramatic - my friends recently upgraded from a Telstra NextG connection to NBN wireless and are getting a 4x speed increase, and a 6x data allocation, for HALF the price of 3G! For them, it's a saving of nearly $50/month - $600 per year extra in their pocket, for a vastly superior service.

    Let's not forget that in addition to the cost of an ADSL connection, a vast number of users are also forced to fork out ~$25/month to Telstra for the privelege of using their copper. Naked ADSL is far from being universal, and adding $25 to the price of an ADSL plan makes it look far less appealing, and much more comparable to current NBN pricing.
    klaw81
    • The iiNET NBN packages

      Cost around $100 per month for their top NBN package: http://www.iinet.net.au/nbn/nbn-plan-residential.html

      If you want top speed (which you would if you support Labor's version of NBN) but don't want higher quota, you are still looking at $80 per month for 100 Mbps down/40 Mbps up. That still won't guarantee the speed you are paying for. Real world speeds would be lower.

      I am currently on ADSL2+ and pay $80 per month for far less, so I agree with you that atleast with the NBN (Coalition or Labor), I will get more for same or less.
      kunalnanda
  • Affordability analysis of NBN

    A very extensive and exhaustive analysis of NBN affordability was done in the NBN Implementation Study done by KPMG and McKinsey. They recommended that prices for NBN need to be equivalent to ADSL prices or demand will be low.
    See report here: http://www.dbcde.gov.au/broadband/national_broadband_network/national_broadband_network_implementation_study
    The Whirlpool posts where I summarised the affordability excerpts from the report seem to be too old to be archived anymore... :-(

    A short excerpt from analysis I did in 2010 says:
    (http://valman.blogspot.com.au/2010/06/nbn-early-pricing-analysis-value-watch.html)
    The McKinsey Report (https://wiki.dbcde.gov.au/dashboard.action) advises pricing for penetration - see Exetel Tas NBN prices http://www.exetel.com.au/residential-fibre-pricing-tasmania.php starting at $0 plus $2/Gb for basic (25mbps) to $50 plus $0.75/Gb for fast (100mbps). Mckinsey advise wholesale price around $30 for entry level broadband (25mbps; unlimited Gb) plus $5 for unlimited calls. Equates to about $55-60 retail entry level. But three other ISPs are pricing NBN like a premium service: iiNet, Primus $50 for 5Gb; $90 for 15 Gb. I know who I would prefer.

    A further comment McKinsey made was for unlimited download.
    (http://valman.blogspot.com.au/2010/08/ten-things-i-would-do-with-1gbps-nbn.html)
    ValueMgmt
  • Affordability Excerpt from NBN Implementation Study 2010 (p.32)

    1.4.2 SET PRICES TO DRIVE AFFORDABILITY AND TAKE-UP,
    ACHIEVING COMMERCIAL VIABILITY OVER TIME
    Wholesale prices for NBN services should be set to meet the goals
    of affordability and take-up. As a wholesale-only provider, NBN Co cannot set the retail prices that end users will ultimately pay. However, the wholesale
    price that NBN Co charges will be the largest input cost for a retailer. This price
    will therefore have a substantial influence on retail price levels. NBN Co’s immediate priority should be take-up of services, which will require wholesale pricing that provides retailers with a better business case on fibre than they currently enjoy on copper, for a significant portion of their customer base. Over time, it is likely
    end users will see additional value in high data rates as more bandwidth-hungry
    applications and content become common. New services such as IPTV and innovative
    applications will also emerge. However, the timing and nature of these future services are
    uncertain, hence the Implementation Study has taken a conservative approach to
    innovation-driven take-up in the revenue modelling.

    ...NBN Co should set prices to deliver a superior offer to service providers compared with
    such legacy networks. Based on the Implementation Study’s modelling, this implies
    pricing entry-level wholesale fibre services at between $30 and $40 per month—
    depending on the level of the competing copper ULL price—with uniform prices across
    the fibre access network.

    Given the advantages that fibre has over copper in operating costs, set-up costs and
    expected churn, this will enable retailers to offer consumers much faster broadband
    speeds without increasing the prices they charge end users. Over time, end users will
    attribute greater value to fibre capabilities, particularly as rich
    services continue to become more prevalent. As this happens,
    NBN Co should be permitted to increase real prices gradually under ACCC supervision to earn a reasonable return on its assets over its lifetime—but must not be permitted to extract monopoly rents.

    ...Prices for NBN services should be set uniformly across the fibre footprint to deliver
    affordability across the country, with a price architecture that encourages take-up of high
    data rate services and usage. Setting a uniform price provides an implicit cross-subsidy
    from lower-cost (denser) areas to higher-cost (less dense) areas. If the higher-cost areas
    have very substantially elevated costs, then the uniform price must be set high so there is
    sufficient cross-subsidy from the prices charge d to lower-cost areas. This can result in a
    uniform price that is too high to drive take-up.

    Chapter 1 - Executive Summary - National Broadband Network Implementation Study
    ValueMgmt
  • Business 101

    This is all Business 101. A business opportunity exists when I can build something at a price you are willing to buy it at. If NBNCo hadn't charged about ADSL prices no-one would have bought its product. Its prices were set to what customers would pay. But even its business case says that it can't make a profit, or even pay for the cost of building it, at that price. In the longer term it has to somehow get something like three times the revenue per connection as ADSL got. If Australians are not willing to pay three times as much it is a project that fails Business 101. It doesn't know how its going to do that. It is being built in the hope that having it would result in people being willing to pay a lot more. But a whole lot of its customers simply can't afford to pay more, and a whole lot more simply won't see it as being worth more.

    The Liberals' NBN is technically inferior. Those people who want high speed and can afford it, don't and won't like it. But there's a whole lot of people who currently can't get ADSL who will be able to get broadband. And it comes a lot closer to passing the Business 101 test. It might actually be able to be built for what people are willing to pay for it. We won't discover, as we will with Labor's FTTH NBN, that long after the copper has been pulled out and there's no alternative we have to either pay a lot more either in the price of the product or as taxpayers.
    Gordon D
  • Look into the details ...

    The $90 average is relatively expensive if you assume that it is only a consumer service being delivered. There will be a substantial number of business accounts and numerous services based around streaming that will go to increasing total revenue. By 2021 there will be faster options (up to 1Gb?) that enthusiasts can pay extra for. Few of these things are viable on the FTTN plan so to compare the $60 average with $90 is a misleading comparison. Given the mix of what is proposed on FTTH I would suggest the entry level plans will be cheaper on fibre at that point in time with the bonus of better performance.
    RHUL_SP
  • $90?

    Why do you say that the subscription price will be $90?

    Is it because the fibre NBN will be so good that people will chose to move off the $30 fibre plans to something better?

    NBN (fibre) prices only increase if people choose to buy more. The NBN guesses that they will, and given so many more choosing the 100 m/b plans, and data use doubleing it would seem they are right. No one is forced off the cheapest plans, and you do a diservice by assuming that $90 is an increase people will have to pay.

    If you look at the allowable price increase (from the ACCC) the 12-50 meg plans will be cheaper then the coalitions.
    Paul Krueger
  • When is the ARPU the same as the Retail Price?

    "That's why Malcolm Turnbull was spot on when he said that we need to reduce the subscriber cost — an AU$66 per month retail price in 2021 is better than AU$90 under the NBN plan, but is it low enough to bring on board all those who think broadband is too expensive?"

    The two figures that are quoted for 2021 by Mr Turnbull is obviously the ARPU (average return per user) he used in his launch papers. This is arrived at by dividing the total revenue by the number of users. It effectively tells us absolutely nothing because there are going to be big users of data paying much more than the family guy at home who is paying a lot less and there will be businesses who are going to be paying close to the mark. It should also be remembered that this figure is the wholesale figure not the retail figure.

    I think you will find that Turnbull has never actually said that the $66 and $90 figures were the retail price. He has just managed to infer it for gullible journalists to regurgitate.
    Bob.H-819a5
  • Reason for low BB growth rate?

    Phil, Neither you, nor any of the people who have commented, have thrown much light on the question of why broadband uptake has practically stalled in Australia since 2008. Could it be because of the NBN? By late 2008 we were expecting a national broadband network, based on FTTN. In early 2009 all of the FTTN proposals were rejected, and by April 2009 the current FTTP scheme was announced. So basically, all investment in broadband other than the NBN ceased some time in 2008. If you weren't in the 24% of Australians who had BB by 2008, then perhaps you've missed the boat completely until the NBN passes your door? Trouble with that is that the NBN won't arrive until 2021 for some folk. In fact about half the population will have to wait until at least 2017, ie 9 years after investment stopped, and that is assuming that NBNCo can stick to the 2012 version of its business plan. A lot has been written about the advantages of getting faster BB, but little attention has been given to the economic and social cost of this huge delay in BB provisioning. For the next few years, the NBN, as a result of its slow rollout, may be having a negative effect on GDP! (I'm not belittling the magnitude of the task that NBNCo faces, but if the target of passing 100,000 premises per month is not achievable, then it's a bad plan.)
    Achilles-9158f