NBN Co's pricing controversy explained

NBN Co's pricing controversy explained

Summary: There is a growing divide between retail service providers and the government on how best to charge for access to National Broadband Network (NBN) Co services, and growing confusion outside of the telco industry as to what it all means. ZDNet Australia has delved into the pricing structure to explain some of these issues.

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There is a growing divide between retail service providers and the government on how best to charge for access to National Broadband Network (NBN) Co services, and growing confusion outside of the telco industry as to what it all means. ZDNet Australia has delved into the pricing structure to explain some of these issues.

Money

(Money image by Cimexus, CC2.0)

In NBN Co's business case released late last year, the company outlined a pricing model for how it will charge service providers to offer services to customers. The pricing model has four components: two physical (the User Network Interface and Network-to-Network interface), and two virtual (the access virtual circuit and the connectivity virtual circuit).

Physical component pricing

The User Network Interface (UNI) is the physical port at the end-user premises and the Network-to-Network Interface (NNI) is the physical port at NBN Co's point of interconnect (POIs), where service providers connect their backhaul. Telcos are charged varied NNI prices in either 1 gigabit per second (Gbps) or 10Gbps segments, depending on whether there is a long or short distance between the POI to the end-user. Depending on the distance, one-off fees range from $1000 to $35,000, while the service provider will also be charged a monthly fee of between $200 and $500.

Virtual component pricing

The Access Virtual Circuit is the bandwidth allocated to each end-user premise, forming the basis for the much-publicised wholesale packages sold by NBN Co, which start at $24 per month for a 12 megabits-per-second (Mbps) downlink on fibre, wireless or satellite.

The Connectivity Virtual Circuit is a product developed by NBN Co which, on top of the AVC cost, charges retail service providers to reserve specific bandwidth from the POI to the end-user's premises on the backhaul. NBN Co has charged this at $20 per Mbps, which NBN Co equates to less than $1 per average end-user on a 12Mbps connection. The price scales down as the amount of data consumed by end users per month increases.

NBN Co's head of product development Jim Hassell has argued that the CVC component of the pricing model was designed because that point in the network would allow service providers to add value to the basic service from NBN Co with their own services, eg IPTV.

How it all adds up

Leaving aside the costs of backhaul outside of the NBN, international traffic and overhead costs for running an ISP, if a new company was to start nationally it would face an upfront NNI cost of between $121,000 and $4.2 million to have a presence at each of the 121 POIs on the NBN. There's no guarantee that customers will connect any services, even if a carrier does decide to make this investment.

Internode's managing director Simon Hackett has argued that the Australian Competition and Consumer Commission's (ACCC) decision to extend the POIs for the NBN from 14 to 121 will increase the costs to service all POIs as ISPs will have to pay an upfront cost for 121 POIs instead of 14. That, in combination with the CVC and other charges, would mean that an ISP with less than 20,000 customers would face up to $106 per month to service just one customer with 30GB, according to Hackett speaking at the Communications Day conference last month.

In a statement provided to ZDNet Australia on Friday, and also published on Whirlpool, Hassell provided a range of estimates of the costs NBN Co considers ISPs will face depending on the number of customers and the amount they were downloading, although his estimates were based on higher customer numbers than the lowest of Internode's.

For an ISP with 80,000 customers servicing all 121 POIs, the total cost (including all four pricing components) for a customer using 10GB per month would be $26.65. If that ISP has 250,000 customers, this cost would be $25.05, according to Hassell. Costs range up to at most $28.15 to provide 30GB per month to a customer for an ISP with 80,000 customers in total, he said.

Hassell has said that because the NBN isn't going to be live all at once, but rather with areas going live at different times over the course of the ten year roll-out, smaller ISPs will have a chance to grow their businesses by starting on a local level and then expanding as the NBN rolls out. On Friday, Hassell said "the costs of marketing and of servicing a small but geographically dispersed customer base may be quite high", and many ISPs may focus on a geographical area or set of areas.

ISPs serving between 1000 and 5000 customers at just a single POI would be paying between $25.05 and $27.60 for plans ranging between 10GB per month and 30GB per month. Hassell said that NBN Co had the right model.

"Using a mix of the speeds, traffic classes and contention on the CVC, service providers will be able to create offerings tailored to their particular customer set. We believe this is one of the most important aspects of the NBN," he said. "We are offering the infrastructure at a price which is expected to reduce over time as usage on the NBN increases and service providers will be able to tailor their services depending on the type of customers they target."

The debate heats up

Internode's managing director Simon Hackett has proposed to remove one component — the linear charge for CVC — and instead increase the AVC by around $1 per customer.

Communications Minister Stephen Conroy told ZDNet Australia on Friday that Hackett's proposal would increase the end-user cost, rather than leveraging out the costs to ISPs through the CVC charge.

"I think he's acknowledging that [the proposal] will put up the AVC pricing, I mean he's offered a range of options, but the government has made a decision we're not going to charge pensioners more per month," he said. "Simon's said it's only a dollar a month for the base model but we're not going to start charging people more than what they're paying today"

In a blog post on Saturday, Hackett rebuffed the minister's comments, stating that because the ACCC had moved to 121 POIs from 14, NBN Co was essentially charging for backhaul in the CVC charge that it wasn't providing to ISPs. Hackett said that his model balances the elements so that the cost would ultimately be the same for consumers.

"It is in fact government inaction on the issues I have highlighted that will lead to higher than expected consumer retail prices. My proposals to rebalance the underlying NBN Co wholesale cost model don't raise source costs — in fact they lower them," he said. "A pensioner forced to pay a higher retail cost from a smaller provider will do so because that smaller provider was forced to obtain NBN access via one of their larger retail competitors at a significant mark-up (unless action is taken to address the issues I'm highlighting)."

Conroy said that the government had wanted only 14 POIs but the ACCC had forced NBN Co to go to 121, meaning the government had to accept the "umpire's decision". Hackett said Conroy could legislate against this if he wished.

"The government has the capacity to legislate to override the ACCC decision on points of interconnect — a decision it continues to re-iterate as being in conflict with their policy aims," he said. "The government has certainly not been shy in passing other major changes to the NBN legislation over the past few weeks alone, all of which represents major intervention in the marketplace. Why be so shy about addressing this particular issue?"

One of the last minute proposed amendments to NBN legislation that passed parliament last month would have given NBN Co the power to veto ACCC rulings regarding POIs; however, this amendment was struck out at the last minute by Greens senator Scott Ludlam and Independent Senator Nick Xenophon.

Hackett said that Conroy could not refer to ISPs signed up for trial services in Tasmania, and the just-announced trials for mainland services, because ISPs are not being charged wholesale access costs as part of the trial.

"To move from a technical trial to a vibrant pro-competition national fibre network with many providers directly attached (and where smaller providers are not forced to buy access from their own larger retail competitors), the access model needs to be re-balanced in the manner that I have proposed," Hackett said.

Topics: NBN, Broadband, Government AU

About

Armed with a degree in Computer Science and a Masters in Journalism, Josh keeps a close eye on the telecommunications industry, the National Broadband Network, and all the goings on in government IT.

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36 comments
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  • What Jims's costs ignore is the very significant baclhaul cost. On top of that $26 per user, the ISP now has to install, buy, or rent backhaul capacity into 121 POI's spread across Australia, rather than than the 14 previously located in Metro areas.

    NBN, the govt, the ISPs (except those who expect to be renting out that fibre) all agreed with this concept, however the ACCC over-ruled it in order to try to keep the big boys happy.

    And Hackett's right - those costs are the same cost that was presented when their were 14 POI's and the NBN were doing the bulk of the long-distance backhaul. Now that's no longer the case, the cost model should be adjusted appropriately.
    gr1f
    • It makes little sense that any 'backhaul' provided by NBN Co to 14 POIs would somehow be free, and not add any cost to the ISp and end-user. This argument you, and Hackett, makes is that the NBN cost per end-user will be the same whether there is 14 POIs or 140 POIs, and it is under 140 POIs there will an extra backhaul cost and therefore cost end-users more.

      But if NBN Co builds and supplies backhaul to the 14 POIs, including all the capital and operating expenditure required, how is this not passed on to the ISP and end-user? Of course it will be! To say it this is somehow free is completely misleading. Even if the cost is cross-subsidised through uniform national pricing, it is still passed on to end-users in aggregate.

      The point of the ACCC outcome was that backhaul from the 140 POIs has the best potential of being provided by competitive backhaul suppliers over time. This is opposed to NBN Co providing it instead. If economics (and economic history) has nothing else to tell us, its that competitive markets provide more efficient (which can mean cheaper) outcomes than monopoly - whether government or privately owned.
      evo-6a294
  • Great.

    The economics of this project are so bad, that we will pay more for less, and the "believers" would not even be able to afford the 100Mbps for their "virtual reality".

    Wasn't the prices of broadband coming down in Australia. And wouldn't the NBN just make them ridiculously higher? Then how can it be justified.

    Gillard really needs to kybosh this garbage and get on with the job of running this country properly...
    Theguy-bbb4a
    • *Wasn't the prices of broadband coming down in Australia.*

      exactly. a lot of the innovations and declining price/cost trends we've witnessed in Australian broadband were possible because we were leveraging off the "old", highly-depreciated ([ACCC machinations aside] still highly-valuable) copper network.

      the simple rule is that: falling costs/prices open up a whole new opportunity set of economic or commercial opportunities which were previously not possible (or viable).

      the A$50bln (avoidable costs) NBN project essentially jacks up the entire cost base of our fixed-line communications infrastructure by a couple of hundred notches and makes everything LESS viable.

      hence the current complaints of the exorbitant CVC charges that are clearly designed to extract as much "value-added" as possible to pay off the white elephant, but are totally counterintuitive in terms of promoting usage of bandwidth-intensive applications.

      so, what's the point of building the NBN? - a A$50bln political edifice in honour of our Communications Minister.
      toshP300
      • Yes just coincidence prices came down when the NBN was announced...!
        RS-ef540
  • NBNco have taken a very old view of the industry – one with Telstra Wholesale as the dominate network wholesaler, and that of competitive ISPs needing to spend $100-200k per exchange to access those clients without Telstra.

    NBNco seem to believe that replacing 5000 exchanges with 120 POI represents an improvement on the capital build process to access customers. ISPs used to have to build to get access to clients on an exchange – now they need to build less.

    If you take the view that private enterprise is unwilling to spend their capital on building new access networks, and that intervention is required, then it is reasonable to expect ISPs to have much higher opex costs.

    What NBNco do not seem to understand, is the market has changed a lot since the NBN project started.

    1. Telstra Wholesale pricing is far more reasonable – in fact, cheaper than NBNco
    2. There is a much greater availability of competitively priced wholesale services from 3rd party networks – AAPT/iiNet, Optus, Amcom, AussieBroadband, NEC/Nextep, TPG/SPT, to name the majors
    3. Competitive DSLAM builds have increased coverage to fill most of the metro areas
    4. Massive falls in ARPU, as existing networks are actually pretty cheap, and amortize quickly – leading to high levels of discounting. The drive to gain more revenue from a fixed cost, deprecated asset.

    As I posted in January this year, the changes in the marketplace, and the need to build revenues for a new network have produced a pricing model that is inappropriate for the market, and asks the RSP/ISP to hold all the risk.

    Using the examples below, you can see that NBNco have produced a model that combines the charges of Telstra Resale with the costs of running your own Metro Backhaul network.

    Telstra Resale Example
    Port Price + AGVC (from DSLAM to Capital City, priced approx $60 per mbit) + Internet Bandwidth

    SSS/ULL Exchange Build Example
    SSS Charge($2.50) + Exchange Backhaul(Fixed Cost, around $1000-$2000 per exchange) + Internet Bandwidth

    NBN – Full RSP Example.
    Port Price + CVC ($20 per mbit) + POI Backhaul (Fixed Cost, around $1000-$2000 per POI) + Internet Bandwidth

    The fact is, internet will be more expensive under NBNco, than with current DSL networks.

    Jason
    Jason_M-e5392
    • *The fact is, internet will be more expensive under NBNco, than with current DSL networks.*

      blind Freddy can see that...

      the simple fact is that the AVOIDABLE COSTS of building the NBN white elephant are:

      (i) project capex of A$36bln

      (ii) A$13bln [Telstra bribe] to "buy out" the copper network (i.e. shutdown competition & force everyone onto the expensive NBN)

      equals ~ 50 BILLION DOLLARS.

      every single dollar of that A$50 BILLION will have to be repaid by consumers PLUS INTEREST. and ON TOP OF THAT, you still have maintenance & operating costs for the new fibre network which will also have to be covered from access fees.

      the NBN will scew up our communications infrastructure (cost-efficiency-wise) for decades to come.

      Conroy is a twit and the NBN executives are a bunch of incompetent liars.
      toshP300
      • i should elaborate regarding point (ii):

        ~A$2bln of "duct savings" aside, the remainder of the A$13bln payment to Telstra represents a "deadweight-loss" to Australian consumers because the money does not go towards capital improvement of our infrastructure, nor is it allocated towards defraying operating costs. (it goes straight into the pockets of Telstra.)

        it's a 100% anti-competitive bribe to Telstra to buy their compliance in not using their "cheap" copper network to compete against the super-expensive NBN fibre network.

        so, we, as broadband consumers, are paying Telstra to shutdown their copper network so that we can't use it!

        how brilliant (not)! we're the laughing stock of the world.
        toshP300
        • Gee all the FUD the Libs can muster all in one comment...wow!

          Back to campaign HQ now, for a chardy and a slap on the back...sigh!
          RS-ef540
          • on a different note Leightons today post a $900million profit downgrade,shares in trading halt while capitol raising undertaken,
            "conspiricy theory",could the tendering halt,be a backroom attempt to bail them out/prop them up.Leightons going under could cause a few problems,both here and abroad ?
            pete196600
        • @toshP300

          "so, we, as broadband consumers, are paying Telstra to shutdown their copper network so that we can't use it!"

          Spot on, but it gets worse than that Telstra and Optus will be paid to shut down their HFC networks and bring their customers across.

          That's how the NBN will survive on its 'technical merits', by using taxpayer funds to inflate the customer base.

          Those pilot areas like Brunswick in Victoria that have plenty of high speed alternatives including wireless give the NBN a miss, poor area choice that one, best stick to the areas that don't have viable ADSL2+ and poor 3G wireless coverage, itmakes the NBN connection rates look good.
          advocate-d95d7
          • the Telstra bribe was [indirectly] anticipated in the McKinsey Implementation Report.

            discussed in detail here: http://whrl.pl/RcAfr8

            cheerio.
            toshP300
          • Hi Alain
            jasmcd
      • 1. Is the cost of building the NBN avoidable? Sure, but so are most road upgrades. If you wait for the need for infrastructure upgrades to move from the realm of forecast to actuality, it is already too late.

        2. The 13 billion dollar Transaction with Telstra ensures the viability of the NBN in the short term. Should Australia have 2 nation wide telecommunication networks and expect both of them to be viable? Or maybe we should say 3 or 4 national networks to allow for all the other competitors who have been waiting the last 15 years to flood into the market. Anti-competitive behaviour is hard to define when there is little competitive behaviour in the first place and where there would be none if it wasn't for the existing regulatory requirements imposed on Telstra.

        3. "every single dollar of that A$50 BILLION will have to be repaid by consumers PLUS INTEREST. and ON TOP OF THAT, you still have maintenance & operating costs" - How is that different in the slightest to any private company? Using mobile phones as an example, Optus loan money to purchase infrastructure, charge their customers at an appropriate rate to make a return on their investment and pay back the loan and the interest amount.

        Are you proposing the government should have printed some more money to build the NBN with? :)
        jasmcd
        • *Is the cost of building the NBN avoidable?*

          i was just trying to point out that the REAL COST of the NBN is A$50bln, and NOT A$36bln.

          the A$13bln Telstra payment does not go towards improving our communications infrastructure or defraying operating costs - it's quite simply a bribe to "buy off" competition. spending that A$13bln creates ZERO value to Australian consumers but ADDS to the cost of the NBN because the cost of the bribe will have to be recouped from access fees. it would be totally unnecessary if the Government weren't so bent on building a white elephant.

          *The 13 billion dollar Transaction with Telstra ensures the viability of the NBN in the short term.*

          lol - that's the NBN Co PR spin right down to the "T" (no pun intended)... "paying off" Telstra "ensures the viability of the NBN".... make something insidious sound so "respectable", almost "natural"... still doesn't change the fact that the A$13bln represents a "deadweight-loss" to Australian consumers.

          *Anti-competitive behaviour is hard to define*

          not at all - here's the children's version:

          NBN Co to Telstra: "here's A$13bln cash. you don't have to do anything - just shutdown your copper network and don't compete against us."

          still have trouble understanding "anti-competitive"?

          3. *How is that different in the slightest to any private company? Using mobile phones as an example, Optus loan money to purchase infrastructure*

          i. private companies do not have the luxury of building white elephants.

          ii. private companies do not have the luxury of "buying out" competitors (and funding it through a legislated government monopoly).

          ii. mobile consumers aren't forced to subscribe to the Optus wireless network.

          cheerio.
          toshP300
          • I do not see it as Anti-competitive to regulate against "cherry picking". This is the real concern over anti-competitive behaviour, that is that an alternate service is not allowed to be offered solely to the CBD's. However it is well known that without the burden of the shared costing to ensure that the majority of Australians benefit from the NBN, any competitor could slaughter NBNco's prices.

            In relation to this, I think the Government should go one step further and regulate that competitive infrastructure should only be allowed if they have/will have similar coverage to what the NBN does/will.

            As a side not to the anti-competitive nonsense, it is STANDARD PRACTICE to stipulate in business and company sale contracts that the seller can not come into direct competition with the entity purchasing the business.
            Also the reason that anti-competitive behaviour is a concern is because businesses, which are driven by profits for shareholders, engage is such tactics, reaping in unjust profits and hurting consumers for it's own benefits. When it is our own government doing it, and when their shareholders (the public) are also the consumers (the public), how is it insidious as you claim?

            "private companies do not have the luxury of building ****EDIT ****(what in your opinion is a) white elephant.

            "private companies do not have the luxury of "buying out" competitors" Private companies do what is best for private companies, not for the development of Australia, that is what government is for... ergo NBN. I have also seen MANY MANY MANY situations where a company has simply purchased one of its major competitors. (Time Warner, ABB, Westpac to name but a few.)

            "mobile consumers aren't forced to subscribe to the Optus wireless network." > it is called opt out/in, you don't need to get that shiny fibre optic connection when it comes down your street.
            jasmcd
        • *Should Australia have 2 nation wide telecommunication networks and expect both of them to be viable?*

          btw, when you're paying A$36bln to build a new network and A$13bln to buy-out the existing network, you're (consumers) effectively paying for TWO networks.

          that's why this A$50bln NBN social project is totally INSANE.
          toshP300
          • the cost is $50B if you accept govt cost estimates,incl p/ment to Telstra,industry costings appear to be 2-3 times that cost,if you believe NBN saying tender prices were double digit above their estimates.
            pete196600
          • Yes, well it is unfortunate that the current Government has had to pay for the mistakes the previous Liberal Government. In context we are undoing the sale of the previous wholesale network that should never have gone ahead.
            jasmcd
  • Hmmm, very interesting but clear as mud.
    Vasso Massonic