NBN anticipates updated CVC model in 2017

NBN is kicking off another round of CVC pricing consultations with industry, with a new model to be implemented during the second half of the financial year.
Written by Corinne Reichert, Contributor

The company rolling out Australia's National Broadband Network (NBN) has said it is about to begin another consultation period with retail service providers (RSPs) on its connectivity virtual circuit (CVC) wholesale pricing, with an "evolved model" expected to be implemented at the start of 2017.

"We've recently implemented an industry-based discount model, ensuring the CVC price falls the more bandwidth retailers allocate to each of their customers," NBN told ZDNet in a statement.

"The CVC price fell by AU$1.75 in June this year and we expect it to continue to fall as demand for bandwidth grows; that's the way the model is designed. We continue to review our pricing structure to ensure it supports uptake and usage, and meets our obligation of providing broadband at affordable prices.

"NBN is working to evolve the CVC pricing model to an RSP-specific discount structure. This will provide further scope for retailers to differentiate their offerings, which in turn will promote competition and assist consumers in accessing a wider choice of broadband plans.

"We are about to begin a consultation period with retail service providers on this evolved model.

"Based on feedback from the consultation, we anticipate this evolved model will be implemented in the second half of this financial year."

NBN in April announced its discounted CVC pricing involving a series of industry-wide tiers rather than being calculated separately for each RSP.

Following criticisms this week from TPG -- which lost AU$2.1 billion of its market value on Tuesday -- that the CVC pricing is too high, Communications Minister Mitch Fifield noted that NBN is still seeking out industry opinion on the matter.

"NBN is acutely aware of this issue; it has been consulting with retail service providers. NBN is trialling offering a discount for those RSPs who purchase greater amounts of network capacity," Fifield said.

"NBN have indicated that there will be further unit price reductions in CVC, so this isn't set in stone. NBN is not going to cut its nose off to spite its face."

NBN's wholesale pricing incorporates a two-part model, with the CVC charge paid in addition to the access charge levied across all speed tiers. The CVC charge reserves a consumer's bandwidth from the point of interconnect (POI), and now sees dimension-based discount (DBD) pricing structure to encourage more dimensioning of CVC capacity -- or greater usage of data.

The new pricing structure, implemented for two years starting in June this year, is calculated as an average of CVC dimensioning per end user across all customers on the NBN; therefore, it will be available for all RSPs, regardless of how small they are.

In November last year, NBN had trialled discounted CVC pricing, rewarding telcos offering customers high-usage plans across high-speed services with a lower levy.

Having concluded industry consultation after trialling it for six weeks, NBN decided to change its discounted model from calculating it individually for each RSP to instead going for an industry-wide model.

Sarah Palmer, executive general manager of NBN Product and Pricing, flagged at the time that the CVC pricing was planned to "evolve over time".

"We do plan to evolve this over time. So we're starting at the industry level; it's an effective discount 1 June; the industry will drive where it needs to go; there's complete transparency of where it will go at what usage, rather than me giving a price decrease each year; and, over time, we will try to move it to an RSP-led and level discount," Palmer said in April.

When asked why NBN didn't proceed with levelling charges on an RSP-by-RSP basis, Palmer said the model was "not workable" as yet.

"We're just not that sophisticated right now," she said at the time.

"Instead of spending time trying to finesse that, we wanted to implement the discount as [an] initial step, and then we'll be working with the industry to get a more optimal model."

By the numbers, April's DBD tiers provided pricing across the board of AU$17.50 per 1Mbps per month for end users with speeds between 0Kbps and 399Kbps; AU$16.75 per 1Mbps for those using speeds of 400Kbps to 549Kbps; AU$16.25 for speeds between 550Kbps and 699Kbps; AU$15.75 for those with 700Kbps to 849Kbps; AU$15.25 for 850Kbps to 999Kbps speeds; AU$14.50 for 1,000Kbps to 1,149Kbps; AU$13.75 for 1,150Kbps to 1,299Kbps; AU$13 for 1,300Kbps to 1,449Kbps; and AU$11.50 -- a discount of AU$6 -- for those using speeds above 1,600Kbps.

These figures will be evolved and lowered continually over time, NBN said at the time.

Despite the discounted pricing, Optus, Vocus, and Superloop criticised both the existence of and the changes to the CVC pricing model.

"As it stands, the CVC charging regime may be one of the biggest obstacles to the NBN delivering on what it was intended to deliver," Optus vice president of Corporate and Regulatory Affairs David Epstein said, adding that levying an industry-wide charge will also stymie innovation and competition among providers.

"The problem with industry averaging is that it's a potentially incrementalist approach that rewards the lowest common denominator. It does not reward RSPs who want to exercise initiative or want to innovate by creating new, better-provisioned service offers that compete on quality of experience.

"Under an averaging model, an RSP offering better tiers of NBN services than its competitors at common price points face real risks of paying a larger penalty in a market that can be quite competitive. So where's the incentive in that?"

Vocus COO Scott Carter said an industry-based CVC model would hamstring his company, as it would be judged on what the rest of the market is doing.

"We cannot have a CVC model that doesn't reflect the user base I have in my business," the COO said.

"We need an RSP dimension-based pricing model for CVC."

Superloop CEO Bevan Slattery, who is also the founder of elastic interconnection services provider Megaport and CEO and founder of subsea cable company SubPartners, pointed out that the CVC pricing will make it more expensive to connect to a domestic POI than an international connection.

"The CVC charge congestion tax is galactically stupid pricing," Slattery said.

"The cost of international capacity, I think, is going to remain cheaper than the CVC charges. So international capacity for the next five years or 10 years is going to be cheaper than the CVC charges ... there is no way it should be cheaper to get connected from next door to the POI next door than it should be to go trans-continental. That's just crazy."

NBN first committed to dropping its CVC charge for RSPs from AU$20 per 1Mbps to AU$17.50 per 1Mbps in November 2014, bowing to industry pressure.

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