NBN Co's pricing controversy explained

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.
Written by Josh Taylor, Contributor

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 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.

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