NBN denies 'margin squeeze' through CVC

Asking NBN to lower its CVC pricing is requiring it to fund the 'race to the bottom' on broadband pricing, it has argued, when RSPs could instead be focusing on quality rather than grabbing market share.
Written by Corinne Reichert, Contributor

The National Broadband Network (NBN) company has denied culpability of its connectivity virtual circuit (CVC) charges in any margin squeezing for retail service providers (RSPs), instead suggesting that falling profits could be due to retailers focusing more on a "land grab" than on providing high-quality services to consumers.

"There was some suggestion in the Market Study Forum that CVC charges are resulting in a 'margin squeeze'. NBN is statutorily prohibited from participating in the retail market and cannot compete with its access seekers in the retail market. Accordingly, NBN cannot be creating a margin squeeze," the company argued in its supporting submission [PDF] to the Australian Competition and Consumer Commission (ACCC) Communications Sector Market Study.

"If one exists, it is created by participants in the retail market who have some level of market power which allows them to set a ceiling on prices, which is profitable for them but not for others," it said in its submission.

"The effect of access seekers' arguments to lower CVC prices even further is to require NBN to fund the 'race to the bottom' pricing that has occurred in the downstream market whilst access seekers embark on an aggressive marketing campaigns to retain and attain market share."

Telstra's marketing campaigns have seen it increase its 41 percent ADSL market share to 47 percent of NBN's fibre-to-the-premises network, 54 percent of fibre to the building, and 58 percent of fibre to the node, NBN said.

"In response to Telstra's increased market share, other RSPs have introduced price reductions in order to stay competitive," NBN pointed out.

Calling the concerns about CVC pricing uncertainty "overstated", NBN said retail margins are also possibly temporarily contracting during the rollout, drawing a distinction between margin reduction and margin squeeze.

"Whilst the CVC charge may be a new input cost, it is not an unquantifiable or unmanageable cost for retail providers," NBN said.

"Even if it contributes to relatively lower margins ... this would only be the temporary result of the 'land grab' phenomenon that is currently occurring in the downstream market as access seekers fight for market share during NBN's rapid expansion phase."

NBN also pointed out that unlike other regulated companies, it has only two significant revenue streams -- CVC and access virtual circuit (AVC) -- and that reducing either would harm its business case.

"Access seekers who claim that CVC prices should be lower without identifying alternative revenue models or acknowledging the impact of such pricing decisions on NBN's cost recovery are simply arguing in favour of increasing their own profits at the cost of the Australian taxpayer," it argued.

NBN added that its CVC discount launched in June is already driving usage in the right direction, with an increase in CVC being purchased by industry and an increase in small operators purchasing directly from NBN.

"Whilst it is too early to assess the long-term impact of that model on retail service innovation, initial indications are that NBN's initiative is having the desired effect," it said.

According to former NBN CTO Gary McLaren, NBN's submission avoided mention that the profit squeeze could be due to higher costs for RSPs on the NBN than they experienced on legacy ADSL networks, with the NBN an "infrastructure monopoly".

"Telstra is singled out as having reduced its retail price by 20 percent on NBN Co's most popular plan over the last six months. By implication, it is Telstra, the 'dominant access seeker', who is causing the margin squeeze, not NBN Co," McLaren said on his personal blog.

"The easy way out for NBN Co is to continue to blame the old foe: Telstra."

McLaren said that during the migration to a new network, RSPs need to keep their pricing constant in order to avoid market share loss -- and that the only way to do so among rising input costs is to "skimp on CVC bandwidth".

RSPs including Vocus, Vodafone, MyRepublic, and Macquarie Telecom have long argued that the only reason retailers are not offering 1Gbps speeds is the CVC and AVC pricing.

NBN CEO Bill Morrow recently responded by criticising retailers for cutting corners by focusing on pricing rather than speeds or quality of service after he revealed that the average bit rate per user is around 1Mbps.

"Under our pricing model, that could be doubled to 2Mbps for each end user for around an extra AU$5 per month," he said.

"If an RSP doesn't price their product high enough to recover their costs, they may be forced to cut corners that could affect the quality of the services being offered."

Morrow also said retailers should not be entering the market if they are unhappy with the well-established cost of reselling an NBN service.

"There's a lot of retailers that are reselling NBN products ... and some of them have come in knowing what the prices are but are now asking for the prices to be reduced," Morrow told ZDNet.

"NBN has an economic model, and we have researched ourselves as to what we think consumers will be willing to pay -- and if a retailer knows what the prices are, they come into it willingly knowing that with their eyes wide open."

The ACCC has said it would prefer RSPs and NBN to come to an agreement on CVC pricing without intervention.

OVO Mobile: 100GB mobile broadband for AU$100 is NBN competitor

Mobile virtual network operator (MVNO) OVO Mobile has announced a series of new mobile broadband pricing, now providing 100GB per month for AU$100, or 70GB for AU$79.95.

OVO, which wholesales Optus' 4G and 3G networks, said its mobile plans offer "a true alternative to fixed broadband", including the NBN, by leveraging Australia's highest ranking mobile speeds in APAC according to Akamai.

"Despite the billions being spent on upgrading Australia's fixed broadband infrastructure, it remains slow and expensive by international standards," OVO CEO Matt Jones said.

"As a mobile company, we're in a position where we can do something about that, and we have. We're offering something that really does prove that fixed broadband, for a significant number of people in this country, is not bloody necessary."

Jones cited mobile broadband speeds, reliability, availability, and portability as points in its favour over fixed-line broadband.

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