NBN should abandon CVC charges, reduce POIs: MNF CEO

CEO and co-founder of retail and wholesale VoIP provider MNF Rene Sugo has said the National Broadband Network (NBN) company risks failure if it does not change its wholesale pricing structure by removing connectivity virtual circuit (CVC) pricing and reducing its points of interconnect (POIs).

Speaking at the 2016 Tech Leaders conference in the Blue Mountains, north of Sydney, Sugo said NBN will continue to suffer from low uptake for two reasons: Wholesale pricing and the mobile "NBN bypass" being offered by Telstra, Optus, Vodafone Australia, and TPG.

In terms of the former, NBN will not be able to offset the cost of constructing its network for an extended period of time, because its wholesale pricing structure has a reliance on connecting a high number of users, according to Sugo.

"The NBN wholesale pricing model business case is currently usage-based and relies on reaching a certain percentage of service activations to generate sufficient revenue to repay the investment of building the network," Sugo explained.

"In order to reach this activation target, NBN has to be the 'number one choice' for data services for consumers, and be available at a viable price point for service providers of all sizes to resell -- and, as it stands, this is not going to be realistic."

With less activation numbers than forecast, revenue will need to be supplemented through higher CVC pricing for wholesalers and, as a result, higher retail prices for consumers. To avoid this "snowballing", the four largest telecommunications providers will instead focus on gaining market share through their mobile offerings, Sugo claimed.

"The big telcos have more attractive bypass alternatives to sell to their consumers. This NBN bypass will eat away at the NBN market share, posing a major barrier to reaching activation and revenue targets."

Telstra, Vodafone, Optus, and TPG all offer high-speed services across their 4G, 4G Plus, and fibre-to-the-building services, with 5G coming within four years. Due to the rising trend towards using primarily mobile services, these telcos provide an "NBN bypass", Sugo argued.

"As retail prices rise, NBN will become less and less attractive to consumers, driving them more to bypass services, further decreasing NBN uptake, leading to further NBN cost increases in a vicious cycle.

"The end result: The NBN business case falls short of recovering its massive build cost."

He added that the 121 POIs "distinctly favour" the four largest telcos, precluding mid-tier telcos from directly linking to the NBN.

"The promised 'level playing field' is nothing more than a mirage. With the untenable 121 POIs, direct NBN interconnect is out of reach to most and they are already forced to resell NBN via the big providers, putting further squeeze on the slim margins," he said.

"Meanwhile, CVC costs also favour large providers who have the scale to reach greater contention efficiency, while mid-size providers need a higher margin of CVC headroom to ensure reasonable contention, translating into higher cost per user."

NBN's CVC charge reserves a consumer's bandwidth from the POI. The wholesale pricing structure incorporates a two-part model, with the CVC charge paid in addition to the access charge levied across all speed tiers.

In November, NBN announced a two-year trial of discounted CVC wholesale pricing, rewarding telcos that offer customers high-usage plans across high-speed services with a lower levy.

The CVC will now be calculated on the average dimensioning of CVC per end user, rather than the volume of purchase of CVC.

Prior to this, NBN bowed to industry pressure in November 2014 and committed to dropping its CVC charge for RSPs from AU$20 per 1Mbps to AU$17.50 per 1Mbps, beginning in February 2015.

RSPs had argued prior to this that the CVC charge would make it difficult to offer competitive market prices, with iiNet claiming in August 2013 that it could not provide unlimited broadband plans through subsidiary Jiva with a CVC charge of AU$20 per 1Mbps.

Internode founder and now NBN non-executive director Simon Hackett had fought with the company over its CVC pricing from 2011, stating that the charge, combined with the competition regulator's decision to expand the NBN to 121 POIs, would result in many smaller carriers being priced out of the market.

In order to prevent mass abandonment of NBN services in favour of mobile broadband, Sugo suggested boosting competition by reducing the POIs, removing CVC usage-based costs, and restructuring the wholesale pricing.

"A fair model would allow middle players to step up and effectively compete in the market, driving NBN uptake and balancing out the challenge of the NBN bypass services," Sugo said.

The government should also write off part of its NBN construction, so that it does not increase wholesale pricing in order to recoup its costs, Sugo said.

In September last year, Sugo told ZDNet that the policy involved in rolling out the national high-speed network is making it difficult for smaller players in the market in regards to costs.

According to Sugo, retail service providers (RSPs) are caught in the middle of broadband usage climbing higher, NBN's decision to charge RSPs on a per-megabit basis, and the Australian Competition and Consumer Commission continuing to push down costs for consumers, meaning RSPs are being "squeezed to nothing".

"We're all being forced off Telstra's copper -- which is not great -- onto NBN's solution, but our costs are actually going to go up. So how do we, as retail providers, keep pushing the cost to the consumer down when we're getting forced to absorb this massive regulated cost on the input side?" he asked.

"There's only so much efficiency you can get; we're cutting all the other costs, and we're getting scaled, but then we're having to pay a large cost per megabit to the NBN Co for access to the consumer ... so the more and more broadband they use, the more it costs."

Also speaking from the Tech Leaders summit on Monday, Shadow Communications Minister Jason Clare criticised the broadband technology being used for the NBN, referencing a recently leaked document that said FttP is cheaper than the Coalition first thought.

"The cost of fibre to the node has almost tripled -- up from AU$600 a premise[s] to over AU$1,600, and the cost of fixing the old Telstra copper to make fibre to the node work has blown out by more than 1,000 percent," Clare said.

"Last Wednesday night, the head of NBN Co, Bill Morrow, gave us another interesting piece of information. He finally revealed how many nodes they are building. The answer is more than 30,000.

"A few months ago NBN Co said that they would need an average of 350 metres of new copper for every node they stood up. Do the maths. That means NBN Co has to buy more than 10 million metres of new copper to make all of this work.

"We really are getting a Copperart version of the NBN. 10 million metres is enough copper to connect us here in the Blue Mountains to Bangalore. It's enough to connect us to Russia. It's almost enough to get us from here to Silicon Valley.

"And to add insult to injury, we got another leaked document two weeks ago that reveals that while the cost of Fibre to the Node is going up, the cost of Fibre to the Premise is going down."

MNF, which rebranded from its previous name of MyNetFone late last year after being founded in 2004 and listed on the Australian Securities Exchange (ASX) in 2006, last month reported a first-half net profit of AU$4 million on revenue of AU$83.98 million. This it attributed to the contribution of New Zealand telco Spark's international voice business, TNZI, which it bought for NZ$22.4 million in April last year.