RSPs should have 'some ownership' of NBN fibre access nodes: Telco analyst

Once the NBN has been rolled out, RSPs should be given 15-year transferrable leases over the assets in order to drive capital risk management.
Written by Corinne Reichert, Contributor

The National Broadband Network (NBN) will be only able to meet its long-term goals through harnessing the capital risk management abilities of retail service providers (RSPs) by allowing end-to-end ownership, according to New Street Research senior telecommunications analyst Ian Martin: Specifically, through 15-year transferrable leases.

"NBN was on a difficult track right from the start, and of course we've also got quite extensive non-commercial areas," Martin said at the CommsDay Congress in Melbourne this week.

"All of this is compounded by the structural separation model, because the capital risk is held in one vehicle of the NBN, but the ability to manage that risk and drive traffic and monetise that traffic is held by those RSPs.

"So you've got a misalignment of where the risk is held, and the ability to manage that risk."

Martin advocated harnessing the capital risk-management abilities of RSPs through the use of leases that could be transferred between RSPs when customers switch providers.

"What I think would make the most impact in terms of the overall economics of the NBN is for those RSPs to have some ownership in that access infrastructure on the customer side of those fibre access nodes," he said.

The lease value should be net average revenue per customer (ARPU), plus a price cap over 15 years; when a customer switches RSP, the lease would be transferred at the remaining value.

Under Martin's model, NBN would be the holding company, handling the settlement of switched leases every quarter, so only dealing in net transfers. By doing this, the government would realise the capital value -- "such as it is" -- of the NBN post-build through the sale of leases to RSPs.

By holding leases, RSPs would have capital at risk and so be incentivised to drive the value of the lease, Martin explained. This would increase usage and utilisation, lead to better structured prices and packages, and improve the set of services on offer, as RSPs would compete to win customers.

The suggestions came as a result of continuing widespread industry criticism of the connectivity virtual circuit (CVC) wholesale pricing, which makes access to the NBN a high cost for RSPs to bear.

Robert James, from iMediate Consulting, said the federal government must also write down the NBN, and that while the network technologies being deployed could put Australia in the global top 10 for broadband speeds, the current pricing structure pushes the nation down to the top 60.

"The NBN has an insurmountable handicap in the form of the amount of money it's [costing], and I think the only way to fix it is to write it off or otherwise put it out of its misery pretty quickly," James, also speaking at the CommsDay Congress, said.

"If the government does refuse to write down the NBN, what's going to happen? Maybe the ISPs will continue swallowing the costs ... but even if they do, and even if the customers accept the prices, that's not good news. It just means Australia will keep falling to the global bottom of affordability, and we'll be falling behind the 60th in global speeds."

Optus vice president of Corporate and Regulatory Affairs David Epstein agreed that the access pricing issue has led RSPs to "very, very seriously question the balance between what a consumer is prepared to pay for a service while there are competing broadband services and there are competing mobile services, and what it's going to cost to provision it across NBN".

"We clearly have a bit of an issue there," Epstein said on Wednesday.

Symbio Networks CEO Rene Sugo, meanwhile, said the CVC construct makes it difficult for RSPs to deliver high-quality packages at predictable price points without either providing a poor customer experience or blowing out their costs. This situation precludes smaller telcos from entering the fixed-line market, he said.

"Unfortunately with the dynamics of the CVC environment, it's just too hard to meet the market at an aggressive price point and be assured of a positive outcome," Sugo said on Tuesday.

In what Shadow Communications Minister Michelle Rowland called a "burning issue", she said the CVC in combination with the access virtual circuit (AVC) charge discourages usage of the NBN at a time when data demand is increasing.

"The biggest issue with the CVC charge is that it does not relate to the cost associated with the CVC itself. Instead, the AVC picks up the usage concept that is applied by others. The effect of the current CVC design is to discourage usage," Rowland said on Wednesday.

"National retail service providers will simply throw all the backhaul to match the retail price to the CVC. In effect, the CVC pricing arrangement signals to RSPs that they should under-use the capability of the network."

Rowland said NBN recognises that the prices will be dropped when RSPs order more capacity -- but said the company doesn't know how to coordinate price reduction with orders.

"That RSPs don't order enough CVC then puts downward pressure on upgrades to the AVC, as consumers doubt they will get benefit from the higher speed."

This invokes political and economic challenges, Rowland argued.

"Applying an economic lens, this is about setting a CVC price signal that can reflect actual costs. And on a political level, it's fundamentally about how quickly the invested capital is to be paid off. If it's quickly, then RSPs and by extension consumers are paying too much for services; if it's slowly, then the government needs to be a patient investor, waiting longer to recover its investment," she said.

"Then there is the political question: Does government want to stimulate the use of broadband in the economy or not? A sensible resolution in this area would be consistent with an LTIE [long-term interest of end users] approach, placing consumers at the policy core. Lowering costs will be of greatest benefit to those whom we are trying to help the most."

While Australian Competition and Consumer Commission (ACCC) chairman Rod Sims recognised that the CVC charge is an issue, he said it must "consider the opportunity for NBN Co to recover its efficient costs and earn a modest return on investment".

The ACCC is nevertheless looking into whether the CVC charges are affecting downstream market competition.

Last month, NBN said it is about to begin another consultation period with RSPs on its CVC, with an "evolved model" expected to be implemented at the start of 2017.

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

NBN's wholesale pricing incorporates a two-part model, with the CVC charge paid in addition to the AVC 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.

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.

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

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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