Telco industry slams NBN CVC pricing

NBN's newly announced plans to calculate its CVC on an industry-wide basis has been met with criticism by Optus, Vocus, and Superloop.
Written by Corinne Reichert, Contributor

The National Broadband Network (NBN) connectivity virtual circuit (CVC) pricing structure is far more paramount than the debate surrounding the broadband technologies being used to roll it out, Optus, Vocus, and Superloop have all said.

NBN announced its new discounted CVC wholesale pricing structure on Tuesday that involves a series of industry-wide tiers, rather than being calculated separately for each retail service provider (RSP).

The new pricing structure, to be implemented for two years starting on June 1, will be calculated as an average of CVC dimensioning per end user across all customers on the NBN, with the changes effected after feedback from RSPs.

However, Optus vice president of Corporate and Regulatory Affairs David Epstein, Vocus COO Scott Carter, and Superloop CEO Bevan Slattery all criticised the existence of, and changes to, the CVC pricing model.

Epstein accused what he labelled as the "increasingly contentious CVC charging model" as being the largest hindrance to the network succeeding.

"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 ... this is because of the Netflix effect, crudely," Epstein said at Tuesday's CommsDay Summit in Sydney.

"What is unfolding is an intersection of a change in customer behaviours and the product economics of the NBN."

This so-called "Netflix effect" -- to which Optus itself will add once its EPL broadcast streams begin in August -- has resulted in more data consumption than the networks were designed for. While some have suggested that telcos simply purchase more capacity on the NBN to allow for this, Epstein pointed out that this has its limits.

"How much capacity can you buy, and deliver services across it, that customers can afford to use, or want to pay for?" he asked.

Epstein added 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," he said.

"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' Carter agreed, saying 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."

Australian technology entrepreneur 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."

With Optus, Vocus, and Superloop all criticising the CVC, it signalled a step away from blaming the broadband technology choice as the biggest obstacle to the NBN's success.

"Customers do want to get on the NBN, and they do want to use the full capabilities of the network. But the NBN needs to adapt its pricing model more fundamentally to fulfil these needs," Epstein said.

"We need a pricing model that unlocks the potential of the NBN without penalising customers for using that capability -- and has nothing to do with the NBN's choice of technology."

Carter added that it is the industry's job to worry about how to get around the "121 POI challenge" -- though he noted that Vocus has solved the issue with its NBN Connect wholesale product that allows smaller providers to gain access to all 121 POIs through Vocus' network by cutting out the middlemen -- saying others should instead focus on how to realise the benefits provided by a high-speed network.

"Stop the debate about the 121 POIs ... stop the debate about the technology mix," he said.

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 will now see a dimension-based discount (DBD) pricing structure to encourage more dimensioning of CVC capacity -- or greater usage of data.

When asked why NBN didn't proceed with levelling charges on an RSP-by-RSP basis, Sarah Palmer, executive general manager of NBN Product and Pricing, said the model was "not workable" as yet.

"We're just not that sophisticated right now," she admitted.

"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, the new DBD tiers provide 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.

Some of these figures are actually a slight increase over the trial's RSP-by-RSP DBD pricing, but will be evolved and lowered continually over time, NBN said.

Carter said the price needs to be lowered to address a "bandwidth tsunami", with data usage swelling by up to 60 percent in the last year. This will only be exacerbated by the Rio Olympics later this year, which will occur mainly during peak data usage times in Australia, he said.

Telcos moving into the streaming-provision services sector has also resulted in "the dissolving distinction between the carriers and broadcasters and content providers", Minister for Communications Mitch Fifield said on Monday.

"Optus' acquisition of the English Premier League rights is a case in point of the fact that we now have a telco selling the broadcast rights to a broadcaster, not the other way around; it shows just how rapidly the competitive landscape has shifted," Fifield said.

To support such a transformation into a multimedia company rather than a pure telecommunications carrier, Optus on Monday announced that it will be restructuring its Enterprise and Consumer divisions through up to 480 redundancies.

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