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NBN examining CVC options, but must give RSPs two years' notice

NBN has been examining a number of options on changing its pricing structure, but consumers may be on hold for a two-year window.
Written by Chris Duckett, Contributor

Australia's National Broadband Network (NBN) company is currently in its second round of consultations with retailers as the broadband wholesaler looks to announce at least one new product prior to Christmas 2017.

Speaking to Senate Estimates on Tuesday night, NBN CEO Bill Morrow said the company has put all options on the table in its connectivity virtual circuit (CVC) and access virtual circuit (AVC) pricing review.

"We have evaluated eliminating the CVC, and only having one AVC fee that has a near-unlimited usage behind that," he said. "We looked at other alternatives of changing the pricing structure altogether.

"Should we bundle things together, should we include a degree of CVC along with an AVC price, should we change the price overall?"

Other options detailed by Morrow were 95th percentile billing, where NBN would waive the top 5 percent of usage, and bill retailers for the remainder; removing the 12Mbps speed tier altogether and putting those users on 25Mbps connections; and moving to a flat-fee model that is similar to the model used by Chorus in New Zealand, which would remove download caps.

The end game for NBN, Morrow said, is to get the average revenue per user (ARPU) per month up to a level that would allow for the network to pay for itself, following questions on NBN's commercial viability earlier this week.

"We need three quarters of the population to take this up, and AU$52 a month that the retailers should be paying us. If we had guarantees, as an example, where if the retailer said, 'We'll guarantee you 75 percent take-up, and we'll pay you AU$52 a month', we are not really fussed by the CVC [after that]."

While consumers say they want unlimited plans, NBN believes average consumers will not pay for them.

"The beauty of the way the previous management team, and the previous government approved, that [AVC and CVC] pricing construct is that we will recover money as more applications come into the home, as more value is presented to the home, and therefore more data consumption comes between the home and NBN network over the RSP," Morrow said.

"It's an important mechanism that keeps the price level down. And that's why I don't think there are too many people that like that idea of a single price, all-you-can-eat component, if we have to put it at the cost recovery level, which is AU$52 -- they won't buy it.

"If we can do something to say, 'How about we have a far more attractive price that gives you a 50Mbps speed product and we have some inclusive CVC that comes with it, and an attractive growth rate thereafter'. Now we are talking, we seem to get people saying they are interested in that and what we need to do now ... is how can we actually massage all this to make sure it works."

Morrow said the company would announce the results of its pricing review before Christmas, but end users could face a two-year window of being on older plans should they wish to change, due to the retailers needing that time frame to switch over.

"You can't pull a product so easily, it takes two years for us to give notice to these RSPs," he said. "And rightfully so, they've built IT systems, they've trained staff, they have customers that are on these products, so it's not like overnight let's shut that one down and here I'll give you this new one.

"We have to be very mindful and thoughtful of the evolutionary process of pulling products out of the market and replacing them with others."

The CEO said NBN would introduce its new products alongside the current lineup before deciding at a later time which ones to remove from the market.

Questioned on whether the company should publish its database of attainable speeds for each premises, Morrow said there is a "right way to do it", and that is communicating via the retailers.

"Shouldn't we mandate that the retailer, if the consumer asks 'What is the maximum speed I could get?', that the retailer tell them?" he said. "In my view, NBN should not be the police."

On the topic of whether cities such as Dubbo, which was highlighted by the ABC this week, suffer from a digital divide, Morrow said the idea is insulting.

"I've also heard Dubbo being used as an example of the new digital divide. This is an absolute insult to the many thousands of Australians who have no access to decent broadband at all, and who are waiting for the NBN," he said.

"A city where almost everyone can order faster speeds than they require is not a city divided. The real digital divide is between people who can do all that they want online, and those who cannot."

Morrow cited figures that said 90 percent of fibre-to-the-node (FttN) users in Dubbo are on plans of 25Mbps or less, while 85 percent of its fibre-to-the-premises (FttP) users are on the lowest two speed tiers available.

"More people on FttP are choosing the lowest-speed tier than those in the FttN areas, with the 12Mbps plans making up 30 percent of FttP and only 23 percent for FttN," he said.

"At least for now, the desire to pay for higher speeds is not evident in the market, and the access technology does not make a material difference."

The Australian Competition and Consumer Commission (ACCC) earlier this month announced that it would not intervene in the CVC discussion between NBN and its retailers, saying an industry-led solution would achieve better outcomes for consumers.

The ACCC said it would review the progress of the pricing consultation in December, with NBN arguing has argued that it already has "strong incentives" to ensure its pricing is efficient without direct regulation, as evidenced by its falling CVC prices.

NBN downplayed CVC uncertainty concerns last month, labelling them as being "overstated" during its response to the ACCC Communications Sector Market Study.

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

"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 aggressive marketing campaigns to retain and attain market share."

RSPs including Vocus, Vodafone, MyRepublic, and Macquarie Telecom have previously argued that the only reason retailers are not offering 1Gbps speeds is NBN's CVC pricing structure; however, Morrow recently criticised 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."

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