Hackett rubbishes NBN Co’s ‘crystal ball gazing’


Internode managing director Simon Hackett has published an impassioned statement responding to the National Broadband Network Company’s attempts to explain its pricing model, accusing the fledgling fibre monopolist of “crystal ball gazing” with regard to its predictions of how much usage its network will see.

The debate about NBN Co’s pricing model as a whole was kicked off in late March when Hackett gave a landmark speech describing the model as “insane” for small internet service providers, warning that none will survive their walk through the “valley of death” transition from the current copper network to the fibre future envisioned by the Federal Government.

Over the past few weeks, NBN Co has made a number of public attempts to further explain its pricing model, going into great detail about why it had chosen the specific mix, as well as this week publishing an online calculator that allows users to calculate projected wholesale costs for providing services to its planned network.

However, in a statement published yesterday on broadband forum Whirlpool, Hackett returned fire on NBN Co.

“Right now, you are arbitrarily choosing parameters that match your crystal ball gazing on exactly how much aggregation capacity will be needed and what mix of port speeds customers will select,” he said, accusing the company of trying to make its average cost per end user equal a total of $33 per customer per month that it required for its business plan.

“You’re doing that at what I consider to be a high risk of being wrong (over or under) that average in practice,” Hackett added. “And yet you can’t afford to be over, OR under, in practice.”

At the heart of the debate is the mix between the basic per user charge for connecting end user customers to NBN Co’s network (the ‘Access Virtual Circuit’), as well as a charge based on data usage (the ‘Connectivity Virtual Circuit’). Hackett has argued for the balance between the two ‘$x and $y’ charges to be changed, with the CVC pricing to come down and the AVC pricing to rise.

In his statement, Hackett said NBN Co could actually abandon its AVC/CVC pricing altogether, and simply charge ISPs a flat fee of $33 per use per month to connect customers to its network. “Why not simply charge $33+GST per month per customer, as a fixed cost, and be done with it?” he asked. “Wouldn’t that generate you precisely the income your plan needs, and result in completely de-risking the chances that you might not earn exactly the right income from the network?”

The Internode MD argued NBN Co could give ISPs the choice – either accept a flat $33 per user per month fee (with no extra connectivity CVC charge), or let the ISPs buy according to the existing variable-based pricing model, with changes for higher speeds and higher volume.

“The principle this works to is that a ‘good’ monopoly should charge a strict margin on top of its true build and operate costs, rather than charging based on parameters that are not actually related to changes in real world cost,” he said.

Over the past several weeks, NBN Co has demonstrated a marked increase in its interaction with the end user community, joining broadband forum Whirlpool and actively posting to its Twitter account. The moves have been broadly welcomed by the community. Hackett ended his post by saying he hoped the fibre monopoly didn’t stop engaging in the debate.

“Great to see you participating here. Don’t stop now :)” he said.

Image credit: Internode


  1. a fixed access charge may well be good if the government’s objective was only to get a 7 percent return, but Simon forgets that they’re trying to flog off the company several years after it is completed too.

    strong revenue growth through a cvc tax will make the NBN an attractive privatisation offer.

    can only hope that the Greens will still hold the balance of power lest history repeats itself.

    • With the way things are going, its highly unlikely that the greens will be of any relevance after the this term of government

    • “strong revenue growth through a cvc tax will make the NBN an attractive privatisation offer.”

      NBN Co is trying hard to spin it like it’s “normal” or “acceptable” for it to swallow a greater share of revenue as data usage on the network increases.

      in terms of “economic efficiency”, once the network is built and the fixed costs are sunk, access pricing on the network should be set so that the capacity of the fibre is fully-utilised. you can do this in two ways:

      (i) you can impose 100mbps connections across the board (without CVC pricing)


      (ii) you can adopt NBN Co’s current pricing mechanism – impose differentiated connection speeds as well as contention pricing to ration the network’s total fibre capacity.

      however, under option (ii), you merely need to raise the CVC price to a level where the subscribers connected at 100mbps+ are not congesting the entire network. this price level is clearly nowhere near the mooted $20/Mbps as NBN Co’s own projections suggest that approx. 50% of subscribers will be connected at 12Mbps. this implies that there is massive underutilisation of the fibre network, i.e. the proposed CVC pricing is not economically-efficient.

      the only rationale for adopting such a pricing structure is to extract as much [“consumer surplus”] as possible out of the customers of the network by engaging in a form of [volume-based] price discrimination.

      we know that the greater part of NBN’s cost structure is largely fixed or sunk in nature, and there’s no/minimal difference in cost in servicing a subscriber who’s downloading 100GB/mth or 1TB/mth. however, the effect of introducing CVC pricing is to vary the cost of fibre access according to the type of customer using the network.

      subscribers with higher discretionary spend on broadband, e.g. VOD, IPTV subscribers, are forced to pay more to access the network as compared to others who use the network for more basic purposes (because RSPs have to provision more capacity). this is monopolistic price discrimination (i.e. the Telstra wholesale ADSL pricing model).

      i’ll enjoy watching the ACCC, the supposed “torchbearer for competition and consumers”, rubberstamp the reintroduction of monopolistic price discrimination in fixed network access pricing.

      this whole CVC pricing fiasco just goes to show that when you choose the extreme option (93% FTTP) for upgrading the national broadband infrastructure, you’re forced to adopt implement extreme pricing models to recover the massive cost involved.

      commonsense suggests that if the NBN is to be funded from retail usage charges (with no ongoing government subsidies), then the asset base of NBN Co should be no larger than what the retail market can reasonably sustain or service. otherwise, you end up with an overly-cost burdensome infrastructure that is not only massively under-utilised but makes broadband LESS affordable for all. just plain silly.

      P.S. some people are trying to quarantine NBN Co from criticism by arguing that the company is merely implementing “government policy”. this is total nonsense. M Quigley has publicly voiced his support for Conroy’s NBN policy and even criticised Opposition policy. in doing so, NBN Co has bought itself (or injected itself directly) into the political process. NBN Co must be held directly accountable for the economic implications of implementing the proposed NBN with its current reach and scope.

      no more blame shifting tyvm.

  2. This guy is absolutely amazing. I am so dismayed that no one else has joined him in his criticism. Why is he the only ISP out there screaming about the retarded nature of NBNCo pricing?

    No other wholesale fiber ISP in the world that I know of has CVC usage costs. Fiber networks are insanely fast and have absolutely no contention or congestion issues WHATSOEVER. You’re talking about sharing 2.4 gbit between 32 users, and building more backhaul is the cheapest part of the operation.

    This pricing model only serves to prop up the incumbents. It’s retarded and completely unnecessary. It will destroy the possibility of ultra high caps and literally *force* the vast majority of people onto 12/1 plans for absolutely no reason. The network as built now should be able to provide literally everyone with 100 mbit with no caps (assuming transoceanic lines keep being built) for the same or cheaper price than they get now.

    • I think the network switches and routers get more expensive as the throughput demands increase – pps and all that. The question would be whether the cvc costs are an accurate reflection of these scaling costs or whether the avc is being held low for political reasons and the meat of the scam is in the cvc charges which most people wont understand anyway.
      It may also be that NBNCo sees a future where the bulk of a users data is directed to registered content providers rather than ISP’s. The cvcs would then become an invisible cost in the content product bundle – profits for all and an attempt to avoid utility returns on the new network. ISPs would go back to offering email services, caching web pages, offering packet transport for fixed IM clients and supporting innovative new services.

  3. Perhaps Simon is thinking about the future NBN world and the good old days when he had control over his bottom line with his own DSLAM’s and the ADSL2+ product range and could flog Telstra ACCC set priced dirt cheap ULL, call it Naked DSL and make a nice little earner out of it.

    The NBN product range does not have quite the same range of variety to it, plus you don’t have your own exchange gear anymore to tweak up your offerings to try and make a technical difference from other ISP’s, every ISP will be flogging the same bog standard NBN Plans like everyone else.

    • “…plus you don’t have your own exchange gear anymore to tweak up your offerings…”

      Actually, that’s completely incorrect.

      Rack space will be available in all POIs for RSPs seeking to locate equipment required for any “tweaking up of their offerings”…

      • What equipment can ISP’s put into POIs to tweak up their ‘technical capabilities’ to give them a competitive edge over every other Tom, Dick and Harry NBN reseller?

        • You brought it up FFS.

          You’re suggesting they won’t be able to do it anymore – inferring that they can and do do it now – so you tell us – what ARE they putting in exchanges NOW that you think they won’t be able to do in the future?

          First you say “they won’t be able to do it anymore”, but you turn around and defend it with “what would they put in there anyway”…

          *many lulz*

          • DSLAMS to bypass any AGVC costs, plus routing equipment and whatnot due to how many more exchanges there are compared to POI’s. ULL is basically layer 1 (or halfway between layer 1 and layer 2). NBNCo is between layer 2 and layer 3, that leaves more room for the ISP’s to use their own capital

            And don’t give me this shit that DSLAMS are expensive, they are an initial capital cost that gets distributed to hundreds of customers, and once DSLAMS are payed off there isn’t any ongoing costs. The same is not said for AGVC (or CVC), which continues to cost you as long as your customers are using the internet

            Its not surprising that the cheapest valued ISP (TPG) is also the one that has the biggest capital expenditure on infrastructure out of any ISP (apart from OPTUS and Telstra).

          • Your argument has always been that internet plans wont increase on price on ISP because the CVC covered for costs that ISP’s have to pay for extra equipment when using ULL/LLS

            Of course this (as has been shown) is blatantly false, especially considering that such equipment is just initial capital costs that is absorbed and paid off, this is not the case for CVC (the CVC is also a lot higher)

          • Well ISP’s seem to be arguing that the CVC costs would make internet more expensive then it would have normally been

            So you are right, I will listen to them then

          • Indeed… as I said to deteego when he disgracefully brought Tourettes into the correspondence (he accused me of such, because he didn’t like what I was saying) he sadly appears to have Tolstoy syndrome.

            Now this is not meant as a cheap shot name calling exercise, as his was, nor a cheap shot at psychiatric disorders, because Tolstoy syndrome (Confirmation bias), isn’t so much a disorder but rather a tendency for some to compute information in such a way that it always fits within their already preconceived and totally partial beliefs…regardless of factuality…

            Again I am not meaning to be disrespectful, it is simply apparent, to not just me that deteego does this 24/7!

          • Renai, isn’t this one of those pointless insults with no relevance whatsoever to the topic that you are meant to moderate?

          • You make some valid points here Deteego, but your statement has absolutely nothing to do with the current thread, which was about putting auxiliary equipment which isn’t required to deliver basic services (which a DSLAM isn’t as a DSLAM is simply there for the purpose of providing DSL to customers) to provide add-on services like IPTV. Hence why Michael was a little confused about your reply, and frankly so am I.

          • @MW

            Why would Telstra keep the current exchange building system going, the majority of which are sitting on valuable real estate post NBN and copper shut down?

          • @Micheal Wyres

            So run it by me again, what equipment will ISP’s place into POI’s to make their NBN Plans and speeds different from a ISP who does not?

          • Well, you brought this up, not me…but since you can’t grasp the concept you actually raised as a problem point:

            – VoIP routing nodes
            – IPTV distribution nodes
            – web proxy servers – (you know, cutting down downloads/improving speeds?)

            Basically, any service that might be architected in a distributed fashion.

          • @Micheal Wyres

            “VoIP routing nodes
            – IPTV distribution nodes
            – web proxy servers – (you know, cutting down downloads/improving speeds?)”

            Those sorts of value add services are more likely to be provided at the wholesale NBN resell level, not on a individual ISP level, I don’t see the NBN Co and Telstra the POI building owner allowing at each POI all this gear sitting in there for say 50+ ISP’s (assuming excess rack capacity in the first place).

          • Poppycock.

            For example, your own web proxy server in each POI you choose to support can help you reduce traffic needing to go upstream to your DC if specific content is cached locally. This reduces your bandwidth costs by not driving it over your POI to DC connection, where possible.

            Why send a voice call from an end user all the way back to the DC and then back to another user on the same POI – (ie: a local call) – if you can route it locally without the DC softswitch getting involved, and again not send that traffic over your POI to DC connection?

          • The proposed NBN POI locations (so far) are where Telstra exchanges are in every case, so the scenario becomes interesting when the copper is decommissioned exchange area by exchange area and Telstra wants to get rid of the exchange buildings sitting on very valuable real estate worth millions of dollars of land value alone but the NBN Co wants Telstra to keep them going for their POI.

          • Well considering there a way more than 122 exchanges, I’m pretty sure Telstra can turn a tidy profit regardless. And if they don’t want to sublease (don’t know why they wouldn’t) they can always sell the exchange to NBN Co.

            Never make the assumption that big corporations want to sell their assets if they are guaranteed a regular income from maintaining the asset. Which they will be if NBN Co has to lease off them.

          • @Nightkhaos

            “. And if they don’t want to sublease (don’t know why they wouldn’t) they can always sell the exchange to NBN Co.”

            Is this part of the NBN rollout budget if they have to buy Telstra exchange building sitting on multiple millions of dollars of valuable real estate? :)

            “Never make the assumption that big corporations want to sell their assets if they are guaranteed a regular income from maintaining the asset. Which they will be if NBN Co has to lease off them.”

            It’s all about ROI , Telstra has no obligation to hold onto exchange land if the building doesn’t have any Telstra gear in it anymore, if they can flog it off to developers for substantial amounts of $$ who would be drooling at the prospect of developing multiple unit complexes on some of those quite large inner city sites they will, the NBN Co lease for a single building won’t be able to match that sort of return.

          • err… those exchanges (amongst other assets) required for 122 POIs are part of the A$13bln deal with NBN Co. that’s why the actual valuation of the last mile CAN is only a measly A$7.5bln (when it’s costing NBN Co at least A$36bln to replace it with fibre).

          • Yes our friend alain has a distinct habit of bluntly contradicting himself… regularly!

      • @Micheal Wyres

        “Rack space will be available in all POIs for RSPs seeking to locate equipment required for any “tweaking up of their offerings”…”

        That’s not what Telstra says.

        “It was also argued by Telstra that large cash investments will need to be invested by NBN Co in order to upgrade the existing exchanges to fibre or find other locations due to space issues.

        “Of the 120 POIs, Telstra believes that over half would require a considerable level of additional investment and an extensive period of time for either the ready works to be performed on the Telstra exchange, or for NBN Co to establish alternative accommodation,” Van Beelen said.

        Telstra used the example of the proposed Cranebrook POI, located in Sydney’s western suburbs. Telstra said that the Cranebrook location had insufficient space to house NBN Co’s infrastructure. Telstra proposed that Penrith, just a few kilometres away, would be a better location”


        • You seem to have this idea in your head that the POIs will be built in existing exchanges.

          Some will, but most won’t. Most existing exchanges are not suitable for power and space requirements, and would not be in desirable locations to suit the network design.

          • @Micheal Wyres

            “You seem to have this idea in your head that the POIs will be built in existing exchanges.”

            Well it’s not MY idea it’s the NBN Co/ACCC published list and taken up by Telstra in their submission.

            from the link above.

            “In a submission made in January and published on the ACCC website on Tuesday (PDF), Telstra said that the proposed POI locations were based on where Telstra’s exchanges are located for its 100-year-old copper.”

            “Some will, but most won’t.”

            So what NBN/ACCC list states that ‘most won’t’ – or are you making that bit up?

  4. I personally don’t see the need for 200 odd ISP’s anyway (whirlpool stats). Why does there need to be so many? Surely 20 or so ISP’s is choice enough. They generally don’t provide a cheaper and better service because they don’t have the economies of scale.

    • 20 is indeed enough. But the way things are going with the NBN at the moment, we will have only a handful (of medium sized or large ones). And by handful, I mean far less than 20.

      • But the idea behind the NBN is to open up competition not decrease it because we now have this supposedly fairer wholesale monopoly, they don’t have to deal with the big bad ogre Telstra monopoly anymore?

        The very real prospect of their being less ISP’s and the very real prospect of entrenching the position of the two main ISP’s, BigPond and Optus who hold well over 50% of the retail BB market even more in the NBN world makes a mockery of the whole premise behind the rollout.

        It would be supreme irony if ISP’s looked back on the Telstra monopoly years as being their revenue honeymoon period.

        • *It would be supreme irony if ISP’s looked back on the Telstra monopoly years as being their revenue honeymoon period.*

          if you look at how the internet industry in Australia has evolved:

          essentially, you have smaller ISPs leading the market and winning market share from the majors by offering cheaper, more attractive and higher cap plans. this has been possible because ULL access and competitive backhaul allowed them to bypass the Telstra AVGC charges*. over time, ULL competition also indirectly pushed AVGC charges lower as Telstra tried to stem the revenue drain from wholesale ADSL.

          by implementing CVC charges in the post-NBN world, you’re basically dialling back all the massive improvements we’ve experienced in retail internet access.

          furthermore, the high (non-trivial) cost of capacity provisioning and the attendant “aggregation economies” that result favours the majors which have disproportionately large customer bases over which they can “amortise” the cost. hence, all the small ISPs which are not already Telstra wholesale ADSL customers will be forced to access the NBN via a wholesale aggregator to share in the “aggregation economies”.

          in the post-NBN world, small ISPs may well still exist as customers of wholesale aggregators. however, all the political marketing fluff about a flowering of renewed retail ISP competition driving costs lower is just plain nonsense. also, the fanciful talk about “smaller ISPs driving innovation with all sorts of magical apps” is just pie-in-the-sky stuff that has little to do with present commercial reality.

          * oversubscription is also another factor

    • Summary is that NBNCo will have to charge a shitload in order to get its 7% return, and that thread is a massive debate about how exactly NBNCo should do its price shifting/charging.

      The more valid option is to completely remove CVC, and just increase AVC, but that would be political suicide since NBN being a monopoly means that every communication service (including people just on phone lines) would have to use NBN, and you can get phone line rental now for around $21 (and such an increase to AVC would be $33+ minimum for the 12/1 service)

      So the alternative of what NBN provided is a charge based tax, aka CVC, which makes it cheaper for light users but a lot more expensive for medium/heavy downloading users. Of course that is somewhat ironic, since the whole point of fiber is medium/heavy uncontended downloading

      • That’s an inaccurate assessment. If NBNCo was planning on offering 100/40 to every single consumer, they could charge a flat $33 AVC fee to everyone. But if they have speed tiers without the CVC garbage like every other wholesale network in the entire world they could charge lower rates for lower plans and higher rates for higher plans. As long as it all averages out to $33/user in the long run.

        However that $33 is based on their estimates of uptake, which IMO is a low-ball estimate, and ignores the massive alternatives for revenue generation (for example cell tower backhaul).

        • No they couldn’t charge $33 for 100/40 to everyone because they lose the money from AVC on the higher speed tiers. The CVC in itself is on average $10+ per month for every customer according to their revenue charts, which would mean they would have to increase the amount of every AVC tier speed by $10

          Of course doing such a thing would open up the threat of wireless killing off NBNCo’s lower market even further, and skews the predictions even further

          Its basically a catch22

        • *However that $33 is based on their estimates of uptake, which IMO is a low-ball estimate, and ignores the massive alternatives for revenue generation (for example cell tower backhaul).*

          this whole $33 ARPU is a total misnomer.

          NBN is being built progressively – hence, their revenue profile rises gradually over time before settling at a long-run “steady state” as the network matures. that oft-cited $33 ARPU is merely NBN Co’s projected ARPU in a specific year during the NBN’s roll-out phase. by no means is it representative of NBN Co’s required ARPU in the subsequent years leading towards the long-run “steady state”. that number by itself is meaningless. (SH was merely using that $33 figure to highlight network cost transparency issues.)

          instead we should be focusing on NBN Co’s projected AVC and CVC revenues in aggregate when the NBN build is complete. these can only be read off a chart by eyeballing because NBN Co’s so secretive about revealing basic financial info about their financial projections. as a result, ISPs like Internode are left in the dark trying to figure out how NBN Co’s financial model hangs together and how it impacts ISPs under different operating scenarios. this also ties in with B’s comment about NBN Co lacking in confidence in its pricing models/forecasts, etc.

  5. Simon’s argument might hold more weight if he practised what he preaches.

    I note that Internode’s ADSL pricing varies based on usage too. If just selecting a flat wholesale price is the right solution, why not apply it to their own pricing structure? Could it be because it would be unfair for the average user to subsidise the high-volume user?

    Seems to me that a usage and speed-based pricing system is a fair implementation of the NBN pricing structure. And if usage increases as much as Simon predicts, then the NBN CVC charges will fall to maintain their 7% return.

      • Thats besides the point thought, the ULL/LLS is a free market, so if you don’t like internodes pricing you can go with someone else

        On the other hand, what NBNCo is doing is going to force this form of pricing onto every RSP, because every RSP is forced to pay these charges (government owned fixed line monopoly)

          • 1. The ULL is a flat rate of $16 (apart from completely remote regional areas)

            2. The NBNCo is a combination of speed tiers + charge based on usage, with a minimum of $24

            You tell me which one imposes more limits on profit margins (hint, its #2)

  6. *I note that Internode’s ADSL pricing varies based on usage too. If just selecting a flat wholesale price is the right solution, why not apply it to their own pricing structure?*

    there’s a big difference between implementing “volume-based” price discrimination at wholesale level and retail level. because ULL pricing has no variable tariff, when retailers like Internode do so [at the retail level], they’re able to earn higher margins on higher cap plans which lifts the overall average margin earned on their products.

    if you introduce CVC charges at the wholesale level, these volume-based charges eat into ISPs’ margins on higher cap plans. simple calculations based on NBN Co’s own examples suggest that ISPs would have no incentive to introduce higher cap plans: http://whrl.pl/RcAphT and http://whrl.pl/RcArJc

    *Could it be because it would be unfair for the average user to subsidise the high-volume user?*

    it doesn’t cost NBN Co anymore to service an “average user” vs a “high volume user” in terms of data throughput. NBN Co’s operating costs do not vary according to data downloaded.

    *And if usage increases as much as Simon predicts, then the NBN CVC charges will fall to maintain their 7% return.*

    this is where the contradiction lies: NBN Co’s pricing structure (fixed CVC rate) disincentivises:

    (i) ISPs offering high quota plans (lower ISP gross margin)

    (ii) consumers buying high quota plans (higher monthly cost)

    • another way of looking at CVC charges is this:

      if you’re solely focused on a 10GB/20GB/30GB plan world, then CVC charges are “inconsequential”.

      however, once you cast your eyes beyond that limited world over the entire spectrum of high cap / data usage plans, then what implementing CVC charges effectively does is it introduces a new, additional (cost) wedge between retail revenues and ISP gross margins.

      to maintain profitability, ISPs have three options:

      (i) raise internet plan prices

      (ii) lower data quotas across the spectrum of plans

      (iii) implement higher contention ratios / oversubscription

      all three options result in consumers getting scr*wed relative to the present status quo.

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