A basic NBN Co revenue calculation: $1.73bn a year

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blog The debate about how much annual revenue the National Broadband Network Company can eventually look forward to has always been a wee bit complicated for mere mortals like myself to understand. That’s why I’m glad that telecommunications commentator Michael Wyres has boiled it down substantially in a new post on his blog (which is very worth subscribing to).

As Wyres points out, we can get a basic guesstimate of what NBN Co’s revenues will eventually look like through calculating the known inputs into the company’s yearly sums. It’s pretty hard to calculate the variable amount of NBN Co’s pricing — the connectivity virtual circuit or CVC — so Wyres has put together a very basic calculation including only the known access virtual circuit (AVC) pricing.

Quoting from his blog post:

“The NBN will eventually cover approximately 12,000,000 premises, so lets do some really simple maths — and presume that only 50 percent of all premises take up a service, and they all take up only the basic service:

Yes. That is 1.728 BILLION dollars of revenue. In a year. If 50 percent of people take up a basic service. Before we add in CVC pricing. Of course, NBN Co has to spend some of the money maintaining the network, and paying its employees – (so it’s not “profit”) – but $1.728bn is a lot of money.”

When you look at things like this, you start to realise that even the absolute minimum amount of money which NBN Co will be pulling in post-2020 when its network is complete is actually quite a large amount. It’s quite easy to foresee both higher levels of take-up on the NBN than 50 percent and the fact that many (most?) users on the network will be using higher value plans rather than the absolute minimum option. In addition, once you factor in that ISPs will be paying NBN Co a stack for CVC pricing to feed backhaul data traffic to users, as Wyres says, “the numbers look pretty rosy”.

Personally, my issue with the NBN has always been the fact that it will recreate a new monopoly in Australian telecommunications, and reduce infrastructure-based competition between ISPs. I’ve always known the NBN would ‘make money’ in terms of pure revenue. However, what Wyres’ analysis gives us is a very quick picture in brief of what that pure revenue would look like post-2020, as an absolute minimum. And for a national infrastructure project of this nature, damn; it’s not bad.

Image credit: Michal Ufniak, royalty free

89 COMMENTS

  1. It may recreate a new monopoly but lets face it, the Internodes and all that will only roll where there is next to nothing [cost] back haul available are not providing competition in regional Australia anyway. Nor is ADSL a reasonable technology to look to for ever failing copper infrastructure.

    In a country with such a spread out population, cherry picking is what the providers all aim to do, we need a wholesale provider that was prepared to take the next step. Remember, competition never worked for HFC.

  2. How – pray tell – does the NBN really “reduce infrastructure competition between competitors”? DSLAMs in exchanges are no more “infrastructure” than the equipment ISPs will install at POIs.

    Yes we lose HFC but as you know from brutal personal experience HFC doesn’t really compete with ADSL as it is not connected to many of the premises it notionally passes.

    Where costs are sub-additive – that is one network can produce all the output cheaper than two – a monopoly is a good thing. What you need to do is regulate their prices so they stay at cost – which is what the SAU discussion paper says they will be – and make sure you don’t incent management on the basis of profit, but instead on the number of connections. The latter you can only do in a Government owned rather than private sector owned model.

    • “How – pray tell – does the NBN really “reduce infrastructure competition between competitors”?”

      Well that’s easy, Conroy requires all working fixed line BB infrastructure to be switched off so the NBN rollout has some chance of uptake success.

      There is nothing like the legislated elimination of competition to try and justify the multi billion dollar infrastructure CAPEX.

      “Yes we lose HFC but as you know from brutal personal experience HFC doesn’t really compete with ADSL as it is not connected to many of the premises it notionally passes.”

      It is not connected to the premises it notionally passes because those premises have decided they don’t need it and have decided that ADSL/ADSL2+ or wireless or no BB at all is good enough, so HFC certainly does compete with ADSL.

      Many premises if faced with a choice of ADSL2+/ADSL or NBN FTTH would stick with what they have, Conroy knows this so FTTH will be forced down residents throats.

      “Where costs are sub-additive – that is one network can produce all the output cheaper than two – a monopoly is a good thing.”

      Which makes you wonder why the Telstra monopoly is painted as a ogre but the NBN is the supposed white knight.

      ” What you need to do is regulate their prices so they stay at cost – which is what the SAU discussion paper says they will be”

      The NBN SAU paper also states the NBN faces ‘uncertain demand’ – which is a interesting description in the face of a $43 billion dollar rollout.

      “and make sure you don’t incent management on the basis of profit, but instead on the number of connections.”

      The problem with that glib statement is that the end user doesn’t buy the end product off the NBN Co, how each individual ISP decides on their markup is what counts and that definitely will have a incentive for management based on profit.

      • “It is not connected to the premises it notionally passes because those premises have decided they don’t need it and have decided that ADSL/ADSL2+”

        Not always the case. I have tried get 3 different premises connected to HFC. Really Telstra are not interested in doing it. If you go broadband only they will put in ADSL2+. If you go Foxtel and broadband they MAY use cable but from what I have heard from friends they usually put in a dish and give you ADSL2+. they really haven’t been that interested in connecting new premises to HFC for a good number of years.

        • Funny how it is still a active plan you can order on the BigPond site?

          http://go.bigpond.com/broadband/

          Funny how Telstra have upgraded certain areas in Melbourne with BigPond Ultimate cable with other areas to follow and you can order it if your address qualifies on the BigPond site?

          “they really haven’t been that interested in connecting new premises to HFC for a good number of years.”

          Really BigPond Cable new sales have stopped have they? – bit of a waste upgrading the HFC infrastructure to Utimate then wasn’t it?

          BTW what has a dish got to with ADSL2+?

          • alain, I don’t really give a crap what you believe or not. I have tried many times to get cable. It has run past 2 houses I have lived in. 2 my gf lived in. Have the cable there and getting Telstra to connect it rather than taking the easy, give them ADSL2 option is at their whim. At one place ADSL2 wasn’t available as the exchange was too far away. Would Telstra connect, even after we got TIO to pressure them? No.

          • It’s not a matter of what I believe or not, BigPond BB cable is a active product on their website and it has been recently upgraded to higher speeds, Telstra wouldn’t go to the expense of doing that if they didn’t want punters to buy it, to quote your examples as being ‘proof’ that BigPond don’t sell cable anymore is rubbish.

            I suspect there is more detail to your ‘examples’ than you are letting on.

          • Suspect what you like. I didn’t say they don’t sell cable. I used it as example that it just because it runs past your hosue doesn’t mean you can get it. Not simply that the people in the house have decided not to get it as you were asserting. Maybe they are keener to connect upgraded cables, I have no idea if the cables near me were upgraded or not. I have asked a number of times for cable. Some times they said they wouldn’t do it unless I already had the cable connected other. Other times it was because the land title was for multiple dwellings. Like two 4 bedroom homes are classed as flats. Try the other route, get Foxtell connected first so there is a cable. They won’t do it. They leave it to the installer. Guess what they find easier to install?

          • Cable broadband may well be on offer to the many thousands who have an active or inactive Foxtel cable connection, but do not use it for broadband. That would be why it is an “active product” on their website, alain.

            That in no way negates Dbremner’s experience of difficulties getting a _new_ cable connection. For all we know, there may be an internal policy (or practice) that now gives preference to Foxtel by satellite, because it is easier (ie cheaper) to install.

          • @Dbremner

            “Other times it was because the land title was for multiple dwellings. Like two 4 bedroom homes are classed as flats.”

            Thank you, I thought there was more to it than were originally letting on.

          • Alain that was one time. The rest were normal houses.
            It was their policy to not supply to multi dwelling sites. This was two houses sitting side by side on a souble width block, they wouldn’t bend even though no other broadband was available. The other times it was just they wouldn’t do it because ADSL2+ was available and no cable was already connected.

            Alain, don’t thank me like you think it proves your point. It proves nothing.

            At least try to putting foward some real arguements to people. Playing word games and misrepresenting peoples post. Ignoring substantial parts of them to single out a few words and take them out of context isn’t fooling anyone. If it is fooling you I feel sorry.

      • interesting that you spent the first 3 or 4 points saying the nbn is a big bad monopoly with no choice, but your very last point…

        “the end user doesn’t buy the end product off the NBN Co, how each individual ISP decides on their markup is what counts…”

        exactly, it’s known as competition, exactly as david said and totally dispels/contradicts absolutely everything you previously said.

        please don’t answer, instead beg the editor to gag me…as usual.

  3. Under the NBN model there will be open competition between providers from the Point of Interconnect onward. That means all the backhaul from the POI, interstate and international connectivity; not to mention value-added services such as cloud-based storage, high-value data streams including streaming video and anything else.

    Since when did all this not constitute “infrastructure”?

    David Havyatt’s point about sub-additive costs are very pertinent, as they are the definition of “natural monopoly”. That’s why I’ve been generally supportive of the 121-POI model over the earlier 14-POI design – it maximises the ability to use competitive infrastructure, while minimising the duplication of the non-competitive, natural monopoly element.

    Thanks are due to Michael for doing the sums on this (my own back-of-the-envelope figures are much rougher).

    I know that Michael has himself suggested around 60-odd POIs as an better number. Certainly, Telstra wanted to have a much higher number – nearly one per existing exchange (400-500 I think), and Optus was looking for around 200 (again, to match its own infrastructure). In the end, the ACCC chose 121 based on the principle that there was competitive backhaul available (ie not just Telstra!)

    Reasonable people are perfectly entitled to differ about the optimal number; but the underlying concept is the same.

    • Exactly. The NBN monopoly simply solves the problem of who lays cable to the door, and how it will be paid for. It is nothing like the vertically integrated Telstra monopoly of old.

      Telstra is responsible to the people who hold Telstra shares, the NBN is responsible to the government of the day and taxpayers, and if the bulk of the Telecommunications industry don’t feel the NBN is meeting their needs then they can lobby government. It’s that simple.

      You don’t hear the telco industry worrying about the NBN monopoly, just a bunch of people who instinctively say monopoly = bad, competition = good, even when 20 years of evidence tells everyone that competition on the cables in the ground has proved a hopelessly inefficient way of producing both good pricing and technology outcomes.

      We get a relatively minor bump in retail pricing or halt in the pricing decrease trend as the new technology is introduced and then the pay-off as the network gets used more. Probably won’t be much different from the rollout of 4g and the pricing impacts from spectrum auctions.

    • “Reasonable people are perfectly entitled to differ about the optimal number; but the underlying concept is the same.”

      Yeah how does 50% become 70%, I am interested in that new approach to statistics as a ‘concept’ as well?

      • Both figures are estimates – different assumptions that can be fed into the pricing model to get different readouts.

        What is the issue?

        It’s fairly commonplace to examine a range of estimates, such as a “conservative” and a “best case” position. The fact that Michael chooses one figure and other documents choose another is neither here nor there. Both assumptions are explicit, not hidden. You may enter other lower or higher figures to generate your own position.

          • Oh I see, well that seals it then.

            PS don’t give up your day job and take up Accounting.

            lol

          • What comments below?

            I’ll cut’n’paste to make it easy for you:

            “Michael chose 50% by pulling it out of the air. Does that make you happy? If NBNCo gets 70% like their business case is forecasting, then obviously they’re even better off than if they only get 50%, right?”

          • “If NBNCo gets 70% like their business case is forecasting, then obviously they’re even better off than if they only get 50%, right?”

            Making less revenue to meet costs is better than making the budgeted and predicted revenue to meet costs?

            Really?

          • Making less revenue to meet costs is better than making the budgeted and predicted revenue to meet costs?

            Of course not, why do you think Michael’s post implies that?

  4. The problem with Micheal Wyres simple glib one eyed analysis is it puts aside as if it of no consequence that the NBN Business case depends on 70% of premises taking a active service.

    A quick wave of the magic pro-NBN fairy wand and we get the amazing conclusion that is really a fantasy that everything is ok in NBN land if we only get 50% takeup of a NBN service on the cheapest plan.

    “as Wyres says, “the numbers look pretty rosy”.

    Yeah sure they do, Micheal Wyres should get a job of turning water into wine.

    • I am sorry you don’t like it.

      But

      Just cause you don’t like the result is no reason to essentially call someone a liar

      • Oh for a minute I thought you were going to criticise what I said based on fact, instead make it personal make a false insinuation I never even said in the first place and then exit left – nice technique AJ.

        • Yeah, because saying “Micheal Wyres should get a job of turning water into wine” is a perfectly reasonable and level-headed response, deserving of an equally reasonable and level-headed response.

          • Yeah there is one thing the pro-NBN glee club hate with a passion, their fantasy bubble being burst.

            I asked how you turn 50% into 70%, which is greeted with total silence.

            Seems like a perfectly apt description of turning water into wine to me.

          • Perhaps if you just ask the question, rather than loading your response full of personal attacks, people will be more inclined to answer? It’s certainly not like you’ve ever dodged a question is it?

            In answer to your question, Michael chose 50% by pulling it out of the air. Does that make you happy? If NBNCo gets 70% like their business case is forecasting, then obviously they’re even better off than if they only get 50%, right?

            If you want to go with the 70% figure in NBNCo’s business case, then plug that number in and see what comes out.

        • Yep thought so keep the off topic personal theme going in the absence of anything substantive to say about what I said, you are not going to break a posting habit of a lifetime anytime soon I see.

        • yes, well if anyone deserves to be banned, as clearly demonstrated right ehr, today, for their constant personal attacks and trolling, we know who don’t we alain (not mentioning any names).

          • It’s not your call, same as it’s not my call when you are banned multiple times, take it up with Renai, and stop playing the poor pathetic victim card – it doesn’t wash.

          • They wouldn’t ban you alain. There would be no discussion. Every board needs it’s evil troll to increase post counts.

  5. Love the “infrastructure based competition” concept. How ridiculous. Honestly, by having a single road network that all types of vehicles that all types of manufacturers can drive on – does that reduce “transport” competition in the car industry? Or would you rather that Holden, Ford, Toyota, Subaru all build their own national road networks?

    Would you rather have several different retailers all run their own power lines down your street? Or would you just prefer one, which allows you to purchase through any electrical retailer?

    • Once again with that totally flawed analysis it fails to mention that the NBN requires ALL existing WORKING fixed line BB infrastructure to be shut down and billions given to the infrastructure owners to do so so that the Government owned NBN FTTH is the only kid on the block and residents are forced to use it if they want a fixed line BB connection.

      Then Labor can gloat about how successful the rollout is.

      lol

      • along with all those perfectly good vcr’s, typewriters, dirt roads and horses. how dare they.

        you know, now i’m forced to watch blu-ray (how I miss tangled tape), use a pc instead of a typewriter (i loved making a mistake near the end and starting over or using white out) and now i’m being forced to drive a car on a smooth asphalt road (my horse and that goat track, are so p***ed off).

        • I know how you feel pepe, I look at my collection of BR discs and sometimes wish that VHS tapes were still around. There is nothing better than watching a static filled SD picture on a 55″ HD Television… it really is quite breathtaking, I suggest you try it.

          • I’m desperately worried about the switch-off of analogue TV in my area. I’m being denied the choice to keep my 20-year-old orange-tinted set exactly as is, and having to defile it with an unsightly and unnecessary set-top box!

            Help me Obi-Wan Turnbull, you’re my only hope…

            (quoted from pan-and-scan VHS original recipe tape…)

          • The quality of the pro-NBN argument demonstrated here is not very good, it’s the same old rubbish, with the same members of the glee club backing each other up (well sort of), the coalition will romp it in at a canter.

    • Would you rather have several different retailers all run their own power lines down your street? Or would you just prefer one, which allows you to purchase through any electrical retailer?

      Honestly Charles I would prefer 2 or 3. In a the case of telecommunications I would prefer 2 or 3 too so that I can swap between them on a whim, one month ASDL2+, one month for fibre and one month for HFC. Socket competition is important. Unfortunately with the coalitions substandard patchwork plan this important competition is not likely to happen either, most people will only get copper just like they do now, they have no plans to roll out FTTH or HFC in areas that will be copper only… and people in new housing estates will have to suffer too under that plan, they wont have the option of using a copper connection they’ll be stuck with fibre only.

  6. A basic NBN Co cost of ownership calculation:

    $36 billion build cost * 7% cost of capital = $2.5 billion per year

    On top of that add:

    – Operational expenses (staffing, maintenance, etc)
    – Payments to Telstra, Optus, etc for various deals
    – Depreciation/replacement of equipment (satellites, ONT, etc)
    – Accumulated losses through the growth phase

    • You’re getting the $2.5b by basing your calculation on 15 years. Where is that number of years from? Is NBN Co going to stop charging people after 15 years, and therefore draw no further revenue?

      The NBN will also be making money BEFORE the final 12,000,000 premises can potentially access it. It will actually be drawing revenue from next week when commercial services commence on October 1st.

      I do actually point out in my original post that costs will have to come out, so I’m not sure what point you’re trying to make there.

      The point I am trying to make is that given that it will generate income – (and quite significant income) – that at some point – (and that date is up for debate) – the outlay will be recouped.

      • ‘You’re getting the $2.5b by basing your calculation on 15 years’

        Nothing to do with ‘years’. Its the cost of capital. The 7% figure also isn’t something which I made up, its the govt (and NBNCo’s) own goal.

        ‘The NBN will also be making money BEFORE the final 12,000,000 premises can potentially access it. It will actually be drawing revenue from next week when commercial services commence on October 1st.’

        Yes and costs accrue from day 1 as well. At the moment the cost of capital alone incurs the govt around $100 million a year. Add that current NBNCo operational costs. Just to put a rough figure of current revenues, 15,000 premises passed this year. Which assuming 80% commercial takeup at $30/month is about $4.3 million in revenue per year. $100 million + opex versues $4.3 million revenues.. as you can see there’s plenty of accumulated losses to come.

        ‘The point I am trying to make is that given that it will generate income – (and quite significant income) – that at some point – (and that date is up for debate) – the outlay will be recouped. ‘

        Its kinda like buying a $500k investment property and charging $300/week rent for it. Sure you’d eventually recoup the outlay.. but its kinda moot when you have big mortgage bills to pay. Of course in the property game at least you can rely on rent increasing over time.

        • 36 * 1.07 / 2.5 = 15

          If you’re going to say “this amount per year”, the number of years involved makes a big difference. If you space it over 30 years instead, then it’s $1.75b a year.

          You’ve got to name the number of years, if you’re going to state “X dollars per year”.

          As for “rent increasing over time”, do you REALLY believe NBN Co will still be charging $24.00 pcm in 2040?

          • Thats nice.. by your math the cost of capital of 7% applies for the entire 15 year repayment period instead of yearly. Wish that was true….

          • Pity that Michael really doesn’t really know about business or economic calculations

            I love how he totally ignored the capex

          • I’m ignoring nothing – I’m merely demonstrating that the original calculation of “$2.5b per year” is completely dependent on the number of years involved.

            It was the original premise that’s wrong – not my demonstration.

          • The point is Micheal, your calculations are completely pointless and useless because you ignore almost every variable that counts

          • seriously, it doesn’t matter what michael says or said, you usual suspects will disagree, regardless, simply because it’s michael, and you know it.

          • Geez, the trolling is intense in here today.

            I’m pointing out that Thrawn’s initial calculation is pointless, so it’s an automatic attack on me.

            Farking hilarious.

            And I’m not interested in joining your penis waving contest.

          • @Micheal Wyres

            “Geez, the trolling is intense in here today.”

            But when you do it is is a better quality of trolling because…?

            “I’m pointing out that Thrawn’s initial calculation is pointless”

            Well you haven’t at all actually, but never mind self-delusion is the hallmark of most amateur pro-NBN argument.

          • If you are going to pull calculations out of your figurative “arse” to try and prove some sought of attitude or point, expect some severe criticism ;)

            Your figures are completely meaningless, to the point of it being sad

          • Well anyone can make up rigged jury sensationalist headlines to push a point of view.

            The simple fact is that the Labor Government and the NBN Co in their Business plan state that a minimum of 70% uptake on a active ISP NBN Plan is required to justify the massive multi billion costing outlay by the predicted finish date in 2020.

            Anything less than that figure has them struggling to justify the cost, so sorry MW 50% doesn’t cut it, and it also means they will not reach anywhere near the 7% ROI required to justify the outlay.

            Your blog might give a warm glow to the converted who only want to read feel good stories about the NBN and not ask awkward questions, but that’s about it.

          • I picked “50%” delberately to be less than NBN Co’s aims for uptake, to demonstrate on AVC pricing alone, they should draw in revenue of approx $1.73b per annum.

            Which is “a lot of money”…

            Using “70%” – (a number which you seem infatuated with) – it comes out as approximately $2.42b per annum.

            Which is “a lot more money”…

            Before any other revenue – (CVC, MAVC, MCVC etc) – are factored in. Those are difficult to factor in, since different RSPs will provision those parts of the solution into their build in different proportions.

            Now you can twist this in any perverted way that you want – (and you will) – but 50% of premises, taking 12/1 services, at $24.00 is $1.73b per annum.

            At 70% is $2.42b per annum.

            That’s a lot of revenue either way.

            I don’t know what the uptake will be, and as much as your masterful economic mind thinks it knows, you don’t know what the uptake will be either.

            50% = $1.73b of AVC revenue…
            70% = $2.42b of AVC revenue…

            These numbers will be higher if people buy lots of connections at higher than 12/1. Exetel have already stated that they have been surprised at the number of people applying for 100/40 connections.

            Full stop.

          • First of all 70% is not my figure ‘I am infatuated with’ it is what is in the NBN Business plan, unlike your mythical 50% figure which is just plucked out of the air to try and make a point, but the point is superfluous because it insinuates that even with 50% uptake on a basic plan the NBN is justifiable, which is total rubbish.

            To justify its use on the basis on the glib simplistic statement ‘it’s a lot of revenue either way’, puts aside the outrageous rollout cost totally met by the taxpayer.

            The simple fact is the minimum target figure as calculated by the NBN Co and the Labor treasury and approved by Parliament is 70% uptake by 2020 and 7% ROI.

          • Just made a table outlining just how much monies NBNco could make over the nine year period after the NBN is complete. This assumes a 70% take up, does not factor in price drops (which they can afford to do) does not factor in the 2012 to 2019 period and includes how much per speed per year too, at the end of it $39 billion ($27 billion at 50% takeup btw)

            http://i.imgur.com/L2lqy.png

  7. I’m very happy that the NBN is recreating a new telecommunications monopoly since Telstra was very poorly privatised every step of the way by both sides of the political divide. If it was done correctly, the NBN would not even be necessary. I have concerns over the future privatisation of the NBN though as in I am not sure it should be done at all. I would and will accept it though as long as the wholesale components are kept within public/government control.

    • How does subject matter totally different about mobiles help missed KPI dates by the NBN Co?

      • it dispels another of your myths.

        because 91% of data volume comes via fixed.

        got it now.

          • In theory we shouldn’t hear about “cost blowouts” now pepe (but I’m sure we will anyway) NBNco has proven to be a stunning and efficient company, no doubt most of this can be attributed to Quigley and when the NBN rollout is in full swing this will become even more apparent.

          • Missed KPI dates ignored, worker build figures ignored in the straight from the Labor NBN PR spin book rant from HC256.

            When negative reports emerge the best tactic is to spin even faster.

            This infrastructure turkey rollout will need all it can get.

          • How is requiring less workers than initially predicted bad? Isn’t that good? Less labour = less cost?

          • What spin? Tell me how requiring fewer workers than initially predicted is a bad thing?

          • Yes, surely reducing the number of workers reduces the cost base, and makes lower uptake rates more viable?

            Thanks for playing.

            I’ll be here all week, try the fish.

          • “Wow the spin is incredible, doesn’t Labor or the NBN Co do ANYTHING wrong?”

            What spin are you referring to in Dean Harding’s reply there alain? (assuming you are replying to Dean) Honest question. I don’t really see it.

            If anything I thought Dean’s question was quite appropriate. Would you say that requiring less workers to build something is better or worse alain?

            You seem to imply from your initial comment that the worker build figures are a negative report but I would have thought that this is in fact a positive. Initial estimates prior to construction would have indicated 37,000 but after the initial rollout phases it seems they have managed to improve their efficiency and do with less labourers for the same result. This is not a good thing?

  8. Alright, that’s it; I’ve had it with the immature and puerile discussion on this thread. It has been on the borderline right from the start and y’all haven’t heeded my warnings. I’m closing the thread for now. If you want to continue to sledge each other ceaselessly, there are plenty of other sites on the Internet for that.

    Delimiter’s policy is that commenters must be polite and I will be enforcing that. I hope you guys are proud of yourself — this is the first comment thead I have closed on Delimiter in the past 18 months.

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