opinion/analysis If the Coalition orders NBN Co to pursue a heterogenuous National Broadband Network rollout which features different rollout styles from Fibre to the Premises, to the Node and to the Basement, the company will face a fundamentally new challenge: How to fairly set wholesale prices on technologies which are fundamentally different?
If you believe Communications Minister Malcolm Turnbull (which we’re not sure we do, given the Member for Wentworth’s hypocritical recent history of doing other than he says when it comes to setting the NBN agenda), the new Coalition Government is open to any possible technological model when it comes to rolling out the NBN — everything from Fibre to the Premises, to the Node, to the Basement, satellite, fixed wireless, and everything in between.
“I am – and the government is – thoroughly open minded, we are not dogmatic about technology,” Turnbull said in a press conference in late September announcing interim steps for NBN Co. “Technology is not an ideological issue, we are completely agnostic about it. What we want to do is get the best result for taxpayers and consumers as soon as possible.”
What this statement means, in effect, is that the Coalition is not wedded to the previous Labor Government’s uniform vision for the NBN.
Under Labor, the NBN was to have been constructed through just one primary technology — Fibre to the Premises — with a minority of premises in very remote regions around Australia served with more economical fixed wireless and satellite services.
The simplicity of this model has always been its strength. Labor’s vision can be boiled down to the simple vision of using the best available technology — Fibre to the Premises — for the vast majority of Australian premises, in an effort to deliver them high-quality, superfast broadband through infrastructure which will likely be around for the next 50 to 100 years. In areas where the cost becomes extreme on a per premises basis, subsidiary technologies will help plug the gaps.
The simplicity of this model has had several direct consequences for the way that NBN Co has priced its wholesale services to retail ISPs.
Firstly, it has allowed NBN Co to set wholesale prices that are largely consistent for most Australians. If you’re in a NBN fibre zone, you’ll be paying the same price, no matter whether you live in Gosford or Gilgandra, Sydney or the Sunshine Coast.
Secondly, the versatility of the FTTP model has allowed NBN Co to arbitrarily set certain tiers of wholesale pricing based around speed, that are largely equivalent to the prices of similar plans on its satellite and fixed wireless prices.
You can see this playing out in the way retail ISPs have been pricing their different types of NBN services. For example, iiNet currently charges customers $64.95 per month for a 25Mbps NBN FTTP service with 200GB of quota. It charges the same for a 25Mbps plan with 200GB of data using NBN Co’s fixed wireless service. And although satellite pricing is an outlier at the moment because NBN Co does not yet have its own satellite infrastructure, we’re sure that the plan was eventually to somewhat harmonise satellite prices at its top 25Mbps speeds as well.
What we see here is the illusion of price cohesion. Even though FTTP, wireless and satellite are fundamentally different technologies, and don’t behave at all the same on any measure, NBN Co has been able to price them at similar wholesale price points at certain gross speed tiers.
The problem for NBN Co and the Coalition is that if NBN Co pursues a heterogenuous technology model for the NBN, this pricing schema will necessarily become significantly more complicated.
To understand what I’m talking about here, let’s take the most likely case.
As at the beginning of October, NBN Co had completed construction of its Fibre to the Premiises network to around 290,000 premises. In addition, in late September Turnbull stated that FTTP construction would be completed in areas containing 300,000 premises where construction contracts had been signed and NBN Co had issued work orders to its rollout partners. Furthermore, detailed network design had already been undertaken in a further 645,000 premises, meaning some of those premises might end up receiving FTTP services.
Although it is likely to maintain most of the satellite and fixed wireless portions of its rollout, it is likely, as per the NBN policy it took to the election, that the Coalition will switch the majority of the NBN rollout to a Fibre to the Node rollout style.
In addition, the Coalition is also canvassing an alternative, ‘Fibre to the Basement’ style of NBN rollout for some areas of the NBN in built-up metropolitan zones, where many commentators have stated it makes more sense to deploy fibre to the basement of apartment buildings or shopping centres, for example, and use existing in-building copper networks to make up the rest of the rollout to actual individual premises.
What this will mean in practice, will be that a future NBN Co will likely need to offer at least five different types of wholesale prices, to match five different types of network deployment.
Of course, it’s theoretically possible that the company could continue to artificially match speed tiers to certain price levels, as it appears to have been doing with its fixed wireless and FTTP offerings at the 25MBps level.
For example, NBN Co could theoretically set uniform or close to uniform prices for the 25Mbps speed tier, which will be universal across satellite, wireless, FttN, FttB and FttP platforms. Satellite and wireless services could then drop off, as they are not capable of speeds higher than 25Mbps, but NBN Co could then theoretically set consistent prices across the FttX family of technologies, ranging up to 100Mbps, which is the theoretical maximum speed offered under FttN and FttB. And I’m sure NBN Co will doubtless make some attempt to generate wholesale and retail price cohesion in this manner.
However, this is going to be a very difficult argument for the company to make to its retail ISPs and to end user customers.
After all, most Australians are aware that under Labor’s plan, metropolitan NBN customers will be subsidising rural users. Setting satellite and wireless wholesale prices close to the lower tier of FttP is not a financial choice; it’s a policy decision, to ensure rural Australians don’t pay prices exorbitantly larger than those in the cities.
However, it would be an entirely different situation if NBN Co started charging the same prices for services delivered in the same street which would be, separately, getting access to FttN, FttB and FttP services.
And this is far from being a remote example. Under the current NBN rollout, everyone in metropolitan Australia would have received the same FttP service, at the same price. However, under the Coalition’s plans, it is extremely likely that many houses in many streets, for example, would have FttP rolled to their door, while their neighbours in flats would receive FttB, and the next street might only receive FttN.
Sure, NBN Co could charge relatively consistent prices for these FttX services at, say, 50Mbps, 75Mbps and then 100Mbps. However, there’s a very serious question about whether it would be ethical to do so.
After all, even if all three platforms were able to deliver stable services at each speed tier, for example (and this is far from a sure thing, given the variability of Telstra’s copper and the distance of each premise from the nearby telephone exchange), the upload speeds available would vary significantly between the three technologies, as would the latency and reliability.
FttN is a significantly less technically capable rollout style than FttB or FttP, and offers significantly reduced services. And while FttB is expected to be more reliable than FttN, the quality of the service it delivers pales in comparison to FttP in pretty much every respect.
Now, let’s get a bit more detailed in our analysis of the situation.
NBN Co currently charges wholesale rates for services on its network in two ways. Firstly, it charges what it calls its Access Virtual Circuit, or AVC. This is the monthly per end user charge which NBN Co charges ISPs to access its network, and it scales up on the basis of speed (for example, you pay more for a 100Mbps link than you do a 12Mbps link). And secondly, the company charges what it calls its Connectivity Virtual Circuit, which refers to the sees ISPs charged for reserving specific bandwidth from the local Point of Interconnect to the end users’ premises. This scales up as ISPs use more overall data.
It’s likely, in a differentiated FttX world, that NBN Co would keep its CVC costs the same for pretty much all of its services (with the possible exception of its satellite platform). However, it’s likely that the company would find it necessary to differentiate its AVC costs depending on what actual variety of fibre users were consuming.
So, for example, NBN Co might $35 per month for a FttP service at 50Mbps, which is around its current price today (PDF). However, it might then charge $32 for that same speed as a FttB service, and $30 for that same speed as a FttN service.
This is the kind of system it is extremely likely that a regulator such as the Australian Competition and Consumer Commission would force NBN Co to adopt; because if the company did not, then it would be charging the same price for different grades of broadband service; something it’s hard to see the ACCC letting any wholesale telco, let alone a government business enterprise, get away with.
If this kind of system is adopted by NBN Co in a differentiated FttX world, it then forces retail ISPs into various choice, most of them unsavoury.
You can imagine a company like TPG or Dodo simply ignoring the differentiated prices and setting one uniform price at a certain level, to stop confusion on the part of consumers. Such companies could probably get away with this, however unethical this would be, by laying out in complex terms and conditions documents how they would attempt to get the best grade of NBN service possible for that price.
This model would probably be great for FttP end users, who would be paying the same price as everyone else for a vastly superior service. However, it would probably disadvantage those on FttN or FttB.
Other, more transparent companies such as iiNet would probably start selling different broadband plans depending on what particular variety of FttX was connected to their premises. So, for example, you might be able to buy a 200GB FttN service for $59.95, or if you lived in an apartment and could only get FttB, the same 200GB plan for $64,95, or $69.95 if you were lucky enough to get FttP.
The problem is that this would result in a massive number of broadband plans. ISPs like iiNet already have relatively complex NBN pricing structures, with a handful of speed and download quota points, plus add-ons such as IP telephony, meaning customers are often already bamboozled by the variety. The options would essentially be tripled in a differentiated FttX world.
Underlying all of this is the concept of “fairness”.
Right now, there are only so many types of broadband that Australians can buy. Usually, most residents buy ADSL because that’s all they have available to them. Some, usually those in metro areas who own their own house, have a choice of HFC cable that they can add to the mix. And for those who can’t get either, there are mobile broadband or even satellite options.
If NBN Co pursues a differentiated FttX strategy, it’s going to create a patchwork of broadband options all over Australia, with Australians unable to determine what type of broadband services they will be able to get access to, at which price points, until they actually move into a premise. Premise by premise will be different and ISP prices will be substantially different from each other. And let’s not forget that the Coalition also wants to keep HFC broadband alive, adding to this complex mix.
A future predictor of this degree of complexity can be found in the revelation by retail ISP TPG last month that it would be deploying its own FttB network in some metro areas, offering 100Mbps plans with unlimited data quota for just $69.99 a month.
Although NBN Co will very likely be planning to deploy FttB to exactly the same locations which TPG will, it’s very hard to imagine any retail ISP on the NBN being able to match those prices, because TPG has an inherent advantage in terms of owning the fibre all the way to the apartment blocks its targeting. It doesn’t have to pay a wholesaler such as NBN Co for access, and so will be able to offer much better prices in the same locations than NBN-dependent ISPs such as iiNet will be able to.
Customers in those areas will be asking: “How can TPG charge radically different prices than NBN Co?” And NBN Co will be forced to either abandon those areas to TPG, leaving the ACCC to force TPG to open up its networks to wholesale competitors, or cut its wholesale prices in those areas and compete, further changing its product model for certain geographies. Retail ISPs such as iiNet will need to offer different pricing again — for certain suburbs.
The whole thing is starting to sound like chaos.
Now, all in all, it’s not easy to say that this is all a bad thing. After all, what Australia should end up with in the long-term under a differentiated FttX model is a much more market-dependent model, and markets are inherently often chaotic when there are different products on offer. It’s not always bad, just confusing. The Coalition’s model should be quicker to deploy than Labor’s all-FttP plan, and this means that almost everyone will receive acceptable levels of fast broadband faster than many would have under Labor. In addition, in the long-term, all fixed broadband networks will also trend towards fibre. FttN and FttB will eventually become FttP in many, perhaps most, areas, and prices will eventually harmonise to a large degree.
However, I also hope this article has done much to forewarn Australians that the broadband future they are likely going to see under the Coalition will be messy. It will be chaotic, inelegant, and it will be seen as being unfair. That’s what happens when you take a position of technological neutrality. You miss out on the chance to pick the best technology — once and for all.