One of the issues that is causing the industry some concern is the possibility that the current design of the NBN will create an environment of wholesale dominance, equally there is concern about potential monopolistic behaviour from NBN Co.
There are a range of options here to address these issues, all of which have their pros and cons. Australia is the international trailblazer and that means we are on our own. We have no benchmarks to draw upon – as a matter of fact, we are the international benchmark.
Let us first address the issue of wholesale dominance.
In 2009, before the NBN design was created, BuddeComm warned that it was critical to ensure that the wholesale entry barrier should be as low as possible. We gave as an example the situation in the Netherlands at that time, where a design consisting of many entry points was preventing companies from buying wholesale capacity on the Dutch FttH network, basically leaving the incumbent KPN as the only national wholesale operator on that fibre network. Since then some changes have taken place in other parts of the Dutch FttH market, but for the purpose of this discussion they are less relevant to the Australian situation.
We were very pleased when NBN Co designed a network with only 14 POIs (points of interconnect). However, after the facilities-based telcos complained, for obvious reasons, about the network being designed in this way the ACCC decided to increase the number of POIs to 121. This would allow them to maximise the use of the transmission networks that they already had in place and/or would extend to facilitate a distributed network design.
The counter-argument for more POIs is that, in order to avoid a monopoly that is unresponsive to market demands and has little incentive to reduce ongoing costs, it makes sense to allow for competition in the transmission market (networks that connect the POIs). In doing so this creates the possibility for wholesale competition, where these players have to be innovative and cost-effective in developing value-added wholesale services in order to attract retail service providers (RSPs).
So, while more POIs does indeed limit the number of RSPs who want to deal directly with NBN Co, this transmission based competition creates incentives to offer RSPs more innovative and competitive priced options.
So far there are at least three transmission network operators that are most likely to embrace this concept: Telstra, Optus and Nextgen. There may be one more, but there will not be enough room for many more players here. There would separately be room for regional or even local transmission/wholesale operators (e.g. in CBDs).
So, on the one hand, we need to balance maintaining the maximum level of wholesale competition to ensure innovation and a downward pressure on prices while, on the other, making sure that such a design is not going to limit access to those organisations who do want to deal directly with NBN Co.
Also, because transmission in itself is plain utility, another threat could be that, for economic reasons, transmission consolidation will happen in the future, this also would require the regulator to step in to prevent monopolistic behaviour.
All of this means that the ACCC is playing a critical role in all of this. They are fully aware of the fine balance required in these situation and have clearly indicated that they will finetune regulations to ensure that sufficient competition occurs on the NBN, both in relation to possible monopolistic behaviour of NBN Co and to a possible lack of sufficient competition in relation to transmission/wholesale.
BuddeComm is confident that this will work. While nobody can predict how this market will evolve, the regulatory tools are in place to make sure that the situation can be adjusted in order to get the right competitive and innovative outcomes that the NBN can offer.
End-user prices – key to success
In the end, however, the commercial success of the NBN does not just depend on the design of the network, or on the technology and its many benefits. The commercial success of the NBN is completely dependent on the end-user price. It is a fairly simple exercise and follows a model that we also successfully used back in the 1990s to predict the success/failure of pay TV and the earlier forms of broadband penetration in Australia.
In relation to the NBN this looks as follows:
Broadband uptake* scenario forecasts 2015 – 2020
|Broadband access charge per month
*Includes telephone access charge
(Source: BuddeComm estimates – Australia – National Broadband Network – Market Forecasts 2015, 2020)
So, whatever ROI NBN Co wants, or whatever charges NBN Co and the wholesalers might charge, or need to charge, the bottom line is very, very simple. If the price is too high there will not be the expected uptake.
This situation will dramatically change once trans-sector services start to kick in. At that point NBN Co and the wholesalers will be able to tap into new revenue from other sectors, such as business, media, healthcare, education, government services, smart grids, etc. However this unfortunately is a ‘build and they will come’ situation. These sectors will only start using the network when it has sufficient penetration.
As BuddeComm has been arguing since 2005, when we first began to talk about what is now known as the NBN, any cost benefit analysis needs to be based on the social and economic benefits from those trans-sector services and not on the ROI that NBN Co can generate based on telecoms charges. The value of the NBN is many times more than the telecoms charges generated from consumers and businesses subscriptions.
While the government accept this principle, so far the Opposition has not indicated that they support this concept and unless this is accepted across the political divide the future of any form of a national broadband network remains shaky.
The consumer price is also a critical factor in the change-over process. Once the NBN is ready and Telstra and Optus have to contractually transfer customers to the NBN they can only do so if the end-user price is the same, or less, than their current charges. If the NBN prices would be higher there would be political upheaval as users will rightfully revolt against that. This politically reality ensures that the price will be right and that we will see the high uptakes as mentioned in the table above.
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