BuddeBlog

No vision and little real business sense

Some of the criticism that is being levelled at the NBN is reminiscent of the attitude of similar alarmists in the last century, who made faulty economic calculations and warned the world about the dangers of making those huge investments in electricity infrastructure. The naysayers of those days calculated what an enormously expensive exercise it would be to replace gas lights. These new electricity networks, they argued, would make lighting much more expensive. 

Those luddites were unable to foresee that electricity would not be used just to replace the gas lights. As we all know today, electricity created and enabled a huge and enormously important economy. 

Professor Henry Ergas’s projections of monthly cost predictions for end-users of the NBN ($215 per month) are based on a similar lack of vision. In this instance Professor Ergas is assuming that Internet access will be the only thing from which the NBN will derive its revenue. 

The advent of the Internet has already shaken up the decades-old telecoms and media business models. How can Ergas’s company Concept Economics make their assessment as if nothing is going to change in the next five or ten years, when FttH is rolled out? And how can they truly believe that at that point we will still be looking at high-speed Internet as the only source of income. The fact that there is widespread industry interest in the project indicates that the reality is rather different from the Ergas theory. 

Wholesale business model is vastly different

The use of Verizon’s FttH example FIOS – which is a retail model – is another major flaw in the report as this is a vertically-integrated telco model. In Australia we are talking about an open network and its business model will be based on wholesale income. To be blunt, the proposed National Broadband Corporation would not be the least bit concerned if its (wholesale) users were to make their services free, or sell them at great premiums to the end-users.  In fact, those models, and probably several others, will exist on the new NBN. 

Financing based on government bonds

Furthermore, the financing of the infrastructure will take place via government bonds, not via a commercial vehicle. This is very different from the Verizon – or for that matter, the old Telstra – model.  Telstra, one of Ergas’s main customers, understands this and it at least is looking at changing its strategies accordingly. 

The government plan was formulated to move away from models such as those presented by Ergas (Verizon) as the government and the rest of the industry have realised that models like the ones discussed by him wouldn’t work, very specifically because they would render the use of the network unaffordable. 

The reality is that in the end none of us have any exact information on what sort of investment will be needed, or how it will be structured. Again it is up to all of us to come up with a formula that works. 

Given the lack of information available at this stage one could also make a more positive financial assessment of the FttH plan. The FttH plans in Europe are much more closely related to the situation in Australia so I have asked some of my European colleagues to come up with their assessment, based on the very limited information we have at present. 

A more positive back-of-the-envelope calculation can be based on financing the plans through government bonds currently trading at around 4.7%. 

If one follows that calculation through the end-user costs for those Internet services would be more like AU$25 per month. Passive investments can be written off over a period of perhaps 25 years which brings that component down to perhaps as low as AU$12 per month. 

In our discussions with WIK, a consultancy firm that has produced one the most comprehensive analysis of NBN-type networks, including costs, returns, prices and take-up. They looked at six European countries and also came up with a far more positive outcome. This has also been extensively reported on by ATUG. This study calculated the necessary take-up rate over eight different density clusters in each country, describing how much of a population can be reached with a viable FttX network build-out – and how that can be improved by regulatory means like duct access. The revenues were in the range of 25 to 43 Euro per month, depending on the country (AU$50-85). 

However, this doesn’t take into account any new business models and BuddeComm predicts that on an FttH network these end-user costs will actually decrease in real terms, based on today’s broadband access prices, simply because business models structured around the 100-year-old telephone services will completely change once we have an open access wholesale FttH network in place. 

Industry is right behind the plan

Clearly most of the industry doesn’t share the view of Professor Ergas. So far the tally is in favour of the government’s plan. True, many people (us included) are keen to know more details, but the government is being pretty transparent and is clearly making this a national issue – one that includes the industry and, indeed, all of us. 

I think most people in the industry would have been rather horrified if the government had come out with an A-Z business plan on how it intended to run a national broadband network. It is doing what we requested – including us in that decision-making process. 

Many people are already very actively involved in these discussions and we will bring together a range of views from the industry at the (fully booked out) Roundtable on 7 May to present to, and discuss with, the Minister. 

Most seem to be at least open to investigating the possibilities and the opportunities before they make their final assessment. And in the meantime most, if not all, are willing to make constructive contributions, rather than becoming involved in the scaremongering of the naysayers. 

We have heard positive public comments from potentially important participants in the NBN such as Telstra, Optus, Internode, Primus, Unwired, Austar and Aarnet. If you read the contributions to our blog on this issue you will see there are many more people supporting the government’s plan than opposing it. See Analysis of the National Broadband Network Announcement Australia. 

Now nobody involved in the NBN will be so naïve to think that this will be an easy project to pull off, if anything one could argue- based on previous attempts – that the odds are against us. However, if we truly collaborate and put our weight behind this project it can be done. Much will depend on the outcome of the regulatory reforms -this will be a first priority. Within the Digital Economy Industry Work Group we have started on our submission, those interested to participate please let me know. 

Also very promising for the trans-sector thinking campaign we launched is the fact that Centrelink has indicated that they want to use this new infrastructure for high bandwidth applications such as videoconferencing. This is exactly the type of application I have been talking about – applications that will constitute 75% of the usage of the new infrastructure. Only 25% of revenues will be related to direct end-user subscription income for services such as basic telecoms services, including Internet access. 

I am very confident that other sectors will start to look at the new infrastructure for exactly the same reason. 

Paul Budde 

See also: 

• Australia – National Broadband Network – Overview & Analysis
• Australia – National Broadband Network – Critical Considerations
• Australia – Trans-sector thinking leading to smart communities

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This entry was posted on Monday, April 27th, 2009 at 10:37 am and is filed under From Paul's Desk. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.