NBN Business Plan

“We will be releasing a 50-page document that summarises the NBN Co business case,” Ms Gillard said.

So the 50 page NBN Co business case summary came out yesterday. It runs to 36 pages, including the table of contents.

According to the document, they’re going to be wholesale providers to retail ISPs/telcos, and be offering a uniform wholesale price across the country (6.3). There’ll be three methods of delivery — fibre, wireless and satellite, though I didn’t notice any indication of whether people would pay more for content over satellite than over fibre. They’re apparently expecting to undercut the wholesale prices for connectivity offered today (6.3.1). They’ve pulled some “market expection” data from Alcatel/Lucent which has a trend line of exponential increase in consumer bandwidth expectations up to 100Mb/s in 2015 or so, and 1Gb/s around 2020 for fixed broadband — and a factor of 100 less for wireless broadband (6.3.2, chart 1). Contrary to that expection, their own “conservative” projections A1 and A2 (6.3.2, exhibit 2) have about 50Mb/s predicted for 2015, and 100Mb/s for 2020 — with A2 projecting no growth in demand whatsoever after 2020, and A1 hitting 1Gb/s a full 20 years later than the Alcatel/Lucent expectations.

Even that little growth in demand is apparently sufficient to ensure the NBN Co’s returns will “exceed the long term government bond rate”. To me, that seems like they’re assuming that the market rates for bandwidth in 2015 or 2020 (or beyond) will be comparable to rates today — rather than exponentially cheaper. In particular, while the plan goes on to project significant increase in demand for data usage (GB/month) in addition to speed (Mb/s), there’s no indication of how the demand for data and speed get transferred into profits over the fifteen year timespan they’re look at. By my recollection, 15 years ago data prices in .au were about 20c/MB, compared to maybe 40c/GB ($60/mo for 150GB on Internode small easy plan) today.

Given NBN Co will be a near-monopoly provider of bandwidth, and has to do cross-subsidisation for rural coverage (and possibly wireless and satellite coverage as well), trying to inflate the cost per GB seems likely to me: getting wires connected up to houses is hard (which is why NBN Co is budgeting almost $10B in payments to Telstra to avoid it where possible), and competing with wires with wireless is hard too (see the 100x difference in speed mentioned earlier), so you’re going to end up paying NBN Co whatever they want you to pay them.

However they plan on managing it, they’re expecting to be issuing dividends from 2020 (6.7), that will “repay the government’s entire investment by 2034″. That investment is supposedly $27.1B, which would mean at least about $2B per year in profits. For comparison, Telstra’s current profits (across all divisions, and known as they are for their generous pricing) are just under $4B per year. I don’t think inflation helps there, either; and there’s also the other $20B or so of debt financing they’re planning on that they’ll have to pay back, along with the 12-25% risk premium they’re expecting to have to pay (6.8, chart 5).

I’m not quite sure I follow the “risk premium” analysis — for them to default on the debt financing, as far as I can see, NBN Co would have to go bankrupt, which would require selling their assets, which would be all that fibre and axis to ducts and whatnot: effectively meaning NBN Co would be privatised, with first dibs going to all the creditors. I doubt the government would accept that, so it seems to me more likely that they’d bail out NBN Co first, and there’s therefore very, very little risk in buying NBN Co debt compared to buying Australian government debt, but a 12-25% upside thrown in anyway.

As a potential shareholder, this all seems pretty nice; as a likely customer, I’m not really terribly optimistic.

2 Comments

  1. Russell Stuart says:

    I get the impression you think they are selling bytes. I am pretty sure they are selling selling bandwidth. Thus they say on page 18: “A 12Mbps downstream and 1Mbps upstream entry-level offer across all three access technologies (i.e. fibre, wireless & satellite), at the same price (network ubiquity)”.

    It is entirely possible the price for bandwidth with go up with inflation while the costs per byte delivered go down. Thus is it not necessary for them to quote “inflate the cost per GB”. Besides, I suspect something close to what they are planning has been happening for a while now. The raw cost of a telephone line rental hasn’t changed much over the years. In fact I vaguely recall it going up. Yet the total price charged per byte on my internet connection has gone down. I guess that must be probably because the ISP’s are now paying less for overseas bytes.

    I think the most interesting thing about this is how you will be sold bytes, and who will be selling them to you. I can’t see how the current cable network will be sustainable. Assuming you write off the capital costs of building it, there is still the ongoing maintenance cost, and surely the NBN will be able to provide the same service cheaper because they can split the maintenance cost over several uses (voice, TV, Internet).

    I can’t see your local ISP being too keen on the idea of charging you the same rate for each of those bytes. An internet byte may come from overseas, and so costs them a lot more than a TV byte coming from some local server. Australian ISP’s already charge cheaper rates for some bytes now of course, as they have free zones. Maybe in future in addition to free zones we will have real time tv zones, voice zones, background download tv zones, global internet zone. It take is how it pans out, I suspect that like ISP’s VOIP services do now, these zones will come different QOS guarantees. How that will fit in with the “Net Neutrality” sacred cow is a bit if a mystery.

    But then again, the NBN can save the cow by deciding it is easier to do the multiplexing themselves. In that case they will slice and dice the bytes so your ISP gets some fixed chunk of bandwidth, Foxtel some other fixed chunk, your voice provider such as Optus/Telstra another and so on. The cable is just carrying etherne frames after all, and ethernet supports VLAN’s.

    This is all wild speculation of course, and I’d be surprised if anybody has a clue where this is going to end up. The current ISP’s, telco’s, pay tv, video stores, indeed anybody who makes their living from transporting bytes (its interesting to think of video stores in that way) are probably all looking on very nervously. The shit is approaching the fan. Timing when to duck is everything.

  2. aj says:

    Internode and iiNet are doing “fetchtv” for TV over IP, and according to it’s FAQ “There is no download metering on any of the TV content, Video On Command or pay per view movies.” Of course, fetchtv has a monthly subscription fee in addition to your internet fee.

    That sort of setup can certainly increase demand for connection speed — but demand for connection speed is the thing they’re assuming won’t grow as fast as it historically has in their profit projections. I haven’t double checked the numbers, but I’m pretty sure that the historical growth figures were for pretty much a constant price point too.

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