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