Internode Blog

Further corrections to the record on NBNCo pricing models

Saturday, April 9th, 2011 by

Recently, federal communications Minister Senator Stephen Conroy has again made some incorrect statements about my proposed improvements to the NBNCo wholesale cost access model.

The comments concerned are reported here:

http://www.zdnet.com.au/hackett-s-nbn-rejig-costs-customers-conroy-339312918.htm

Those reported comments (if accurate) contain a variety of statements about my proposals that are misleading in some cases, and entirely wrong in others.

In an effort to correct the record (again), I will take a look at the statements attributed to Senator Conroy and provide correction and comment about each.

Before doing so, it is important to appreciate that there are two separate but interrelated issues here:

One issue is the ACCC decision to force NBNCo to locate its network access points at 122 places that are physically distant from where their customers are located, instead of locating them at 14 sites designed to be efficient and cost effective for service providers to access.

The other issue here relates to problems in the structure of the NBNCo wholesale access pricing model.

The NBNCo pricing model (as it stands) will serve to inhibit smaller providers from affordable direct access to the NBN, and will force them, instead, to obtain NBN access at a mark-up via their own larger retail competitors.

The current pricing model will also drive up pricing for all providers artificially (and hence will drive up retail pricing) as consumer use of the network grows (in other words, as consumer use of download quotas rises).

This is because the NBNCo backhaul (CVC) costs are far too high, as currently framed: In a network built with abundant bandwidth, the current ‘CVC’ pricing will create (and charge for) artificial scarcity.

These problems are interrelated, because when the ACCC forced providers to meet NBNCo in 122 remote locations instead of in 14 local ones (and hence drove up overall RSP backhaul costs), NBNCo did not reduce its CVC (backhaul) costs reciprocally to balance this out.

As a result, the NBNCo CVC price (as it stands) is effectively charging for long distance backhaul services that (after the ACCC intervention) NBNCo no longer provides to RSPs.

In addition, that same backhaul path (the transit of data from service provider networks to the remote points of interconnect) now has to be purchased separately from ‘the market’ to reach the remote POIs.

In effect the market is being charged twice to cover the same backhaul paths (paying once via charges from ‘competitive’ long haul fibre owners and paying again via the NBNCo model that charges for the same thing despite no longer providing it).

Let us now turn to the specific recent statements that deserve a response:

(Each bold-faced comment has been attributed to Senator Conroy in the media report noted above)

“I think he’s acknowledging that [the proposal] will put up the AVC pricing”

Picking on a single parameter misses the point. My NBNCo wholesale re-balancing proposal keeps the total access cost the same or lower for consumers, while encouraging more content delivery over the network in the medium to long term by not unfairly penalising higher download quotas in the future.

“…but the government has made a decision we’re not going to charge pensioners more per month”

It is in fact government inaction on the issues I have highlighted that will lead to higher than expected consumer retail prices. My proposals to rebalance the underlying NBNCo wholesale cost model don’t raise source costs – in fact they lower them!

A pensioner forced to pay a higher retail cost from a smaller provider will do so because that smaller provider was forced to obtain NBN access via one of their larger retail competitors at a significant markup (unless action is taken to address the issues I’m highlighting).

“The bottom line is Simon is agreeing with what the government and NBN Co put forward and I wish that the debate had perhaps gone a different way but we have accepted the umpire’s decision”

The NBN is a major market intervention driven by government policy. It will erase the entire facilities based tail circuit broadband market and replace it with NBN fibre.

The government has the capacity to legislate to override the ACCC decision on points of interconnect – a decision it continues to reiterate as being in conflict with their policy aims!

The government has certainly not been shy in passing other major changes to the NBN legislation over the past few weeks alone, all of which represents major intervention in the marketplace. Why be so shy about addressing this particular issue?

In addition, as the sole shareholder in NBNCo, the government similarly has the capacity to direct NBNCo to re-balance its wholesale pricing in a consumer-centric manner.

“Simon’s said it’s only a dollar a month for the base model but we’re not going to start charging people more than what they’re paying today”

This is simply false. My  proposal reduces pricing across the full spectrum of provider sizes and download quotas!

Unfortunately it seems as if Senator Conroy has not actually read my proposal before passing judgment about it.

The worked example of how my proposal operates is provided in the public document I posted at the start of April, here:

http://blog.internode.on.net/2011/04/01/rebalancing-nbnco-pricing-model/

Even a cursory glance at the worked example that may be downloaded via that link shows that the average access cost is substantially lower up to a customer base of 250,000 (encouraging industry participation), and that it remains essentially unchanged for larger service providers.

In addition, that rebalancing addresses the critical requirement to encourage, rather than to financially inhibit, growth in the use of the network over time.

“… the fact that twelve ISPs today signed up to offer services at the first mainland release sites for the NBN showed that competition is alive and well.”

Unfortunately it shows nothing of the sort.

Wholesale access costs are being waived during the trial period – this is a technical trial, and not a proof of anything regarding the wholesale pricing model.

It’s great that 12 providers have signed up to be a part of the technical trial phase!

But: The trial period is simply designed to verify that the technical aspects of the network… work.

To move from a technical trial to a vibrant pro-competition national fibre network with many providers directly attached (and where smaller providers are not forced to buy access from their own larger retail competitors), the access model needs to be re-balanced in the manner that I have proposed.

I am a strong supporter of the high level NBN FTTH policy – I always have been.

However, having people ‘shooting from the hip’ regarding my proposals (intended to improve the practical outcomes of this policy), without even taking the time to read them properly, is really not advancing the debate in a useful manner.

Our motivations here are to have the NBN work brilliantly with a lot of direct NBN participation from many providers, driven by improvements to the structure of the cost model that promote the greatest possible use of the network by consumers.

We’re trying to help – not to hinder – the widespread and rapid adoption of the NBN.

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