Internode Blog

Rebalancing NBNCo Wholesale Pricing Model To Encourage Innovation

Friday, April 1st, 2011 by

NBNCo’s current wholesale pricing model that was released to the market in late 2010 contains some significant challenges that will stop direct participation with NBNCo by national retail service providers with less than 250,000 customers.

There are just two simple changes required to the NBNCo cost model in order to address this issue. These changes are income-neutral for NBNCo but they will have very positive effects on the consumer outcomes for the network.

These changes are precisely balanced so that NBNCo earns the same (or higher) income per customer and hence it suffers no disadvantage in the process.

While income below 250,000 customers would appear lower for NBNCo in the rebalanced model, in reality it will be the same or greater.

Thats because without this rebalancing, there will simply be no direct customers of NBNCo below the 250,000 level, with those smaller providers being forced into the uncomfortable position of having to buy access at a markup from one of their much larger retail competitors.

That choice for a smaller player to use an aggregator won’t be taken away, of course. However in the revised model, retail providers from 10,000 customers and up will have the choice to directly participate with NBNCo in an economically tenable manner.

That direct interaction is of great benefit to consumers, because innovation in this market is a function of the amount of direct participation by multiple providers with NBNCo.

In addition, all consumers will benefit from this rebalancing because it will allow them to download larger amounts of data from the network at a lower cost.

The re-balancing is achieved with two very simple changes that should be made to the NBNCo pricing model. Here they are:

1) The punative $20,000 per gigabit ($20 per megabit) CVC price is reduced to a fair market rate of $1000 per gigabit per month ($1 per megabit per month) for the delivery of data from points of interconnect to customer sites.

Remember this is only the cost to move data from one of the 122 Points of Interconnect to a customer site. All long distance data carriage from these 122 POI’s back to the ISP network core in metro areas has to be purchased separately (as driven by the ACCC POI decision).

Indeed it is the ACCC decision around POI’s that really makes the reduction in NBNCo CVC charging mandatory. If this is not reduced as proposed here, then the NBNCo CVC charge is really double-dipping on the costs paid by retail service providers to reach the far flung 122 points of interconnect, instead of picking up access to the NBN in 14 metro area sites.

2) The charge per customer port (to deliver an entry level 12 megabit downstream/1 megabit upstream port, plus a PSTN voice port) rises by $1.63 per month per port (taking it up from $24 per month to $25.63 per month).

(all costs here are Ex GST)

The increase in per port charges has been calculated to exactly offset the reduction in CVC charges, so that the income to NBNCo is identical at their ‘reference’ 250,000 customer level.

You can see from the table and chart I’ve provided that the resulting income curve (the yellow line on the chart) allows viable entry into the market for a national retailer from 10,000 customers and upward (encouraging participation and innovation), while preserving NBNCo income beyond that point (where the income lines per customer all converge on a very similar result).

Reducing the punative CVC price down to a tenable level is simply essential for customer takeup on the network to be viable at quota levels that future customers will require as their needs for video and other content evolve. The CVC price point proposed by NBNCo is simply not a rationally cost based number – a simple comparison to the market price for delivering a gigabit rate fibre backhaul link makes that quite obvious.

My calculations to explain the numbers provided above, along with a table of the resulting per-customer tail circuit costs, and a chart illustrating these outcomes may be downloaded from the link below:

NBN Rebalancing Cost Projection

This is a simple (and balanced) pair of changes to the NBNCo cost model that has enormous positive outcomes for the long term interests of end users.

I would welcome feedback on this proposition.

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