A new era for NBN Co pricing

Australia's National Broadband Network is not currently what it was planned to be. I was for many years up to my eyeballs in the policy issues. I was part of the discussions that initiated Labor thinking that structural reform of the industry should be achieved when a new access network was built (a proposition advanced at a Competitive Carriers Coalition and AAPT seminar in 2004). I was part of the group devising an alternative to Telstra's proposition for an access holiday for a new network. I was bizarrely part of attempts by a wireless operator to pitch fixed wireless as an alternative technology in parts f metropolitan areas (proof that as an employee I can pitch thgings I don't believe in...my employer at the time stuffed it up royally by trying to go to Rudd directly bypassing Conroy under the mistaken belief that Rudd was a leader and a decision maker).

I watched in horror as NBN Co started negotiating on its acceess terms with retailers in a private consultation in which only the retailers participated.  I watched in horror as NBN Co would not include quality of service in those discussions.

Later I was recruited into Stephen Conroy's office as special adviser and speech writer. I again watched in horror as NBN Co struggled to develop its access undertaking in a consultative manner, and equally in horror as  telco regulatory managers expressed the view that they wanted the ACCC to be in the centre as a price setter rather than price approver (I am looking at you Optus). I wound up in a shouting match with Bill Shorten's office and John McTiernan in (Gillard's) PMO over the response to the Penrith asbestos incident and Shorten's repeat of a demand that Telstra remediate its entire network to remove all copper. The roll-out timetable could not recover from the six months of suspension of operations that this approach resulted in. 

I then watched as NBN Co management released a deeply flawed strategic review that pleased its new shareholding ministers but ignored the documented improvements already made to the fibre roll-out. I think I cried when the coalition adopted the Multi-Technology Mix (or Malcolm Turnbull's Mess) and thereby trashed the revenue model (see footnote 1).

We are where we are. NBN Co's pricing model has largely been shelved as repeated special offers have applied discounts - mostly to the CVC component. NBN Co is apparently looking at 'soft caps' on  excess usage charges and the ACCC has jumped on this saying it welcomes NBN Co's announcement that a 'new approach' to the regulation of its access pricing is needed (see footnote 2). In a most extraordinary statement the ACCC Chair makes a play to be at the centre of the pricing arrangements, saying: 

Until now, access pricing has largely been developed by NBN Co, so the prospect of bringing this work squarely within the remit of a special access undertaking with effective ACCC oversight is a very significant change. This is the start of a long reform process that would effectively put NBN pricing under the ACCC’s regulatory umbrella, and would improve access pricing for NBN Co customers.

It is extraordinary because NBN Co pricing already is under the ACCC's regulatory umbrella - it is just that the umbrella specifies a maximum price, not the exact price. 

The more frustrating part is the telcos complaining about a margin squeeze. They make the point that consumers are used to declining telco costs and that an increasing NBN Co ARPU is inconsistent with that. However, the pricing behaviour is such that telcos have been reducing retail prices at a faster rate since the NBN came into being than they did in the period of competition with an integrated Telstra after 1991. The chart below shows the real telecommunications price index from CPI data and trend lines for three separate periods (see footnote 3). 

NBN Co needs to change its approach entirely. They need to be working with retailers to identify how they can design premium products that retailers can command premium prices for. This is hard given the MTM but not impossible. Now that almost every copper pair is actually being used for an NBN service a service qualification can be performed, and strategies to provide improvements developed so that retailers can confidently offer guaranteed higher speeds. Getting on with remediating the network to at least fibre to the kerb will also help.

NBN Co needs to consider all options for restructuring prices - including if need be the original 14 POI model - noting that recovering its costs at a WACC of the risk free rate plus 3% (or whatever the arbitrary amount chosen is) is a requirement. 

Multi-lateral price design isn't impossible - it is essential. 

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Footnote 1: It is hilarious in hindsight to re-read one justification for reducing the revenue forecasts (i.e. appetite for higher speed tears and the planned multicast service) that the NBN Co plan had overestimated Australian interest in streaming services. 

Footnote 2: The ACCC Chair Rod Sims is normally quite adament that an 'access price' only relates to the price an integrated firm charges for access to a bottleneck facility that is provided to firms with which the regulated firm competes in downstream markets. Technically as a structurally separated entity NBN Co is just charging a price - it isn't an access price. I understand the difficulty that the law is still drafted referring to access undertakings etc.

Footnote 3: This data is for the aggregate of services and it might be thought that mobile services are bringing this down. But telcos made the same complaint before the introduction of 4G in mobiles - that the high capital cost of spectrum and equipment would be hard to recover from consumers. The simple reality is that CEO's and CFO's like bigger profit margins and will do anything to find them. The regulatory team has long been the go to group. 

Tangentially related footnote: In the context this week of the Health Minister announcing the continuation of the tele-health arrangements for another six months and that the Government and stakeholders would now work to make it a permanent model. Pathetically tele-health is mostly nothing more than telephone conversations. 

Tele-health was one of the applications identified for the NBN and featured prominently in the ALP's National Digital Economy Strategy. The Coalition Policy on the Digital Economy in 2013 said:

Many of the aspirations contained in the updated NDES are outside the scope of this policy because they fall under other portfolios (for example expanding the Medicare Benefits Schedule to include remotely delivered services or changing the taxation of employee shares), are largely the responsibility of the States and Territories (for example the National Plan to Fight Cybercrime), or are both (for example adding ICT to the National Curriculum in schools). 

The woefully inadequate state of tele-health is in dicative of the failure of the coalition under all of Abbott, Turnbull and Morrison to take both Broadband and the Digital Economy seriously. 

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Life is what happens while you are busy making other plans JWL