SteveJ on NBN: ER-edition: NBN: Business Myths or "NBN Co pricing Time Bomb"

Simon Hackett, one of the best known and most respected Comms commentators in Australia, because he started and ran his own very successful Telco/ISP for more than 15 years, spoke this week at a CommsDay event, "Wholesale and Data Centre Summit". [slides]

Simon called for real debate over the implementation of the NBN: How to build a Fibre NBN on a Copper Budget. Mike Quigley, CEO of NBN Co, also called for an "all options" debate earlier this year, but the Coalition attacked, mocked and pilloried him for suggesting this. I hope Simon's call will start real debate now.

Simon made three points in support of his assertion, "there's a financial time-bomb in the plan" and again called for a small number of replicated MegaPOPs, not the 121 PoI's, to lower burdens on ISPs':

Drop the tiered AVC (Access Virtual Circuit) Charges should be dropped and, like current ADSL/ULLS, adopt a single charge.

Plus, remove or radically reduce the CVC (Connection Virtual Circuit) or Volume charges.

Drop QoS (Quality of Service) altogether, just like current ADSL/ULLS. Four 'traffic classes', TC1-TC4, are defined to allow customer traffic to be prioritised.

Drop the customer 4+2-port NTD (Network Termination Device) and separate power supply, with optional battery-backup (UPS).

Allow RSP's (Retail Service Providers) to provide their own integrated GPON-Routers, just like current ADSL services.
Or supply a simple single-port GPON to Ethernet device.

It seems to me that Simon has misunderstood why these three innovations are actually very good for both the Customer and NBN's Retailers.

However, I do strongly agree with him that installing the high-end NTD without charge and by default is an unnecessary financial drag, one that could be converted to revenue. And I agree that the NBN free install should end with the internal FWO (Fibre Wall Outlet) and a tested/certified optical connection, not the full service and CPE (Customer Premises Equipment).

Firstly, Simon seems to have misread the NBN Co Corporate Plan. Yes, the ARPU (Average Revenue Per User [per month]) does increase from around $30 to $110. This is a good thing - it means business has increased! This is exactly like complaining "I'll pay more tax". Yes, A Good Thing! You're earning more and getting more in your pocket.

Secondly, NBN Co provided a comparison of their wholesale volume charges versus Telstra ADSL. Retailers also need to pickup backhaul from the 121 PoI's (Points of Interconnect) versus Telstra's interconnects in 7 State Capitals. In NBN Co's view, and the independent umpire (ACCC), the volume charges are fair.

Simon could've reused the NBN Co chart, avoiding calculating and charting the data, Exhibit 8-11 2012 NBN Co Corporate Plan.

4-port NTD

While I agree that both giving away this piece of high-end 'kit' and its installation, for free, seems poor business practice, I don't agree that the NTD is a bad idea. The lack of connection options and 'no charge' are commercially unsound: providing a cheap, 1-port GPON/ethernet device or allowing RSP's to provide integrated GPON Routers will provide customer choice and better match needs. Selling 4-port NTD's as an upgrade seems better commercially to me.

I agree with Simon that including 2-voice ports for the GPON NTD isn't necessary. The Fixed Wireless NTD only includes 4 data ports, no voice.

The basic "layer-2" architecture of the NBN is very different to current ADSL networks in three important ways:

Customers access IP directly, not over tunnelled connections (PPPoE).

VLAN's (Virtual LANs) allow separation of traffic throughout the network.

This network isolation provides both security and simple administration for RSP's.
It allows customers access to multiple RSP's on the single connection.

Multicast, versus normal TCP/IP unicast, allows the NBN Co network to 'amplify' packets and cheaply provide broadcast traffic, like scheduled TV, saving Customers and RSP's substantial costs. This cannot be done with ADSL's PPPoE.

The commercial innovation of direct-IP & VLAN's and the multi-port NTD is that customers can simply and cheaply connect to multiple RSP/ISP's: say ISP, TV and Work. It's the modern equivalent of tuneable Radio and TV. [Radios were once sold pre-tuned to a single station.]

QoS (Network Quality of Service)

Simon's criticism is correct and valid, paraphrased as: "Within the NBN CAN (Customer Access Network) there is no need for QoS prioritisation, because there should never be significant congestion and queues to address." Yes, and that is what the NBN Co docs say they'll do.

NBN Co make it clear that they add QoS 'tags' to customer packets at source (the NTD), not for their network, but for the RSP/ISP's. QoS is to allow the RSP/ISP to buy smaller CVC's (pay less), smaller backhaul (pay less), creating some congestion/queuing in peak-times whilst being able to trivially provide different grades of service to customers (charge more).

QoS and packet prioritisation is solely there for the benefit of RSP/ISP's. They get to minimise costs and increase their revenues. If I was an ISP, I wouldn't argue against it...

Tiered AVC Charges & lower CVC (Volume) Charging

Multiple AVC is a brilliant commercial innovation on the part of NBN Co, soundly based in Economic Theory and of real value to ISP/RSP's: they can charge different clients more for exactly the same physical service.

Look at Exhibit 8.5 of the NBN Co Plan: they charge between $24 (12/1) and $150 (1000/400) for the same physical line. The RSP can just add their margin, or charge a premium for higher speeds, and the presumed higher downloads. Like iiNet, they can raise the per-GB price of included data for 'premium' plans as well.

In Economics, this is called reducing Consumer Surplus, or "not leaving money on the table". Nobody is forced to pay higher AVC charges. Customers are able to put a dollar figure on what the extra access rate is worth, to them. Providing customers with model choice, to express their preferences and willingness to pay, is fundamental to the consumer goods business. It's great business to abandon the current ADSL single-fee model.

But it doesn't stop there: NBN Co will reduce the AVC charges over time. By 69% for 100/40 and 82% for 1000/400 in 2040 (nominal not real $). [Exhibits 3-1 to 3-3 of April 2013 and Ex. 8.8 of 2012 Plan]

And it gets better: NBN Co will reduce CVC (Volume) charges as average monthly volume increases, not total volume. [Exhibit 8.9 of 2012 Plan]. ISP/RSP input costs from NBN Co will halve after 3-4 doublings in traffic. At current rates of growth, that's before 2020.

What Simon didn't raise is that willingness of consumers to buy premium plans is higher than NBN Co planned for (32% @ 100/40 not 18%) prompting them to bring forward higher rate (read more profitable) plans up to 1000/40. [Exhibit 4.3, April 2013]

This benefits ISP/RSP's as much, or more, than it benefits NBN Co. They not only increase revenues, they can increase their Gross Margin (EBITDA) as well: consumers are showing their willingness to pay a premium. Building on that is good commercial practice.

Not only have take-up rates and high-end AVC's exceeded forecasts, but average download volume is 50% higher than the Australian average (45GB/mth vs 30GB/mth) [Exhibit 5.2, April 2013]. That's more revenue and potentially higher Gross Margins for ISP/RSP's as well. Exhibit 5.1 [April 2013] shows that fixed-line download volumes are growing solidly and at much higher rates than mobile data: Fixed-line is where the money is to be made.

Exhibit 7.6 [2012 Plan] shows that independent experts are forecasting this continuing exponential growth in demand to continue well past 2040. [That's a log-scale, not linear, of speed. Even line is ten-times more than the last.]

Could it get any better? I think so...

The high take-up rates of 100/400 [Ex 4.3, April 2013] coincide with the Sandvine traffic distribution graph [final graph]: 1% of users account for 10% of traffic, while the lowest 50% of users account for 6.4% of traffic.

If the overwhelming (~95%) majority of your demand is from high-end customers who self-select their willingness to pay a premium and on which you can make higher Gross Margins, do you throw away that business and ignore the premiums? No, it's not good business.

ISP/RSP's can afford to lose 50% of their customers, the low-end, to mobile competitors and it will increase both their ARPU's and their Gross Margins. I don't have the data to say if demand growth rate will increase as well.

In answer to Simon: NBN Co has already given ISP/RSP's decreasing volume charges, but has also gifted them increased revenue (tiered AVC's) and allowed them to differentiate premium customers and increase Gross Margins.

This commercial strategy of introducing premium products at high Gross Margins, then steadily reducing the price and Margin as new higher-spec/feature products are released over them is well established. It's the enormously successful Apple Strategy.

Charts [click to enlarge]