NBN: Unanswered business questions of the Turnbull Node Plan

My current list of business, not technical, questions about the Turnbull Node Plan.
There are some questions about implementation details and things like "Traffic Class" that arise because they're on the NBN Co rate card.

From what Turnbull has published, we know, more than merely infer, that Turnbull did indeed prepare a full Business Plan, out to 2040 at least. A reasonable Business Plan would include the replacement of the Node (FTTN) network as described multiple times in the Coalition documents.

This is at least a $4 billion charge to the full project, referred to by the Coalition "CapEx Reuse", normally this would be classified as "deliberate waste".

This is, by my calculation, the whole of the CapEx saving achieved by the Turnbull Node Plan, the $17 billion claimed is impossible, even if the full Telstra payments are swapped to OpEx in a "rent, not buy" deal - leaving the original contracted "PSAA" payments of around $7.5 billion still to be paid later. This point was raised directly with Turnbull's office very early on and has never been explained.

The Parliamentary Budget Office, PBO, has sufficient capability and time to evaluate a full spreadsheet model of the Turnbull Node Plan (if supplied electronically) and to extract the financial/marketing assumptions and refer them to experts in DCBDE (Department of Communications, Broadband etc), NBN Co or external Telcos like Telstra and Optus, or the many experts & consultants in the field.

It doesn't take long, a day or two, for real domain experts to assess given assumptions, like traffic growth and market demand. Interest rates and A$ exchange rates are well within the expertise of the PBO. A panel assessment of the Turnbull Node Plan would allow PBO to quickly create a credible range of estimates. There are good techniques, such as "Delphi", to apply these estimates.

Outstanding Questions on Coalition Business Plan:

First, a competently assembled Policy with adequate supporting documents would have included the full Business Plan to 2040. If the Coalition has intended to clearly annunciate its Plan, for its communication to be be complete and clear and for its assumptions to be open and transparent, it would have gone about things very differently. Instead, that Master Magician, Turnbull has engaged in misdirection, distraction, obfuscating, deflecting, confusing & conflating, attacking, inverting positives ($110 ARPU is "bad") and drowning all an sundry is masses of superfluous and irrelevant detail.

This is why the PBO cannot examine the Coalition NBN Policy and would need a huge amount of expensive, external consultant time ($250,000-$500,000) to properly assess the Coalition documents: they are not designed to convey pertinent information, but to prevent exactly that.

That the Coalition haven't submitted their full Business Plan to 2040, and that they've deliberately withheld critical and necessary headline figures, like ROI and pay-back period, speaks volumes in the political world. It's as close as it gets to a flat-out admission of deliberate action.

They are presenting a Plan that will fail, they know will fail, is designed to fail and will complete Turnbull's commission to "Destroy the NBN" by sending it bankrupt.

As Turnbull has started to state frequently now, "nobody has challenged my figures in 4 months".
Which raises the question:

Why has the Mainstream Media not asked and had answered all these questions in the last 4 months?

• What's the CapEx, in their model, of the FTTN component to 2016 & 2019?
• What is the CapEx, in their model, of the "90% premises to 50Mbps" upgrade between 2016 and 2019?
• Is this upgrade via Vectoring, increased nodes (shorter distances), a combination or something different?

• What interest rate is assumed in their model? per year, if it is modelled as changing.
• what cumulative total, by year, is borrowed in their model?
• If NBN Co is not cash-flow positive in any year, how will they fund that?

• What is the assumed project life of the FTTN component?
• Do they assume a "straight-line" depreciation in their model?
• What is the ROI, in their model, of the FTTN component?
• Does that include the "50% Capex _not_ Reused"? [pg 14 of "Policy Background"]
• What's the break-even period in their model?

• The new "Statement of Expectations" to NBN Co include non-commercial directives about prioritising rollout to "poor service" areas and "Cost-effectively as possible".
• In their model, is there an extra cost for the prioritisation?
• When will the Coalition more precisely define for NBN Co the meaning of "Cost-effective" in this context?

• What are the OpEx payments to Telstra, in their model, of the FTTN?
• How are they modelled to change over time?

• Is the FTTN component a "pure digital" network or Telephony with ADSL2/VDSL2 on top?
• Does the Coalition FTTN model follow the UK model of ADSL2/VDSL2 only in the nodes and telephony routed back to existing exchanges?
• Does their model allow for service disruptions for telephony and ADSL to consumer on cutover to Nodes?
• Under the FTTN model, will consumer ADSL2 services continue to operate normally after cutover to a Node? Allowing for a disconnect/reconnect?
• What is the maximum service outage planned for in their FTTN modelling?

• What does the figure of "8,968,000" on pg 7 of the Plan (finish of rollout 2019) refer to?
• premises "covered", passed, ports built or something else?

• If the 8.968M figure is premises passed or ports built, why is that number so specific?
• Does that imply the FTTN rollout will only occur in the major urban areas?

• The Coalition Plan states that by 2016, both at least 25Mbps 'by late 2016" will be available "to every household and business" and that ~65% (5.829M premises) of the FTTN rollout is expected to be completed by 2016-17. If there are currently 2.5M premises covered by HFC and 3.139M premises not to be covered by FTTN by "late 2016", how will, in their model, the 639,000 premises later to be included in the FTTN footprint be connected with 25Mbps?

• Does the FTTN component in their model assume compensation payments to owners of DSLAMs with residual-values, ie not fully depreciated?
• Does the Coalition model treat cutting the copper back to the exchange as different to offering an alternative broadband service, Fibre or Wireless? If so, on what legal advice?

• Will the Coalition offer a VDSL2 "NTD" on the same terms as Fibre and Fixed Wireless?
• If so, will there be any NBN Co charge to customers or retailers?
• If not, who will pay for the provision, installation and testing of a VDSL2 "NTD" for a customer?

• In their model, what are the initial FTTN AVC charges per month?
•  In their model, what are the AVC charges for HFC, Vectored VDSL2, ADSL2 and VDSL2 services?
• Does the Coalition modelling to 2016 include income from the 35% non-FTTN connected premises?
• In their model, what are the AVC charges for FTTN & HFC in the period 2016-2019?

• Does the Coalition model for the FTTN component include the 10% decrease, in real terms, "over the next 10 years"?
• Is that date in 2013, 2014 or 2016? Is it 1-Jan, 30-Jul or "late in the year" (up to 31-Dec)?
• Does that 10% decrease apply across all FTTN and HFC AVC services,including Vectored VDSL2?
• Does the one AVC wholesale price reduction apply to all NBN Co services, Fibre, Fixed Wireless and Satellite, or just the FTTN/HFC components?
• What are the long-term AVC charge reductions modelled by the Coalition, to 2040?
• How does this "10%" compare to the already stipulated ACCC AVC price reductions and the price reduction curves published by NBN Co on 19th April, 2013?
• Does the Coalition model follow the existing CVC price reduction
• curve, starting at 120GB/mth/avg download, already published by NBN Co?
• If not, what is the reduction plan and trigger volume for FTTN component and whole NBN Co traffic?
• - What is the average consumer data download volume (GB/mth) included in the Coalition model for both the FTTN component and the full NBN for all years out to 2040?

• In their model, what proportion of FTTN services have a telephony service?
• What are the wholesale charges for Telephony to Retailers in their model?
• Is this solely a line access charge, or are there other charges (time, distance, ...)?
• Is this charge, like Fibre and Wireless included in a standard service with a rebate for non-use?
• Will telephony traffic from Nodes use the same TC1 [traffic class 1] switching network as Fibre?
• Will customers be able to access TC1 telephony services from their in-premises equipment, or forced to use TC4, normal data, VoIP services?

• Will the Coalition FTTN and HFC networks allow customers access to the full range of NBN Co layer 2 bitstream services?
• direct IP (IP over Ethernet), not soley PPPoE used by ADSL2.
• multicast at TC2 or TC3.
• TC1 services
• multiple "QinQ" VLAN services at customer premise

• Does the Coalition modelling to 2019 include loss of NBN Co traffic across all delivery networks due to local competition & price under-cutting by them?
• Does the Coalition policy demand national players like Telstra and Optus charge a single national price?
• Require them, if they choose to undercut NBN Co pricing under the "ACCC price is a cap" change, to offer the lower prices everywhere they can offer the same service?
• How is this policy on "price cap" not the major Risk factor identified in the 2010 NBN Co Corporate Plan, "Cherry Picking"?

Sources:

NBN Co:
http://www.nbnco.com.au/assets/documents/nbn-co-corporate-plan-6-aug-2012.pdf
http://nbnco.com.au/assets/media-releases/2013/report-to-parliamentary-joint-committee.pdf


Coalition Papers:
http://www.malcolmturnbull.com.au/assets/Coalition_NBN_policy_-_Background_Paper.pdf
http://lpa.webcontent.s3.amazonaws.com/NBN/The%20Coalition\U2019s%20Plan%20for%20Fast%20Broadband%20and%20an%20Affordable%20NBN.pdf

NBN: summary reasons for Full Fibre

Abstract: The full Fibre NBN redefines the Internet in Australia and already shows signs of running far, far ahead of the conservation forecasts in the NBN Co Plan. It's a bonanza to business and consumers alike. It's necessary to underpin continued Productivity Growth and national competitiveness here. See Summary at the end for detail.

The Labor full Fibre National Broadband Network fixes a whole slew of problems with Broadband that were either created or ignored by the Howard government. Ironically, Howard came to power in 1996, the year most people view as when "The Internet" broke out commercially.

In 2001, Telstra's core business, Telephony had peaked and was in decline - displaced by mobile phones and Internet. Telstra was heading to being a distressed asset when Sol Trujillo took over in 2005, and within weeks he was telling Howard and his senior ministers this and the fix: an NBN.

Trujillo was right, from the T2 high in 1999 at $7.40, the Telstra share price fell to $2.60-$2.80 in early 2011. Howard's deliberate inaction cost shareholder tens of billions. Since the NBN deal, they're back over $5 - a $30 billion increase in valuation so far. That alone makes the NBN worthwhile.

Turnbull has said he approached "Telstra", code for Howard et al, pre-2000 telling them that breaking Telstra into a Retailer and Wholesaler, structural separation, would unlock shareholder value and break the deadlock with the Regulator, the ACCC. This was obvious at the time and proven in 2011.

Turnbull's "reasonable assumptions" in modelling are wrong or ignore the most important factors.

Turnbull wrongly argues that telecommunications in Australia has never seen long-term strong growth:

We said they’re not going to be able to increase their ARPU at nine per cent real every year for ten years because there’s absolutely no precedent for that in the history of telecommunications, at least in this country, ...

O.T.C., where I worked in the 1980's, increased revenues and profits a hundred-fold over 25 years by partly passing on "Moore's Law" speed/cost benefits and decreasing real charges for international phone calls every year. In the realm of the Internet, since 2000 the ABS has tracked Download Volumes. Award ("Test of Time") winning A/Prof Matthew Roughan of Adelaide Uni tracks this data: it's grown at 70%/year, doubling ever 1.3 years. He forecasts Australian downloads to pass 1 Exabyte/mth by 2016. (1 ExaB = 1,000 PetaB = 1,000,000 TerraB = 1,000,000,000 GigaB)

The raw demand underlying Internet use in Australia is growing strongly, as it has for over a decade.

What OTC, and not Telstra management, understood is that people love to talk, this creates high Demand Price Elasticity: drop the price 5% and increase sales 10+%. For nothing, the seller makes 5% more profit. OTC also understood marketing, product innovation and the power of advertising.

On top of insatiable demand and Price Elasticity, there's also strong pent-up demand caused by effectively capped access speeds since 2004 (ADSL2). The national average monthly download is 30GB, while for NBN users, it's 45GB.

But it gets better: Internet users are exponentially distributed, not the usual "Normal" distribution.
Sandvine report for the USA that 1% of users consume 10% of Downloads (more for Uploads).
50% of users account for just 6.4% of total Downloads.

Turnbull, partly correctly, claims "most consumers don't need really high speed". True, but the highest-value consumers, worth 10-100 times more, do have an unmet need for speed.

The average Download of the top 1% is 300GB/mth, while the low 50% average 3.6GB.
70% of consumers download less than the average 30GB/mth.

The economics of the Internet is driven by the high-end consumers, this is why take-up of 100Mbps NBN Co services, 31%, is running well ahead of forecast, 18%. That number corresponds to half the download data. Those 1% who download 300GB/mth could do that with a 1Mbps, running 24/7.

Consumers, especially small Business and Professionals, value their time. 15GB/day takes around an hour at 100/40 Mbps. This is the driver for 1Gbps. As soon as it's released, expect a 10% uptake.

"Tiered Access Rates" are the biggest commercial innovation in the NBN Co plan - they haven't been available in Australia like this before [ADSL1's 256/512/1000/1500 kbps don't compare].

They allow the business to sell the exact same physical equipment for (wholesale) prices ranging from $24/mth (12/1Mbps) to $150/mth (1000/400). Not only does the business make more revenue and accelerating profits, but the customers are happy because perceive they are getting great value for money. Customers value products differently to producers. A 100/40Mbps service doesn't cost the $150+/mth eight 12/1Mbps would cost, but $38. A 1000/400 service costs just $150/mth, not $380/mth.

NBN Co is both not "leaving money on the table" by reducing the Consumer Surplus, but also meeting real demand from the higher access rates by the majority consumers of data, not the 'average' or low-end consumers.

Conversely, the low-end consumers benefit from everything the high-end consumers pay, download and access charges:  the NBN Co plan recognises the Price Elasticity in the market and built-in are 19%/year decreases in the cost of download and faster decreases in consumer access charges.

The profits of the NBN are generated almost entirely by high-end consumers.
It isn't a case of "pensioners and low-income earners subside the Rich", but exactly the opposite:

The NBN is the high-spending 30% subsidising the rest: high-income earners using high-speed services pay for everyone else.

Access Rate also allows Retailers to identify Premium Customers, whom they can "upsell" or charge higher rates for Volume. None of this has been possible with the ADSL single-price services.

On top of this the "$110 APRU" is a windfall for ISP's/Retailers. With no extra effort they'll triple Revenues, and increase Profits by 5-10 times. Imagine how much better they'll do if they try.

The NBN is about Business, not domestic consumers and retail customers: that's small business and single-operator micro-businesses too.

With cheap, fast, guaranteed low-latency services more consumers will do more on-line business and consumer more on-line products. This is what's driven the spectacular collapse of "print media" and the "eTailers" threatening Bricks-and-Mortar retailers. Next we'll see entertainment change: in the USA, Netflix accounts for 30% of night-time Internet traffic. It's displacing TV, both Cable and Free to Air.

Could it get better? Yes...

NBN Co supports 4 "Traffic Classes" - packets that get priority over others. This allows services like Voice-over-IP (phone) and Video Streaming to operate flawlessly, without getting caught up in the usual nigh-time congestion. Retailers can charge a little more for better service.

But priority data isn't because NBN Co's network gets congeted: it's there to help the ISP's and Retailers. They can pay for a lot less capacity and still meet service targets for real-time services, like voice and video-streaming.

Then there's what could be the secret weapon, that no other country has: Multicast.


This is aimed directly at wide-scale broadcast of scheduled video. The ISP/Retailer sends just one stream of a channel, at say 5Mbps, down to the NBN Point of Interconnect. The NBN switching equipment then amplifies that channel, sending the same bits to potentially 100,000 services.

It costs just $5/mth extra in User Access Charges to start. The ISP/Retailer, for the standard fee, gets to send 200 channels down the wire, whether just one or 100,000 people are watching. This changes the rules of broadcasting.

Nowhere else in the world is national multicast being tried, it puts us in the box seat to develop new media, content and content-billing schemes.

The NBN Co plan, as already demonstrated by actual revenues and take-up rates, is conservative, it understates the real growth and revenue potential. The current ARPU of $38, while an aberration due to ramp-up and closer to $35, is years ahead of the Plan.

The NBN Co is already showing signs of being wildly successful, of becoming the new standard for "Rivers of Gold".

All this, the Coalition is hell bent on destroying. Dealing with the deliberate deceptions and obscuring of facts is another task.

Summary

The full Fibre NBN:

• Addresses the inaction of the Howard Government in not starting a National Broadband Network when it first became apparent in 2002 and was demand by Sol Trujillo in 2005.

• Corrects the deliberate market foul-up by Howard in not Structurally Separating Telstra.
• This policy resulted in the market failure where no commercial was prepared to invest in a new Broadband network. They'd already seen multiple infrastructure disasters: 1993 HFC Cable ($4 billion wiped out), 4 Mobile phone networks overbuilding one another and the ADSL debacle: every operator must install it's own DSLAMs in every exchange.

• Has already added over $30 billion to Telstra's valuation, probably well over $60 billion when done.

• Introduced "tiered pricing" that reduces Consumer Surplus, increases both wholesale and retail revenues and gives customers a great deal.
• Removing the "single-price" model of ADSL line charging allows retailers to identify the Premium Users, the top 30% how contribute most of the profit, and better market to them.
• The $110 ARPU will be a gold-mine for ISP's/Retailers: with no effort, they get to triple their Revenues and increase Profits considerably more.

• Leverage Price Elasticity by dropping both Access and Volume Charges ~20%/year, stimulating demand and increasing profits.
• The high-end consumers generate the profits and pay for the rest of us.

• Providing Traffic Priorities so ISP's/Retailers can decrease their costs further and still guarantee service levels where it matters.

• Provides multicast, that will allow new, higher definition or higher feature Video streaming or gaming, while allowing low-cost content providers to enter the field or sports associations (eg AFL) to live broadcast multi-view, high-quality game feeds for many games.

• The full Fibre NBN is a bonanza to almost every Business in the country. It will drive sales, the same way we've seen eTailers, News & Content, it will lower their costs and drive Profits.

• The NBN Co Plan is conservative, actual results are years ahead of forecasts.
• If even historical growth rates are sustained, the NBN will be a new standard in "Rivers of Gold".

• A National Broadband Network is solely about business and necessary for sustained Productivity Growth underpinning our National competitiveness. We can choose to be a mine and quarry with no value-add or use our world-beating skills in innovation to become and stay competitive in the Information Age.

NBN: Business Economics of Fibre in the New Silicon Revolution

The economics of Fibre Customer Data Networks are surprisingly strong, they are a license to print money, unlike any other business opportunity out there now. Exponential growth in revenues are backed by exponentially dropping underlying costs. The most-profitable high-end users willingly pay more and self-identify, allowing NBN Co's Retailers to provide them premium-priced services, maximising retailer margins and profitability. Copper Data Networks fail on all these critical commercial points.

History

At a Unix Conference in 1988 I spoke about how Optical Fibre had changed the rules of the game, today I can tell you a lot more about why. It's another effect of Moore's Law, the headlong rush that has seen CPU performance double even 12-18 months for around four decades.

Optical Fibre has changed very little since the 1980's, all the development happens in the Silicon at either end: the transceivers, the laser transmitters and photodiode receivers.

Moore's Law is driving the speed increase at rates that boggle the mind: a thousand times faster in 15 years. What other commodity has its input prices change that much?

The second part of the equation is the cost of production parts is not related to speed or complexity, but to how many you make. The price halves when you make 10 times more. It approaches the cost of the raw materials when you make 100,000 times as many. Think of flash memory in USB memory sticks or camera SD cards. They are now 4-8GB for $5-$10 at the supermarket. They're "as cheap as chips" because so many are made. Just a decade ago, they were 100+ times more expensive.

The commercial implications of this are profound: it's a license to print money, especially if you can get people to pay by the MegaByte (MB) or now GigaByte (GB), not to be confused with a Gigabit per second (Gbps) [1 Byte equals 8 bits, Big-B and little-b].

This is the commercial underpinning of commercial Optical Fibre networking: install the fibre and upgrade the electronics at either end. The first Fibre link in Australia was put in service in 1988. The Fibre is still in use, the original electronics long gone. They may have been 34Mbps, today they would be using 40Gbps WDM, faster than 1,000Gbps (1Tbps, or Terrabit per second). Now they use volume production standard ethernet parts, not low-volume "Telco grade" systems that were 100 or more times the price for 30,000 times less performance.

The cost-per-bit has gone down 3,000,000 times since my talk. A figure I would not have been game to estimate back then. [In nominal dollars. In real terms another 5 or so times, but who's counting?]

But unless you have customers willing to buy at good price, you have no business. If internal costs go down to almost nothing, but customers purchase no more units, then you can't drop prices!

What we've seen over 6 decades of computing is insatiable consumer demand for every sub-system: CPU's, memory, storage, LAN-speed and now Internet access speeds.

As speed/capacity rises exponentially and per-part price drops, consumer demand has relentlessly increased faster, driving production volumes up, which drives prices down, stimulating more sales in a "virtuous circle".

The first (1983) 4.77Mhz (not GHz) IBM PC with a 5MB drive cost $2-3,000 then, 30 years ago.
A $75 tablet today is 1,000 times faster, with 16,000 more memory and 1,000 times more storage, with  much better display and graphics card. It runs off an internal battery, using at most a few watts compared to 130W - and has sound, camera, USB, WiFi networking, bluetooth and more.

While sales do build, they follow the usual early-adopter -- mature adopter -- laggard, formula. They have always been people who will pay a premium to buy the latest and greatest: they can assign a dollar value to the extra utility the device gives them.

The early-adopters, the 5-10% "high-end" consumers, pay for the development of products and let the rest of us ride on their coat tails. Somebody has to start the virtuous circle of demand driving down price, stimulating demand, and it's these people who'll pay more.

While  the price of PC's and now smartphones and tablets has come down, while their capacity has increased, the total sales, and hence the total revenue & profits, have steadily increased. The demand for additional computing resources keeps expanding even as prices drop.

It's important to not look at average demand, but what the premium-users (5-10%) are wanting today. Next year, 25% of consumers will want it, the year after 50%, and so on.
Look at the stupendous take-up rates of smartphones since 2007 and tablets since 2010. There is serious money in this. Apple understands these economics and rode them to become, for a time, the big company on the Stock Exchange.

Telcos need to compare the input prices of the competing technologies: Copper and Fibre.
Then the price-per-bit now and in 5- and 10-years: what does the cost curve look like?
Until you get there, the Operational costs determine your profit margin or pricing.
And the crunch is: Customer Demand. How will it grow?

But less obvious: The distribution of consumer demand. What impact do the premium customers have on your income?

To break this down further, some extra concepts are needed.

Management Accounting likes to break product costs into parts: Fixed and Variable.
Telcos and Network Operators have a very large proportion of Fixed Costs and low Variable costs. Fixed costs are those that you have to pay if you sell nothing, like interest and depreciation on all your equipment. The power to run the gear is a variable cost.

Costs are further divided into direct and indirect. Is a particular asset or consumable linked to exactly one product or service, or shared? The Fibre that runs into your house, and all that goes with it, is a direct cost. The transit network and PoI's are shared amongst many subscribers. The fixed fraction could be a direct cost, and shared upgrades, replacements and housekeeping taken as indirect costs.

In Customer Access Networks, engineering is generally simple and cheap, but total costs are high because there are millions of connections. As you move from the edge, closer to the centre of the network, speed, price and complexity of gear required increases because instead of supporting just one subscriber, traffic from hundreds or thousands must be carried.

The majority of the network costs are Fixed, not Variable: the whole network has to be built for it to sell a useful product. Interest and Depreciation dominate the overheads, with I.T. systems and Labour to run the system next. There are Variable Costs: Power, consumables, replacement parts and rental, plus line-related maintenance, dominated by labour costs.

What really makes a difference to input costs is Interest Rate and line-related maintenance.
Any company, like NBN Co, that can get money at 3% p.a. is laughing. One of its biggest Fixed costs becomes quite manageable.

Comparing Copper and Fibre Costs

NBN Co in April released construction figures for direct Fibre: $1100-$1400 per service. These are commercially supported figures, not estimates or guesses based on dissimilar projects.

The Coalition detailed plan suggests they used $900/service passed for VDSL2/FTTN (Copper) with $90/service in line-related maintenance, 10% of the capital price.

NBN Co have not released figures for line-related maintenance. Elsewhere there are suggestions Fibre is 7-8 times cheaper to maintain than FTTN. The Coalition suggested a figure of 1.5-2% of capital cost, this would be $20-$25/service.

The Depreciation rates of the two networks, FTTN and FTTP, Copper and Fibre, are different, but with their different build cost, they end up depreciating around the same amount per year.

The Copper Network will have a service life of 15-20 years, while the Fibre Network will have more than 30 years in service.

Copper depreciation per service, straight-line, will be $900 ÷ 20, or $45/year,
while Fibre depreciation per service, is $1400 ÷ 30, or $45/year.

According to reliable commercial figures, the FTTP (Fibre) network is only 50% more than the price guessed by the Coalition. At 3% p.a. interest, that's $27 for Copper and $42 for Fibre.

Total Costs (Interest, Depreciation, Maintenance) per service are:
Copper = $27 + $45 + $90 = $162
Fibre = $42 + $45 + $25 = $112.

A Fibre Network will be $50/year/service cheaper to own, around 30% less based on sound figures.


Comparing Copper and Fibre Network charges

There is a small variable cost in CAN's related to cost-per-bit. Consumers value services based on what 'utility' it provide them. For someone that has a need, higher access rates are worth more.

While access-rate barely affects costs, it can be used to differentiate services for users. For Fibre here are 3 indicative prices: 12/1Mbps: $24, 100/40Mbps: $38, 1000/400: $150. For users that need higher speeds, they offer exceptional value. To the consumer, it's twenty times cheaper to buy a single 1000/400 Mbps service than 80 of the slowest services.

Currently, the access charges of NBN Co average around $30/user. That's a 25% increase for exactly the same physical equipment, just for asking. You'll find customers buying the premium service are extremely happy with the deal.

When 1000/400 Mbps access is offered, the average will kick up by another 15%, just for asking. And underlying the point, with customers happy they are getting an outstanding deal.

For a Copper CAN, without the ability to guarantee per-customer access rate, a single access price of $20-$24 is all that could be charged, the same or less than the cheapest rate for Fibre. It may be possible to increase charges for VDSL2 and VDSL2 Vectoring services, but probably only by 10%.

Right now Fibre Access earns 50% more than Copper, with a 15% kick coming soon.

Comparing Copper and Fibre Upgrades

The current GPON technology used in the Fibre network uses 2.5Gbps transceivers.
Already there are 10Gbps, 40Gbps and 100Gbps transceivers in production. This is not some untested putative "all singing and dancing" laboratory demonstration, but real devices.

We know that volume demand, by the millions as needed for large-scale Fibre Networks, will drive silicon transceiver prices down to commodity prices: the same or less than current transceivers.
The GPON transceiver electronics account for under 10% of the total service cost, under $100 for two ends.

The cost-per-bit of fibre has a proven growth path down to 50-times less than today. That's reassuring to Network Operators. For $100 or less, they can upgrade to 40Gbps, even 100Gbps within 10 years.

Copper, as FTTN, has precisely two upgrades from existing ADSL2 (24Mbps): VDSL2 (to 50Mbps) and VDSL2 with Vectoring (to 100Mbps).

Upgrade costs will be anywhere between 20-100% of the current cost.
$900 buys the upgrade to 24Mbps for everyone.
$50 buys the line-card to upgrade to 50Mbps with VDSL2.
$500-$900/line buys the upgrade to a node for Vectoring. It's noise cancellation that only works if every active line in a node is under control. You can't install it on one or two services on a node.

Note that these are prices only for one end of the line, the Network Operator. The Customer has to bear the cost of the other end. This is not a recipe for happy customers, forcing costs onto them.

Look at the best upgrade, $50 for 24Mbps to 50Mbps. That's $2.00 per 1Mbps, for one end only.
The next copper upgrade, 50Mbps to 100Mpbs (maximum), it's $10 per 1Mpbs for one end only.
Right now, for $100, they get 1Gpbs, or $0.10 per 1Mbps, for both ends.

Looking to the future, this goes down 50-times, or $0.002 per 1Mpbs, or $2.00 per Gpbs: 1,000 times less than the best Copper price.

That's the challenge for Network Operators sticking with Copper: costs per extra 1Mbps have started to rise, and will continue to rise at an increasing rate.

Comparing Copper and Fibre Revenues

While a Fibre CAN (FTTP) is 30% cheaper to run than a Copper CAN (FTTN) and currently gets 50% higher access revenues than Copper by delivering guaranteed access rates, the 1,000-fold less cost-per-bit means nothing, if there is no demand. I contend that Fibre, and only Fibre, unlocks the economic potential of Customer Data Networks because of tiered pricing, with high-end users self-identifying and being charged a premium for access and volume by RSP's.

This is where the Customer Demand Distribution comes into play. Sandvine data, for the USA, 1H 2013, show the low 50% of consumers account for just 6.4% of traffic. If you dropped them off the network, download volume would barely change and ARPU, Average Revenue Per User (per month), would increase considerably because there's a link between higher line access rates and higher downloads. 

People with a need for speed, download and upload more.

The high-end 50% of users account for around 95% of total traffic, more for upload. The top 1% of users consume 10% of total traffic. These are the people driving demand and traffic growth.
Data Networks for Customer Access are not built for the average user, they account for an insignificant volume of traffic. The customers that drive demand and fill your order books are the top 1-10% of users.
People who base their argument on "I don't need more speed, therefore the whole thing is a waste of time and money", don't understand the economics. They are almost noise in the system.

The long-term average download demand reported by the ABS has grown at around 70% (1.3 year doubling period) for some time, despite the average line access rate being limited to 4.2Mbps. We know that 95% of this traffic is from the high-end users: the ABS data is a good description of the solid, exponential-growth of demand by the early adopters. It is not a measure of ordinary use.

Network Operators will make their money from the top 1-10% of customers who will both buy the highest offered line access speeds and generate the bulk of the traffic. These customers can be charged a premium for both access and volume ($/GB) by RSP's - they have shown a willingness to pay and the NBN Co pricing model encourages this.

Low-end users, the late-maturity and laggards in market-speak, will either continue their current usage patterns and enjoy continually falling prices, or increase their usage for roughly constant ARPU. Some will discover their unique "killer application" and move up the curve above the 50th percentile.
For a Fibre network, the demand for increased volume and access rates will continue, because it is driven by the top 50% of users, especially the top 1%-10%, and the last 15 years of data tells us they are following the six decade old Computing demand curve: the thirst for data keeps growing as more is provided. [See Bell's Law diagram of prices in this previous post.]

Just as the business model of every Telco offering Telephone services is based on the human characteristic, "people love to talk", Computing devices and Data Networks are driven by a similar so-far insatiable human appetite for information and understanding: "people want to know, 'Why?'". This same appetite drives the entertainment and education industries.

For a Copper Network, line access rate cannot be guaranteed. Because of this, the most demanding users, the top 1%-10% cannot be supplied with Copper services they'll pay a premium for: supply and demand cannot be matched, a fundamental market failure.

Because all users will be charged a single price, RSP's will find it very difficult to charge a premium to high-end users, drying up their revenues.

We know from the faster take-up rates of high-end Fibre services and that average monthly downloads are 50% higher on new Fibre services, comparing to the Australian average, that there is significant pent-up demand in the Data Networking market, especially in the important and highly profitable high-end.

This pent-up demand cannot be reliably served or exploited in a Copper network because high-end users cannot reliably be matched to faster services.

As well, there's barely any speed increase options available, and they are increasingly expensive to deploy, versus the exponentially dropping cost-per-bit of Fibre transceivers.

Copper is being pushed from two ends: slower and 1,000 times more expensive!

Comparing Copper and FibreSummary

A Fibre Customer Network will be 30% cheaper to run, already is achieving a 50% higher ARPU than Copper will ever be able to, and has a 10-20% uptick in ARPU coming with 1000/400 Mbps plans. Fibre differentiates the most-profitable high-end users for Retailers, increasing their Gross Margins & Profitability. History tells us, these high-end users will continue to increase traffic and create demand for the next 3 generations of Fibre transceivers already in production.

Input costs per-bit are set to go down 1,000-fold while demand will continue to double every 15-24 months into the foreseeable future. This is a license to print money that can only be attained with a Fibre Customer Network.

The low-end 50% of users get the benefit of price reductions paid for by the high-end users. They can either chose to maintain their current usage and pay less, or pay the same and use a lot more data.
The low-end users get an enormous gift from the high-end. Rather than paying for a network they don't need and don't want, they are getting subsidised by the high-end to a remarkable extent.