Analysts greet NBN Study but ask for business case

Four analysts provide the low down on the study, with some doubt over customer uptake rate assumptions

Analysts have broadly welcomed the findings of the NBN Implementation Study, but expressed some doubt around the state of a business case for the national infrastructure project.

Ovum’s David Kennedy said the Study’s cost estimate of $26 billion for coverage of 93 per cent of the population was realistic and in the range the analyst house had expected – between $25 and $30 billion.

However, there was much less detail in the Study on the revenue side, Kennedy said, particularly around the assumptions on the rate of fibre take up.

“They are predicting, based on international experience, a six to 12 per cent per annum take up where fibre is rolled out,” he said. “But, if you look at their examples it’s places like Japan, Korea and Holland. In those cases we’ve had an incumbent transferring its customers over to fibre. That can happen here, but only if a deal with Telstra is struck.

“In the event of a competitive scenario with Telstra the benchmark is more like Italy where the newcomer is competing against the incumbent and the take up is just two per cent.”

Kennedy was also sceptical when it came to the extent to which the Study provided a business case for the NBN.

“There’s nothing in this report that you’d call a business case.” He said. “The question of how much the government is going to be committed to capitalising [the NBN] and how much they will get back I don’t think is settled by this report.”

According to telco industry stalwart, Paul Budde, the Study confirmed the importance of the NBN as national infrastructure project and as a utility for the digital economy.

The NBN’s return on investment figure of between six to seven per cent would also mean that it was possible to create wholesale prices that were competitive.

According to Communications Minister, Stephen Conroy, entry level NBN wholesale prices would start at between $20 and $30 for basic broadband.

“Based on this a $30-$35 wholesale rate is most certainly achievable and will lead to a $50-$60 retail prices for a combined broadband services (20Mb) and a voice service,” Budde said in a blogpost on the Study. “This certainly is a competitive price. This will lead to a rapid penetration and that in turn will make the roll out economically viable.”

On the question of a business case and return on the NBN Budde said it was critical to leave the NBN in government ownership for the duration of the roll out to ensure a competitive and affordable environment.

“It is perfectly acceptable that as a utilities investment the government works around a 15 year pay back period, again this applies to many other forms of infrastructure,” he said.

Echoing the Study’s comments that the NBN could be built without Telstra, Budde said this was possibly but would require some overbuild.

“There obviously will be a cost saving - at a minimum of $5 billion according to the study - if the NBN can be built in cooperation with Telstra,” he said.

Emilie Ditton at Telsyte said while there was no doubt that NBN Co could push ahead to build the NBN in the event that Telstra chooses not to be part of the NBN, an network without Telstra would lead to far greater build cost, far fewer subscribers in the initial years and a slower rate of take-up, which would mean the project would not achieve the market share required to satisfy investors.

"This would also mean a much longer payback period and probably significant delays in the network build. In summary, the scenario without Telstra involves much greater commercial risk for NBN Co and the government," she said. "Additionally, in the event that Telstra does not agree to join NBN, it will be a formidable competitor with a substantial subscriber base to which it can offer a sticky triple play offering.

"It will have first mover advantage and time to market over the NBN, and well established cable and wireless networks. Whether Telstra can hang on to these subscribers depends on the demand for services that really require very high speed network, how truly sticky Telstra’s customers are and Telstra’s pricing and product packaging. However, Telstra has shown itself to be a extremely aggressive marketer of its services and has the P&L to do so, unlike a lot of emerging RSPs."

Ditton added that the Study lacked insight into the specific data and assumptions that result in the consultants' view that the NBN could achieve an acceptable and viable commercial return with or without Telstra.

"So, it is difficult to make an assessment of the validity of their analysis without these underlying assumptions. Certainly analysis undertaken by Telsyte and others relating to building an FTTP based network on a national scale in Australia is that it is extremely difficult to make an acceptable commercial return within a reasonable timeframe, if it is possible at all. Having said this, the nature of economic modeling is that you can always get the outcomes you are after, it depends on the assumptions used. I find it hard to believe that the NBN could be built within budget and without Telstra."

David Cannon at IDC said the Study was in line with what the industry expectations and reconfirmed that a combination of fibre, wireless and satellite was the right technology for the national network.

“The NBN’s being financially viable is based on the premise that they are the monopoly provider,” he said. “If they aren’t the monopoly then the whole business case goes back to the drawing board.”

With the Study now available, the industry would now look to the its impact on the NBN and Telstra separation legislation.

“The report has always been a pre-requisite to the discussion about the legislation so it will be interesting to see what kind of spin doctoring gets done [around the Study] prior to the legislation getting into the Parliament in the next two weeks,” he said.

Cannon added that despite the Study’s recommendation that equity in the NBN not be swapped for Telstra’s network assets, such a deal should not be ruled out in the current NBN Co, Government and Telstra negotiations.

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