NBN offers slim pickings for smaller ISPs

The cost of backhaul to POIs means smaller RSPs face challenges if they want to deliver NBN services to customers across all of Australia.

Michael Blake, co-founder of Adelaide ISP Nuskope, says it will cost up to $2.42 million for an RSP to provide Australia-wide services for the National Broadband Network (NBN).

Due to the high start-up cost for the NBN, Blake said NuSkope will need to resell another provider’s services, which will cut the company's margins on its NBN plans.

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“Our plan is to try and keep [plans] reasonably competitive, but the costs involved in supplying the NBN for a smaller ISP makes it hard to compete with the larger guys that can pump out the volume and then let their ADSL or other networks subsidies their NBN plans,” he says.

“[When you have hundreds of POIs], no small company can do it on their own – you have to resell somebody else’s product, which means then there’s less margin in it for smaller ISPs. [There is] significantly less margin because then we’re the next carrier down.”

This leaves a company like NuSkope with a $5 profit margin per plan for the NBN, according to Blake; small change for a company like NuSkope which currently only has around 14 customers on the NBN.

Blake believes that even large companies could suffer from low margins on the NBN. He says the profit margin for larger companies typically sits around the $6 or $7 mark. However, they sometimes price their plans cheaper and/or offer higher data limits, which can reduce their profit margin to $5 per plan, Blake says.

“I know [with one ISP] … [it] was posted somewhere that they thought they were only going to get $1 or $2 per customer for the NBN,” he says.

Smaller RSP margins could also be significantly impacted by the need to buy backhaul from companies such as Nextgen, which is providing access to RSPs to all points of interconnect (POI).

While larger companies will already have existing fibre networks to points of interconnect, such as TPG, which has fibre to two-thirds of the 121 POI, smaller RSPs will need to either build their own fibre or buy backhaul.

Blake says it will cost NuSkope from $10,000 to $20,000 to buy backhaul to each NBN POI, resulting in a $1.21 million to $2.42 million start-up cost for it to provide NBN services across Australia, which it intends to do.

This is in addition to the charge per service levied by NBN Co. This 'access virtual circuit' (AVC) fee is charged based on the speed of each service. For a customer on a 12/1Mbps plan, the cost is $24, while a customer on a 100/40Mbps connection will cost an RSP $38.

On top of this is the 'connectivity virtual circuit' (CVC) cost for RSPs, which is a $20 charge for every megabit per second of capacity an RSP purchases at a POI.

While NBN Co has introduced a credit on the CVC after industry backlash to its initial pricing, offering a rebate on the wholesale charge for the first 150Mbps per month until NBN Co pass 30,000 premises in a connectivity serving area, connecting to the NBN could still prove costly for some RSPs.

“For a POI you need much more than 100Mbps [of backhaul] and then you’d have to have times [that by] how many POIs you connect to,” Blake says.

“Then you have to pay for your internet. Obviously you have to buy that from somewhere and put that on there as well. So there are a lot of expenses and a lot of overheads in regards to us providing an NBN service.”

Nextgen managing director Phil Sykes won't comment on whether Blake's figure of up to $20,000 per POI for backhaul from providers like Nextgen is correct, stating he “didn’t want to put any pricing information down on paper”.

He says pricing can be dependent on several factors, such as the distance to the POI, the amount of data required and the speed required.

“You’ve [also] got to understand how many customers they’re servicing to know whether [$10,000 to $20,000 is] a lot of money or not. If they’re servicing one customer, you’re right, it’s pretty difficult,” Sykes says.

Blake says that despite the barriers, NuSkope has little choice over whether to provide NBN services or not.

“We’re mostly offering [the NBN] so we can churn our customers across to the new product, while still keeping them as our own customer. We’ll make a bit less money on them, but at least we’re still keeping them as a number on our books,” he says.

NuSkope has already released pricing plans for the NBN, but Blake says so far it is not worthwhile for the company to spend too much money on backhaul to POIs when so few homes have active lines on the network.

“There are places at the moment where there might only be 1000 homes that are getting connected to that POI, so it’s not worth us … connecting to that POI yet until there’s more customers, because out of that 1000 we might get two,” Blake says.

Nextgen also made the decision early on to be cautious about its investment in the NBN.

With the NBN now running six months behind schedule, NBN Co has set the target for construction to have commenced or been completed for around 758,000 premises by 31 December, 2012. Construction is now expected to reach a peak in 2016, when NBN Co will connect 6000 premises every working day.

Sykes says while it would have been nice to have had two million homes connected by the end of this year, Nextgen has synchronised its business with the rate of the rollout by NBN Co, having previously making the decision not to overinvest in the network too soon.

“That was a wise strategy, I think,” he says.

Follow Stephanie McDonald on Twitter: @stephmcdonald0

Follow Computerworld Australia on Twitter: @ComputerworldAU

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