The changing usage patterns of Australian broadband customers means that one of the key revenue streams for NBN — the Connectivity Virtual Circuit (CVC) charge — needs a major rethink, according to Optus’ head of regulatory affairs, David Epstein.
NBN levies two major charges on retail service providers (RSPs) that sell services across the National Broadband Network. One is the per-customer Access Virtual Circuit (AVC), which is purchased at different speed tiers.
The second is the CVC, which is a capacity-based charge based on blocks of 100 megabits per second shared between an RSP’s customers.
Epstein told the CommsDay summit in Sydney that Optus’ analysis of figures in NBN’s half-year results indicated RSPs are provisioning 0.849Mbps of CVC for each end-user, with each 100Mbps CVC block shared between 116 end users.
“This is where we hit the congestion: In peak periods when a large number of customers start to use their service speeds will drop dramatically as there is insufficient head-room capacity,” Epstein said in remarks prepared for the conference.
NBN has previously revealed that CVC under-provisioning by RSPs was the root cause of some complaints in areas where fibre to the node (FTTN) has been rolled out.
“The CVC pricing construct was established with the aim of promoting take-up of services and allowing NBN Co to recover its costs over time,” Epstein said.
“Laudable aims. But the current CVC regime has not kept pace with changing customer behaviour. As a result, it is fostering some perverse incentives.”
“The CVC pricing construct effectively drives RSPs to reduce end-user costs by provisioning their networks to achieve a minimum level of acceptable speed throughput in the peak period rather than to maximise speed throughput,” the Optus executive said.
“In effect, CVC pricing forces RSPs to have little or no throughput head room in peak times; leading to adverse customer outcomes. This is the opposite of the way next generation broadband networks are being provisioned in overseas jurisdictions.”
As the rollout continues and more customers are brought on to the network, the problem will worsen, Epstein said.
NBN yesterday announced it was pushing ahead with a CVC discounting scheme that is intended to encourage RSPs to provision more capacity.
The dimension-based discount scheme operates on a Mbps per customer basis instead of total Mbps basis; the greater the capacity per user, the greater the discount.
However, NBN said that the scheme, which kicks in on 1 June, will initially operate on an industry basis instead of a per-RSP basis.
“Customers are being ‘sold’ the vision of high speed services on the NBN,” Epstein said.
“In periods of high demand, such as evening peak, these expectations cannot be met because of the relatively high price of CVC.
“The evidence is clear that customers want to get on the NBN and they want to use fully the capabilities of the network. NBN Co needs to adapt its pricing model to fulfil their needs.”
Such an adjustment “cannot be done overnight,” he added. A first step would be to review the “industry averaging” approach used by the CVC discounting scheme.
“Using an industry averaging approach might provide an interesting lab test to allow some exploration of a retail customer’s willingness to pay or the possibilities for ‘monetising’ speed tiers but it is likely to pose serious challenges in the real consumer market,” he said.
Short term return on invested capital shouldn’t be the primary objective of NBN, Epstein said.
“This is an enterprise also designed to deliver other outcomes, such as enabling competition, delivering better quality services to consumers at lower prices and creating sustainable commercial enterprises,” he said.
“There needs to be recognition of these factors and its impact on the capex profile of NBN Co in the variable component of its charging regime.”