NBN CEO unloads at ‘land grab’ price war by ISPs

Price war between RSPs delivering poor end user performance, Bill Morrow argues

NBN CEO Bill Morrow has cited a “land grab” by retail service providers (RSPs) as a key factor in poor end user experience on the National Broadband Network.

In position paper (PDF) released today, the NBN chief argued that the “prices on offer in a heavily competitive market do not necessarily reflect what consumers are willing to pay”.

End users are “willing to pay more than they are today if they understand it will give them a higher quality service,” Morrow argued

“There is a temporary ‘land grab’ phenomena now underway with the retailers,” Morrow claimed. “As NBN releases over a hundred thousand new homes each week for the retailers to sell in to, there is aggressive pricing behaviour designed to maintain and/or increase their retail market share.”

RSPs’ “primary marketing strategy” has been “focused on price with little mention of data speed or quality during the peak of the day”.

“The grab for market share means there is more competition on price, rather than quality, as the primary selling point,” Morrow wrote.

The drive for market share via cheap NBN broadband plans means that RSPs are selling lower speed plans or are skimping on their ratio of Connectivity Virtual Circuit (CVC) — end user capacity — per end user.

The result can be a sub-par experience for end users, with household connections delivering speeds far below the particular type of access technology employed.

NBN levies two key charges on RSPs: CVC and Access Virtual Circuit (AVC), which is a per user charge based on the maximum bit rate for an individual service.

Morrow’s paper argued that other factors — such as an RSP’s backhaul between an NBN Point of Interconnect and their data centres — can also act as a fetter on end user speeds.

“The CVC – like the cost of marketing, customer service, labour, their own network and others – is just one of many variables that make up the cost base of RSPs when delivering broadband to their customers,” Morrow argued.

“To suggest the CVC affects the quality of service would also be saying the cost of every other expense item does the same. It is a conscious decision to save money in this area versus others. To be fair, the RSPs are between a rock and a hard place. Even though the consumer may be willing to pay more, the RSP can’t raise their price on like-for-like offerings when other RSPs are setting their price to maintain and/or capture market share rather than make a reasonable profit.”

In a blog entry accompanying the position paper, the CEO said that on average RSPs are purchasing about 1Mbps of CVC per end user — which Morrow said “could be doubled to 2Mbps for each end user for around an extra $5 per month”.

NBN has revamped its CVC pricing several times, most recently introducing a discount scheme that cuts the price of CVC for individual RSPs if they commission more CVC per end user.

“The CVC structure and speed tiers allow NBN to offer lower prices today and bear the risk of ultimately getting the higher revenues through the growth in consumer consumption,” Morrow argued.

NBN’s CEO wrote that the company’s pricing structure needs to “evolve” even further “in a way that allows for a triple win solution for NBN, RSPs, and end-users.”

“This is a focus for the board and management and we will be working closely with our RSP partners and relevant stakeholders to address these issues and solve for the problem at hand,” the CEO concluded.

Underlying NBN’s pricing structures are its need to generate a positive rate of return over the long-term in order for it to be kept off-budget and treated as an investment by the federal government.

A number of telcos have called for the government to write off a portion of its investment in the network rollout, in order to reduce pressure on NBN’s pricing.

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