NBN not worth the money it cost to build it, Vocus chief executive says

Telco CEO decries NBN Co’s approach to wholesale pricing

Consumers are paying the price for government rules designed to protect NBN Co’s monopoly and help ensure it recovers the cost of building its network, Vocus Group chief executive Kevin Russell has argued.

“The real market value of the NBN is far, far less than what it cost to build,” the CEO said today. NBN Co’s decision-making “is driven as a monopoly targeting financial returns, rather than consumer needs and market reality.”

In remarks prepared for the ACCANect conference of the Australian Communications Consumer Action Network, the Vocus CEO said that because NBN Co’s financial targets are based on recovering the network’s build cost, “prices are far higher than would be achievable in a market-led environment.”

The Vocus chief executive took aim at NBN Co both over its prices and its approach to wholesale pricing.

In the ADSL era, the prices charged by Dodo, which is owned by Vocus, consistently trended downwards, he said. “This is in stark contrast to Dodo’s NBN plans, where all we have done is continually put prices up, to cover NBN’s increasing wholesale costs,” the CEO said.

Accessing Telstra’s copper network for ADSL services cost around $15 a month, compared to an average wholesale cost of $44 on the NBN. “That’s around a 300-per-cent increase in wholesale costs from ADSL to NBN,” the Vocus CEO said. “And consumers don’t have an option. If they want fixed-line broadband, they have to be on the NBN.”

One of the key charges levied by NBN Co on retail service providers (RSPs) is CVC. RSPs pay both an access charge per service (AVC), as well as CVC, which is a capacity-based charge (some NBN Co products bundle both access and bandwidth).  CVC is “a download tax on consumers” that “creates artificial scarcity where there is none,” Russell argued.

“The overwhelming majority of broadband consumers are on unlimited download plans, so they pay a predictable monthly rate. But retailers pay an unpredictable monthly rate, which forces them to ration bandwidth to manage costs. If NBN were led by consumer needs rather than its own financial requirements, pricing would be set to promote usage, not ration it.”

Although NBN Co has repeatedly cut its bandwidth charges, that is counteracted by the massive growth in household downloads, Russell said.

NBN Co’s efforts to shift consumers away from cheaper 12 and 25Mbps plans to higher speed tiers have helped boost the government-owned company’s revenue but also benefited “premium brands which charge premium prices,” the Vcous CEO said. As a result, “value brands” like Dodo have taken a hit.

Russell in February revealed that Vocus wouldn’t seek to grow its consumer NBN market share, citing NBN’s approach to pricing (including its complexity).

Infrastructure-based competition

Since NBN Co’s launch, successive federal governments have sought to prevent other network operators undermining the economic model of the new network, which is based on the government treating it as an investment rather than an on-budget expense. Anti-cherry-picking rules are aimed are preventing telcos from rolling out competing infrastructure in profitable metropolitan areas, because NBN Co uses the revenue from metro areas to help subsidise the regional services that aren’t commercially viable.

The approach prevents infrastructure investment and helps drive up the cost of broadband services in metro areas, Russell said. The government’s Regional Broadband Scheme subsidy will make things worse, he argued. He said instead that unprofitable services in regional areas should be funded through the federal budget. That approach is aligned with the views of the Australian Competition and Consumer Commission (ACCC) which in its April 2018 Communications Sector Market Study argued that “direct budget funding of regional and remote communications services is preferable”.

“Up to this point, both sides of politics have made a conscious decision to pursue the approach of NBN cross-subsidising its loss-making regional networks,” Russell said.

“Some may argue this approach is the fairest way to ensure regional consumers can access broadband under the same wholesale price caps as people in metro areas. But I would argue that in the long term, the protectionism required to sustain NBN’s cross-subsidy costs us more. It costs us the infrastructure investment that doesn’t occur. It costs consumers higher prices in metro areas due to the lack of infrastructure competition.”

Russell said that it was also important to ensure the right settings are in place for NBN Co’s eventual privatisation. NBN Co was established as a wholesale-only network to avoid repeating the experience of privatising Telstra as a vertically integrated telco. “But these good intentions were hampered by the fact that it would cost more to build the NBN than the asset would be worth, and so the network would be dependent on legislated protection from competition to meet its required returns,” the CEO said.

A privatised NBN “must remain open-access and wholesale-only, regardless of who buys it or how it is sold,” he said. “Consumers have suffered from a vertically integrated monopoly model before – we can’t repeat the mistakes of the past.”

The government also resist an urge to make NBN Co more attractive to potential buyers by “entrenching the existing protection from competition that NBN enjoys today”.

“The privatised network must be forced to compete against other providers in a marketplace which actively encourages infrastructure competition,” the CEO said. Consumers have suffered from a lack of competition over the last 10 years – they shouldn’t have to endure it in the next 10.”

A privatised NBN Co must also “properly regulated in areas where it is a monopoly provider,” he added.

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