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Telco's warn that the NBN wholesale price is too high

Vodafone CEO Inaki Berroeta, whose company started reselling NBN plans about a year ago, had a similar complaint in February. "Regardless of how efficient you are in running your business, the chance to get a margin out of current retail prices is limited to say the least," he said.

Optus and Vocus prefer action to words. Optus is already starting to offer customers an option to bypass NBN's fixed line broadband with its wireless alternative that is beamed to households over a 5G spectrum. The telco projects have much healthier margins than reselling NBN. In the meantime, Vocus has stopped expanding its NBN activities and intends to follow the leadership of Optus. Both hope that these fast wireless alternatives will attract customers of the NBN.

But right now Penn and his fellow CEOs base their complaints on what might happen in the future. As things stand now, there is no system problem. NBN Co is very clear that its target of getting 73-75 percent of Australian households in the NBN is now achieved after the rollout is completed in 2020.

That figure of 73-75 percent is crucial. If NBN Co receives less than that, it will not be able to achieve its intended internal return of 3.2 percent. If that is not possible, the entire business model is endangered. The risk is that it will stop being a commercial enterprise, and the federal government will have to make it.

One way to ensure that the 73-75 percent target is reached can be to lower wholesale prices. But again, that would mean that it would not achieve its target rate of return and would have to be reimbursed at the expense of the taxpayer.

But for now, NBN Co says that enough Australians are willing to pay for NBN at current prices. If this continues, it is not necessary for NBN Co to lower the wholesale price.

The first question then is whether it will continue?

If store prices rise …

Ian Martin, a telco analyst at New Street Research, says there is a land trap on the NBN market, as telco's compete for the constant flow of customers migrating from old ADSL subscriptions to NBN to get hold of.

"There is clearly a market share game between Telstra, Optus and TPG," says Martin. "I think there is a willingness to work with small margins while that clientele is established and then look for the best way to generate a margin. And that will become easier as you have more customers. There is some pain in it the short term, but it can improve performance and return in the longer term. "

The question at the time – which Martin says is likely to be around two years in the future – is whether retailers should raise their prices to generate a margin or find another way to do it. Assuming they have to raise consumer prices, as Penn claims they will, the question is whether enough households are willing to pay a little more, for example $ 75 or $ 80 per month, or whether a large number choose to ignore full landline broadband .

According to Una Lawrence, Australian Communications Consumer Action Network (ACCAN) policy director, the question is not whether enough people are willing to pay so much, but whether they can afford it. She is clear that they cannot do that.

"What we are really worried about is that if prices go up, a significant portion of the community is excluded from getting an NBN service," she says.

"It could force them to turn to sombre options that are not a sufficient substitute, or it would contribute to the financial stress they are under. It will make life a lot harder and undermine the entire concept of NBN."

The ACCAN response is that the government subsidizes NBN plans for recipients of the Newstart benefit, pensions for old age and disability support and those for family taxes part A. "We see it work the same way as the Health Card," she said. says, adding that about 2 million households could be eligible.

Eligible households would receive NBN plans at a wholesale price of $ 20 per month instead of $ 45, plus retail costs. That $ 25 difference would be paid by the government and could cost $ 600 million a year.

Without change – whether the kind that Penn is proposing or the kind that ACCAN is proposing – Lawrence is pushing for higher selling prices, NBN Co will not be able to reach its target of 73-75 percent of households. Too many households simply cannot afford it.

Inaki Berroeta, CEO of Vodafone Australia, has indicated that his company is considering, but has not yet committed, fixed wireless alternatives to the NBN. Josh Robenstone

Mobile bypass

If the ACCAN proposal is not picked up, it means that there will be a high demand for cheaper alternatives to the NBN. And that is where fixed wireless can come in. If telco & # 39; s can get the business model right, they can take many more customers from the NBN than NBN Co allows and earn much more money in the process.

At present, around 10 percent of Australian buildings have no broadband connection. NBN Co uses a further 15 percent mobile or wireless alternatives. That leaves 73-75 percent behind on the NBN.

Martin says this is unrealistic. "It's not the 15 percent that the NBN is talking about, but it won't be 50 percent either, it depends on the price response, a good estimate is 30 percent, and that's enough to undermine NBN's business plan."

He says that Optus is already aggressively trying to get customers out of NBN and predicts that Vodafone-TPG (assuming the proposed $ 15 billion merger will continue) will follow this example. If that succeeds, so does NBN Co.

But things are more complicated for the largest NBN reseller, Telstra. NBN Co pays Telstra for every customer who migrates from his copper network to the NBN. These payments are very valuable for Telstra – they raised $ 699 million in the first half of 2018-19. But if, during the six months following the migration, that customer switches from the NBN to a fixed Telstra product, Telstra will not receive those decoupling costs.

Martin says this partly explains why Telstra did not aggressively pursue the fixed wireless option. At a time when Telstra is confronted with a $ 3 billion revenue gap due to the loss of ongoing broadband revenue to the NBN, it risks that $ 699 million would only continue to send shareholders because they have the reliable annual dividend for the past two years have seen a dive.

The other reason, says Martin, has to do with Telstra's ambition to merge its infrastructure department, InfraCo, with NBN. He says that if Telstra were to actively undermine the NBN, it was unlikely that the government would choose InfraCo as the buyer.

Telstra is therefore more interested than other telcos to ensure that the NBN is affordable, which explains Penn's constant call for lower wholesale prices.

The rollout of the NBN is in the final phase and should be completed next year. At that time, the viability of its price structure will really be tested. Graham Denholm

Just wait

But whether you side with Telstra or NBN Co in this argument, it is a fact that they are all projections. As long as NBN Co is able to deliver a "modest return" return to its shareholders, the federal government, the argument for lower prices is purely social rather than an economic argument.

"There is no logic in the NBN to lower their wholesale price when people finally pay," says Martin.

"There is no logic in the NBN to lower their wholesale price when people finally pay," says Martin. David Rowe

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