Wednesday, June 29, 2011

NBNCo. Don't say you weren't warned.

Wednesday column

You know a business case is hopeless when the company that’s drawn it up has to bribe its competitors not to compete against it.

The NBNCo business case has a tenuous relationship with reality.

The publicly-released corporate plan detailing how the company will spend $27 billion of public money and hit its targets reads like a cry for help, and also an exercise in laying down a paper-trail so its executives can say “we told you so” when their targets are nowhere near met.

Optus cable passes 1.4 million homes in Sydney, Melbourne and Brisbane. Fast already, it is capable of being upgraded to a top speed of 240 megabits per second, far faster than anyone needs for conceivable uses; way faster than NBNCo’s entry level speed of 12 Mbps and on the way to the maximum NBNCo speed of 1000 Mbps.

Optus was in the process of upgrading its cable from 30 to 80 Mbps. Instead it will now “decommission” it in return for payments from NBNCo worth $800 million.

Telstra is already offering 100 Mbps on its Foxtel cables in Melbourne. As a condition of taking $9 billion from NBNCo over time it will “disconnect” its broadband customers from the cable although in its case it will continue to use it to deliver pay TV.

These ‘Do Not Compete’ agreements are not mere icing on the cake, enhancing a business model that already makes sense - they are necessary for the business model to make sense. NBNCo will never make a return on the cost of its capital or meet its customer targets if it faces competition. Its corporate plan says so, at point 1: “The plan assumes effective regulatory protection to prevent opportunistic cherry picking... the viability of the project is dependent upon this protection.”

Cherry picking means competing for good customers on price.

And cherry picking is impossible to prevent...

One of the reasons we don’t have a very fast train between Sydney and Melbourne is because as soon as the money was spent the airlines would discount the flights that competed with it to cream off its valuable customers.

In the case of the National Broadband Network as soon as it is built someone will come along and offer something cheaper to its most valuable city customers. The corporate plan tries to ensure against this, noting wistfully that “the government will consider the introduction of a levy, if necessary to prevent opportunistic cherry picking”.

The deal with Telstra requires Australia’s biggest supplier of wireless broadband to “not promote wireless services as a substitute for fibre based services for 20 years.”

Even if Telstra complied, and it has already indicated it won’t let the clause prevent it promoting wireless broadband, there’s nothing to stop a firm which hasn’t signed an agreement with NBNCo aggressively promoting a cheaper and more convenient product.

In the OECD fixed broadband connections are growing at 6 per cent per year; wireless connections are growing at 10 per cent per six months. South Korea, said to show the way for Australia because of its lightening-fast fibre to the home connections, has just 34 fibre or cable connections per 100 residents. It has 90 such wireless connections.

To some extent the new Korean figures are good for NBNCo - they show people buy wireless connections in addition to fixed lines. To a larger extent they are bad news. They suggest that even with fast fixed broadband on offer an awful lot of households forsake it for a still-fast, cheaper and more convenient alternative.

Research reported in NBNCo’s corporate plan finds that in Australia around 1 in 3 wireless broadband users have no fixed lines.

Acknowledging there is no real need for the very fast speeds it will be offering the plan says “the main limiting factor in the early years of the NBN will be the availability of applications that require high bandwidth”.

Further down the track it is expecting applications such as remote hosting and 3D imaging to become mainstream, pushing bandwidth demand towards 100 Mbps - which Telstra cable already provides. In the long-term it says ultra high definition video will require speeds of more than 250 Mbps - which would be encouraging had not Australian viewers already voted with their remotes and as good as closed down Australian HD TV broadcasts, preferring instead reruns of sixties and seventies sitcoms on low-definition channels such as GEM and 7Mate.

It’s a shaky foundation on which to build a business case.

Just as it will remain legal for anyone to offer a cheaper and lower-bandwith product competing with NBNCo, despite the NBNCo’s wishes, it will also be remain legal for large CBD-based organisations to take their high-bandwidth traffic “off-grid”. Why pay NBNCo a large sum to communicate internally when you can do it yourself for a fraction of the cost?

As the customers NBNCo is counting on are leached away it will have to continue to service what will eventually be $50 billion of capital and debt.

Its corporate plan says it won’t be to stay ahead servicing the debt. Its cost of capital will be 10 per cent, its internal rate of return will be 7.04 per cent.

And that’s assuming no corporate customers leach away to wireless, assuming the bleed to wireless-only households stops at 16.4 per cent, assuming no non-wireless competition, assuming Australians take up ultra high definition television in a way they have shown no inclination to, assuming it isn’t required by the government to deploy the superior single rather than split fibre technology the government will force it to test... in short, assuming every one of its judgement calls turns out right.

Including population growth. The NBNCo plan assumes housing growth of 177,000 premises per year to 2025. Downwardly-revised ABS projections released last week have just 151,000 households per year added over the coming two decades.

Maybe this will come right too. More likely, NBNCo will look sick. Those of us who have flicked through its corporate plan can’t say we weren’t warned.

Published in today's SMH and Age

Related Posts

. Overselling fibre. Ouch.

. Just build the NBN and bugger the expense

. The NBN is a slowly unfolding disaster

. We're spending a fortune on new wires, we'll disconnect the ones you have

. Questions for the NBN cheer-squad