Monday, October 23, 2017

NBNCo may never make a profit, warns chief

The national broadband network is losing money with each typical connection it makes and believes that unless it is protected from competition due to data delivered by ultrafast mobile broadband it will never make a profit.

The company's concerns have been detailed by chief executive Bill Morrow in an exclusive interview ahead of a Four Corners report on Monday that it fears will suggest "the whole thing is a mess".

"We collect about $43 per month from retail service providers for each home they sell into," Mr Morrow said. "In order to recover costs we need $52."

"We, NBN and the board, are betting that future applications are going to bring more value into homes, that they are going to need more bandwidth or more data and that the retail service providers will pay us more."

"It's a bet we've taken. If it doesn't come together, we've got a problem."

Asked whether NBN could withstand competition from data delivered by new ultrafast 5G networks that didn't need connections to houses, Mr Morrow said: "Forget about 5G for a moment, even the antenna technology using 4G is a viable alternative to NBN where the towers are already up."

"Think about the NBN business model. The only reason we are able to get connections into those 2 million difficult-to-wire homes that are cost prohibitive is because we are taking margin from low-cost city areas. As soon as competitors eat into these margins through enhanced antenna technology, we've got a problem."

Fixed-line competitors to the NBN will soon have to pay a levy beginning at $7.09 a month to help subsidise delivery to hard-to-connect customers.

"The problem is the levy excludes wireless, even where people never take the modem outside of the house," Mr Morrow said. "It's a threat that wasn't envisaged by this government or the last when the business plans were put together."

Conceding that a levy on mobile broadband would be unpopular, Mr Morrow said: "Things are going to have to happen. The government has two options: to regulate to protect this model, or to realise that the NBN won't have the finances it thought and might require some off-budget monies to go in to make it happen."

At the moment the NBN is required to make a profit, repaying government loans and returning the government's investment through dividends.

"I think government moves are going to be inevitable," Mr Morrow said. "It all depends on how serious this competitive threat is, but being an old wireless guy I can guarantee you I would have had my team seriously looking at this."

In April, internet service provider TPG spent $1.3 billion on wireless spectrum in what was widely interpreted to be a move into mobile data. Telstra, Optus and Vodafone already have substantial mobile data networks.

Asked how much subsidy the NBN would need if it wasn't protected from competition, Mr Morrow said it was too early to predict how much mobile competition would eat into its margins.

Asked whether NBN would ever make the profit required of it even with protection from competition, Mr Morrow said he wouldn't speculate.

"It's too early. I've been around the telco industry for 40 years and things have ebbed and flowed quite a bit. Companies have crashed and burned and later emerged as super-valuable – it's too premature to think about."

In The Age and Sydney Morning Herald


NBN Co chief says under Labor connections cost it up to $40,000

NBN Co had to shell out more than $40,000 to connect some hard-to-reach properties, in one case spending more than $90,000 when it was compelled to provide fibre to a property near Townsville in Queensland, according to figures to be released on Monday in a bid to counter a push to have it revert to the Rudd government's original target of 93 per cent fibre to premises.

The list of the 10 most expensive to connect locations in each state shows it spent $41,304 connecting a business in Strathfield in Sydney that needed concrete and bitumen broken to install a new conduit. It spent $51,464 connecting a business in Ballarat than needed 10 metres of bitumen broken and relayed.

"It's all very well to say leave no home left behind when it comes to fibre as was the original Labor requirement," NBN Co chief Bill Morrow told BusinessDay, "But boy, some of those homes are bloody expensive; you've got heritage homes and rock to drill through and they've often already got infrastructure in place you can use to get good speeds."

Mr Morrow was appointed in 2013 as the incoming communications minister Malcolm Turnbull abandoned the 93 per cent target and allowed NBN to deliver city connections by a mix of technologies including fibre to the node, fibre to the curb and the so-called HFC cables installed to deliver pay TV.

It cost an average of $4400 to connect premises purely by fibre and only $2300 using the multi-technology mix.

Mr Morrow rejected comparisons with the $3000 it costs the New Zealand provider Chorus to deliver fibre direct to premises.

"We are required to connect every premise. Chorus doesn't need to because it can leave the existing network in place," Mr Morrow said.

"In fact, they've told us, they struggle to get people to go over the fibre, because people are happy with the fibre to the node they've got and don't want any more."

"Our rules require us to force people off. That means we have to supply every premise. Unlike Chorus which owns the existing network, we have to pay Telstra about $1000 for each of its customers we disconnect."

The Telecommunications Industry Ombudsman's annual report shows a sharp increase in the number of complaints about the NBN, often relating to delays in connections and missed appointments by retailers.

Mr Morrow said one of the reasons for consumer frustration might be that for most purposes, ultrafast broadband provided little more than standard broadband.

"Much of the emotion geared around some of the poor experiences people are having relates to their expectations. They can't help but think this comes back to policy-based decisions and therefore technology-based decisions and that the government made the wrong decisions deploying the wrong technology and the whole thing's a mess.

"I've done tests in my own house. I have two kids that are on internet constantly, I have two university students in my house and there's two professionals. We're on the internet all the time."

"I said, alright you Stan users and Netflix users and YouTube users, I want you to get on and go for your maximum. I have a 50-megabit per second product. I tested it and we were using maximum of 10 megabits. So if I had just the 12 megabits, the basic low service, l would have felt no difference within my house."

"The only difference, and this is valid, is that if I've got a 100-megabit service versus a >four-megabit or five-megabit, and I try to download a movie, it clearly is going to download faster. But my argument to those people who say they could get files faster is to say – great, you can download the National Library in an hour, but then what? What are you going to do with that 100-megabit service thereafter?"

"What's lost on a lot of the fibre zealots out there is that this isn't a free product provided with taxpayer money. We have to make a modest return. The more we charge, the harder it will be to get people connected.

"There are these small circles who say 'I want more fibre and I want it faster'. My reply is that it's not just about you, it's about everybody in the country. If everybody in the country had 25 megabits we would be far better off than you having a gigabit."

Asked how much more it could have cost to deliver fibre to 93 per cent of Australian premises as originally required, Mr Morrow said it would have been at least another $10 billion. Some of that would have been the extra expense, and some the lost revenue because it would have taken at least four more years to build, meaning delivery well beyond the current target date of 2020.

Mr Morrow rejected the suggestion that fibre to the premise would have been cheaper in the long run because of lower running and maintenance costs.

"It craps me up. You've got to remember we are talking millions of homes you have to spread the cost of electricity and extra technicians over. It's nothing. You would never be able to spend enough money on operations and maintenance to make up the cost difference, not over 50 years, not over 100 years."

Nor was it true that the Telstra pay TV hybrid fibre-coaxial being repurposed by the NBN was more expensive to get right than would be new fibre.

"HFC is probably the most invested in infrastructure around the world and the most deployed infrastructure to provide superfast broadband to people's homes. People are employing it in brand new greenfield applications. We are seeing speeds of tens of gigabits per coming down, very low fault rates and very maintenance costs."

"Yes, it is true that the HFC network we got from Telstra is requiring far more of an upgrade than we originally envisioned. That was an oversight, or a lack of data that we had. But it still a far cheaper and far faster to deploy than putting fibre to every home."

In The Age and Sydney Morning Herald