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

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Dodgy from the start: don't blame Turnbull for Labor's flawed NBN

Some things you can't blame Malcolm Turnbull for: the state of the NBN is one of them.

Customers who switch to it (and they are being given no choice – their existing services turn off 18 months after they are invited to switch) are greeted with slower speeds, more dropouts, unreliable phone and alarm services, and movies that continually buffer when they try to watch them between 4pm and 10pm.

Many are worse off than they were before.

Importantly, they are worse off whether they are getting the new Turnbull NBN, which is delivered by a mix of technologies, or Labor's original national broadband network, which in cities was to be delivered all by fibre-to-the-premises.

Australia's foremost telecommunications analyst, Ian Martin of New Street Research, says the method of delivery has nothing to do with it.

"Let's be clear, technology is not the issue in slow speeds," he wrote in the Australian Financial Review this month. "Hybrid fibre coaxial and fibre to the node are well able to handle speeds of 50 megabits per second and 100Mbps or more. In some places the copper component is old and slow but this is not an issue across the board and can be dealt with other than by an expensive upgrade to fibre to the home nationally."

Horrendously expensive and unbelievably time-consuming, Labor's original plan was for a technician to lay or string an optic fibre cable into each home and business in each of Australia's cities and big towns at a cost of $4300 per premises. It was essential for Labor to keep the cost off-budget: $49 billion gets noticed when you are running a deficit. So it decreed that NBNCo, the government-owned company that was to build the NBN, would eventually make a profit.

Spending on profit-making companies isn't treated as spending under the oddly-named Charter of Budget Honesty, which is one of the reasons the current government is building the Western Sydney airport and the Melbourne to Brisbane rail freight link that way. As long as it can pretend they'll one day make a profit it can keep the cost of building them off its books.

For a project as expensive as the NBN, that was hard.

Dodgy assumptions in its 2010 corporate plan helped. It assumed that no more than 16.4 per cent of customers would abandon fixed lines. It's achieving only a 75 per cent take-up, suggesting the real figure is closer to 25 per cent. It assumed the number of households would grow at a compound annual rate of 1.6 per cent per year. Between the last two censuses it's grown by much less.

It assumed that people would want to pay big-time for more speed, as it had to.

Two million or so customers on, it's discovering that eight out of 10 select the lowest speeds possible: 12Mbps and 25Mbps, turning 50Mbps and 100Mbps into niche products.

It expected customers to upgrade as they became acquainted with the wonders of high speed, but given that many were acquainted with higher speeds before they switched, that's unlikely.

And it adopted a curious method of charging the retailers who sold its connections to the public. It billed them twice. First for speed, under a monthly "access virtual circuit" charge set to reflect the speed provided. It's a silly idea. There's nothing to stop it giving everyone the highest possible speed; it's like constraining a car engine until the owner hands over more. And it charges for "connectivity virtual circuits" which reflect how much data the retailer is able to put through at once. Again, there's no reason for this. There's usually no physical constraint on how much can be put through at once.

Retailers wanting to grab market share have been paying for the first – it's an access charge – and skimping on the second. This means they can claim to offer the quoted speeds at a good price,  but can't deliver them when their cut-price connections become congested in the early evenings and speeds slow to a crawl.

Their customers blame the NBN, the NBN blames the retailers, and so worried is the government it has commissioned the Australian Communications and Media Authority to inquire into the whole mess.

There's nothing inherent in the NBN that's strangling its speed and giving customers grief; it's inherent in the pricing model it adopted to make it look as if it could make money.

Turnbull's NBN will at least be cheaper. Martin believes that under Labor's scheme the connectivity virtual circuit charge would have been three times higher, making the retailers skimp more and degrade speeds further.

One day it will be sold. That's the policy of both parties. Even under Turnbull's scheme the government will be lucky to get back half of what it spent. Then, when it becomes clear it was never a profit-making concern and the spending gets brought back on-budget tarnishing the financial records of both Swan and Morrison, we'll start wondering why we ever thought we could spend up big replacing what for many is a perfectly good service instead of spending less and zeroing in on the people who needed help.

In The Age and Sydney Morning Herald

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And the NBN cost-benefit analysis finds...

No wonder Labor never wanted its National Broadband Network subjected to cost benefit analysis.

For all of its talk about the public benefits that would flow from fibre to the home broadband such as e-health, e-learning and working, those benefits turn out to require very little bandwidth.

The Coalition's independent cost benefit review finds that what does need high bandwidth is high-definition TV. But even that doesn't need anything like what the NBN was going to deliver.

By 2023 the typical household will need just 15 megabits per second, according to the review's bottom-up analysis. The top 5 per cent of households will need at least 43 Mbps. The top 1 per cent will need 48 Mbps. The NBN was going to deliver 100, upgrading later to 1000.

Tech-heads might think those figures are low, but the review explains that the most common household comprises just two people.

"Even if those two are each watching their own HDTV stream, each surfing the web and each having a video call all simultaneously, then (in part thanks to the impact of improving video compression) the total bandwidth in 2023 for this somewhat extreme use case for that household is just over 14 Mbps."

Bandwidth that isn't used is bandwidth that's wasted. If it costs a lot to get it it's money wasted.

The review finds the Coalition's pared-down model will cost $7.2 billion in today's dollars. Labor's fibre-to-the-premises NBN would have cost $17.6 billion. The benefit from the Coalition's model is $1 billion. The benefit from Labor's model is minus $4.7 billion. That's right, minus $4.7 billion. The minus sign is because Labor's scheme would have delayed the spread of fast broadband. The review finds that without it the market would have delivered high-speed broadband to most Australians sooner.

Australians care about speed, but not that much. The review finds we are prepared to pay an extra $1.50 per month for an extra Mbps when our speed is low, but only an extra 70¢ when it climbs to 50 Mbps and nothing when it climbs above 90 Mbps.

On the other hand, we care deeply about getting high-speed broadband quickly.

The Coalition's plan uses a mix of technologies to deliver speeds of 20 to 100 Mbps to all of Australia and does it much sooner than Labor would have delivered 20 in the bush and 100-plus in cities.

The Coalition scheme will cost a net $620 per person in today's dollars. Labor's would have cost $2200.

It's hard to fault the review panel for thoroughness. It's review goes out until 2040, and beyond that using residual value. It developed Australia's first bottom-up analysis of what Australians actually need; something Labor never did, starting instead with a solution and then assuming it was needed. It commissioned the Institute for Choice at the University of South Australia to examine what consumers were actually prepared to pay and it has submitted its work to peer review from an international panel made up of experts from the Brookings Institution and the University of Texas.

It finds that both the Coalition and Labor's NBN needlessly waste money, but that Labor's wastes more.

In The Age and Sydney Morning Herald

Cost benefit analysis shows Turnbull plan has $16b advantage

The Abbott government's pared-back broadband plan is three times more cost effective than Labor's ambitious scheme and would leave Australians $16 billion better off, according to the first independent cost-benefit analysis of the national broadband network.

In a scathing verdict on the Rudd and Gillard governments' plan to introduce fibre directly to 93 per cent of premises, the cost benefit analysis finds the policy is so expensive it would barely leave the community any better off in net terms than if broadband investment remained frozen at present levels.

The much-anticipated report finds households and businesses will benefit from quicker downloads but the much-vaunted societal benefits of fast broadband – such as improvements to health and education services – will probably be extremely limited.

The cost benefit analysis panel, led by former Victorian Treasury head Michael Vertigan, modelled the estimated costs and benefits of expanded broadband access from 2015 to 2040.

Communications Minister Malcolm Turnbull, who commissioned the analysis, will use the findings to justify his decision to pursue a "multi-technology mix" broadband network using a combination of fibre to the premises, fibre to the node, hybrid-fibre coaxial, satellite and wireless services.

Mr Turnbull regularly attacked Labor for failing to commission a cost-benefit analysis before launching the national broadband network, the biggest infrastructure project in Australia's history.

The report finds the multi-technology mix model outperforms a fibre to the premises plan in net economic benefits in 98 per cent of scenarios.

A multi-technology mix NBN would cost $24.9 billion to launch from 2015 compared with $35.3 billion for fibre to the premises (FTTP), the report finds.

A multi-technology mix would deliver download and upload speeds of 20-100 megabits a second, while FTTP would deliver speeds above 100Mbps.

The report finds the most cost-effective option would be an unsubsidised launch in which the free market delivers high-speed broadband to 93 per cent of homes. This would have a net economic benefit of $24 billion, but would leave 7 per cent of premises in regional and rural areas without fast broadband.

Providing fast broadband to the bush through wireless and satellite services – as envisaged under both Labor and the Coalition's plans – will cost nearly $5 billion but produce only $600 million in economic benefits.

This suggests an alternative model for a government committed to fast broadband for all Australians at a low cost: subsidising the introduction to the bush while leaving private providers to serve metropolitan areas.

Compared with the unsubsidised launch scenario, the multi-technology mix model has a net cost of $6 billion ($620 a household) and fibre to the premises has a net cost of $22 billion ($2220 a household).

Australians would be only $2 billion better off, in net terms, than if there was no further launch> of broadband under a fibre to the premises model. They would be $18 billion better off under a multi-technology mix.

The report finds a multi-technology mix is more "future proof" because it can be upgraded to fibre to the premises later if demand for fast broadband booms.

"The [multi-technology mix] scenario leaves open more options for the future because it avoids high up-front costs while still allowing the capture of benefits if, and when, they emerge," the report finds.

The cost benefit analysis finds most of the benefits of fast broadband – most notably video downloads – will accrue to private users within households and businesses. By contrast, hospitals and schools require relatively low bandwidth to deliver services. 

As well as Mr Vertigan, the expert panel members were economist Henry Ergas, former Australian Communications Authority chairman Tony Shaw and former eBay Australia managing director Alison Deans.

Mr Vertigan said the findings of his report show that cost benefit analyses should be mandatory before construction begins on major public infrastructure projects.

Labor communications spokesman Jason Clare said the cost-benefit analysis was "tainted" by the involvement of figures such as longstanding NBN critic Henry Ergas.

"It's hard to take the report seriously when three weeks before the last election Malcolm Turnbull said he would get this report done by the government body Infrastructure Australia and instead what he has done is got some of the most vociferous critics of the NBN, as well as former staff, to write this report," he said.

Mr Clare said the government had a "myopic" view that fast broadband was just about video games.

This is about setting us and Australia up for the future. That is why Japan, South Korea and China and New Zealand are doing it and even in Indonesia." 

In The Age and Sydney Morning Herald SUNDAY EXPLAINER

It was going to be bigger than the Snowy Mountains Scheme and it was going to revolutionise our lives. Four years ago Labor began an audacious program of connecting every house and business in the country to the internet, all over again. It was to cost $43 billion and it commenced without a cost benefit analysis. This week the Coalition released the results of a cost benefit analysis into Labor's NBN, the first. It finds the benefits would never have approached the cost. Who's right, and who's offering the best plan now? Peter Martin runs the numbers.

WHAT WAS LABOR OFFERING?

Every address in every city and reasonable sized town was to be offered the chance to be wired up to an optical fibre cable. Remote locations were to be connected by satellite and wireless. As of June this year NBN Co had connected 210,000 locations and had millions to go. The promised speed for the fibre links was 100 megabits per second, with the whole system upgradable later to 1000 Mbps, each far faster anything that was available at the time.

WHAT COULD IT BE USED FOR?

The cost benefit study finds most uses don't require anything like 100 Mbps. Ultra high definition TV comes closest. The government's advertising stressed instead the unknowable nature of its uses saying the NBN would be used "in ways we only dream of".

WHY NO COST BENEFIT ANALYSIS?

Labor might have felt there was no point after it had given the go ahead. But it was big on claims. The NBN would "boost our economy", it would "open up a world of interactive health care never thought possible". It might have felt these claims couldn't be tested. After all if its uses are unknowable, how can we know what it will be used for?

WHAT IS THE COALITION'S ALTERNATIVE?

A cut-down version. Instead of costing $73 billion (the revised figure for Labor's scheme determined by the strategic review in December, 2013) the Coalition's scheme would cost $41 billion. Instead of connecting every house and business in every city to an optical fibre, it would use a mix of technologies. One quarter of city addresses would get fibre, 44 per cent would get fibre to the basement in apartment buildings, or fibre to a node (a shared connection housed in a street cabinet), with the last link to the residence or business by existing copper wire and 33 per cent would be serviced by Foxtel and Optus Vision cables re-engineered to deliver high speeds.  

The Coalition would deliver 43 per cent of the nation 25 Mbps or more by 2016 and 91 per cent 50 Mbps or more by 2019 (two thirds would get 100 Mbps). By then Labor would have wired up only 57 per cent of the nation.

CAN FIBRE TO THE NODE ACTUALLY DELIVER FAST SPEEDS?

It can certainly deliver speed more quickly than could have fibre to each home. NBN Co says fibre to the apartment test sites in Victoria have delivered download speeds in excess of 100 Mbps and upload speeds in excess of 45 Mbps. Fibre to the node test sites at Woy Woy in NSW have delivered download speeds of 95-97 Mbps and upload speeds of 28-34 Mbps.

HOW MUCH SPEED WILL WE NEED?

The cost benefit review panel headed by the former head of the Victorian Treasury Michael Vertigan> finds we won't need that much.

It says by 2023 the typical household will need 15 Mbps, the top 5 per cent will need 43 Mbps, the top 1 per cent 45 Mbps and the top 0.01 per cent 48 Mbps.

It says the biggest user of bandwidth is high definition video. Even a household watching two HD video streams at once, simultaneously searching the web twice and conducting two video calls will need "just over 14 Mbps".

WHY ALL THE TALK ABOUT HIGH DEFINITION VIDEO? AREN'T THERE OTHER MORE IMPORTANT USES FOR THE NBN?

Too right. But high definition video is the biggest hogger of bandwidth. The review finds other uses including e-health need much less. Hospitals and associated institutions that need serious bandwidth for e-health can connect directly to the internet via fibre.

BUT WON'T WE BE USING THE INTERNET MORE AND MORE?

Yes, even for fridges and air conditioners. But those sort of uses don't require high speeds, and extra use of things that do require high speed doesn't necessitate even higher speed. The panel explains it this way: If a household that previously watched one hour of high definition video a day ramped up its usage to four hours a day the amount of data it needed would have quadrupled, but the speed it needed would have not.

WHAT IF THE COALITION'S NBN DOESN'T PROVIDE ENOUGH FOR ME?

You can connect directly to the internet by fibre, but it'll cost you a few thousand dollars. The review believes few households will bother. It finds that after speed reaches 90 Mbps our willingness to pay for even more flattens to zero.

BUT AREN'T EARLY ADOPTERS ALREADY SIGNING UP FOR HIGH SPEEDS?

Yes. Around 18 per cent of the NBN's first customers have signed up for the top speed. But most, three quarters, want 50 Mbps or less. One third want only 12 Mbps.

WHAT ABOUT THE FUTURE? WON'T WE NEED EVER HIGHER SPEEDS DOWN THE TRACK?

That's Labor's argument, that the future is unknowable. But it cuts both ways. One response to an unknowable future is to build something very expensive in case it will be needed, the other is to build something cheaper which can be expanded later where needed.

HOW MUCH WILL THE COALITION'S CUT DOWN MODEL SAVE?

Converted to present day dollars the panel says the Coalition scheme will cost $7.2 billion. The Labor scheme would have cost $17.6 billion. It says the Coalition scheme will deliver a (disturbingly low) benefit of $1 billion. In contrast Labor's scheme would have delivered a benefit of minus $4.7 billion. The minus sign is because it would have delivered high speed broadband slower than would the market itself. The review found that beyond a certain point we don't much value the extra speed we would get in return for the delay.

WHEN CAN I GET MY NBN?

By 2020 under the Coalition's scheme. By 2024 under Labor's.

Peter Martin is economics editor of The Age

In The Age and Sydney Morning Herald

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Australia Post. Why it no longer needs to deliver daily

When I was young the postman came twice a day. You could post a letter in the morning and if you were lucky have it delivered across town by the afternoon.

It was the only way to send messages (apart from telegrams, which were expensive).

Then came the phone (and the increasing usefulness of phones - they weren’t very useful at first when only a few houses were connected). Deliveries were cut back to once a day, and the Saturday service was axed.

The nature of the post changed. Short messages arranging meetings were no longer needed. Longer 'essays' were still the preserve of the post as was the delivery of documents, parcels and bills.

Then came mobile phones and text messages (and with them the gradual disappearance of Doctor Who style telephone boxes). You could send messages from almost anywhere. Even away from home there was no need to send a letter.

At first the arrival of email made little difference to the post. As with the phone it was of limited use when few of us had email addresses. And we couldn't send big documents.

Then email addresses became ubiquitous, as did social media. The much forecast 'digital divide' never happened. Every strata of Australia is now connected, from the elderly to farmers to school children. And the capacity of the system has grown. Almost all of us can send big documents and long letters with ease. We don't need to post them.

Australia Post says back in the 1980s almost all written communication was carried by the post. Today it’s less than 1 per cent...

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And most of it is bills or notices from various levels of government.

Late to the party, businesses are abandoning the post big time. They are using email to send us bills and even ‘junk mail’. Links to websites mean they can get an instant response, or instant payment.

The Coalition has pledged to put virtually all government services and interactions online by 2017. By then there will be scarcely anything left to post.

Mail deliveries are plummeting at the rate of 4 to 5 per cent a year. Twelve years ago Australia Post delivered an average of 2.2 local letters or bills per day to each street address per day. It is now 1.7 and on track to fall to 1.3 by 2016, sliding further beyond that.

When the national broadband network is complete there will be no excuse whatsoever for daily mail deliveries. Australia's really remote locations are already limited to two deliveries per week. That should become the standard for the rest of us, as a precursor to eliminating local deliveries. If the spread of the telephone was responsible for halving the frequency of mail deliveries, the spread of the internet should be responsible for eliminating them.

It would be absurd to have spent $40 billion building a world-class system to instantly deliver messages while hanging on a system poorly replicating it that hardly anyone used.

Delivering mail used to make Australia Post money. It now costs it $150 million per year. The loss is on track to blow out to $1 billion, and then perhaps $2 billion, far exceeding the profits from delivering parcels and making the entire organisation an albatross around the taxpayers necks.

Delivery twice a week is more than adequate for most parcels. If someone wants one sooner, they can try a competitor to Australia Post or pay a premium.

Australia will soon stop paying Holden and Ford to make cars Australians aren't keen to buy.

If we are serious about getting value for our taxpayer dollars we will also stop paying postal workers to make deliveries Australians no longer need.

Australia Post employs 33,000 workers and provides work for another 10,000 contractors. Twice-weekly deliveries would slash the wage bill (and the rubber burnt and the petrol poured into tanks) and give us a chance of making good on our investment in the NBN.

It’s not only a question of money. Right now there are roughly 2 Australians of traditional working age for each Australian who is older or younger. The Intergenerational Report says by 2050 there will be just 1.5.

Australia will need to make good use of every worker it has. Employing someone to do something we no longer need merely because we always have will be a waste of a scarce resource. In most fields the market will handle the transition. Banks are moving us away from tellers, supermarkets invite us to check out our own groceries, and the baker and the milkman no longer call.

But Australia Post is stuck with a government-imposed requirement to deliver mail five days a week to 98 per cent of Australian addresses. Changing it will require a government decision. It’ll mean taking on unions and the National Party.

The Business Council tackles the question obliquely in its submission to the Commission of Audit by saying there’s a case for selling Australia Post. But that's beside the point. The point is that we are asking Australia Post to do things we no longer need. Passing the parcel to a private owner who can take on the unions and lobby for weaker service standards is passing the bucks.

In The Sydney Morning Herald and The Age


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Turnbull saves the NBN from itself

And saves Conroy's legacy

The Coalition has saved Labor’s bacon.

Had it wanted, it could have shut down or sold NBN Co after the election, crystallising a loss on the billions spent so far.

The loss would have moved the billions on to the main part of the budget. It would have weighed down Wayne Swan’s deficit and been tagged as “Conroy’s Folly” or “Labor’s Broadband Black hole”.

While Wayne Swan has been cutting spending everywhere the eye can see to bring the budget closer to surplus, he hasn’t been cutting it on the NBN because it couldn’t be seen.

His predecessor Peter Costello takes the credit.

Annoyed at the budget fiddles of the Hawke and Keating governments that counted as regular income money made from selling parts of Qantas and the Commonwealth Bank, he started calculating a so-called “underlying budget balance” that didn’t include income from from selling financial assets. A variant of it has become the measure of surplus or deficit most widely quoted.

It also excludes from the underlying calculation the money spent acquiring financial assets.

Labor has been able to claim that that’s what it’s doing when it spends on the NBN - acquiring a financial asset.

But it is only able to keep claiming that if NBN Co looks like a financial asset. Always line-ball, its financial projections were pushed right to the edge by the Competition and Consumer Commission last week which made it agree to limit the price increases of its regular products to the consumer price index minus 1.5 per cent, all the way out to 2040. It is to keep reviewing the pricing structure to make sure the cap isn’t being evaded.

"If they invest efficiently, if demand broadly goes up as they expect, they will make their commercial rate of return," Commission chairman Rod Sims said. "If circumstances turn out otherwise, the price caps might bite, and they will not."

As should have been expected during a mining construction boom, NBN Co has been finding it hard to get the workers it needs to run new lines into almost every house in the country.

It’s been looking less and less like a financial asset as each month passes.

The Coalition’s plan removes the need. It’s thrown it a lifeline.

In today's Age

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Rich? Australian? You're targeted.

Wednesday column

Have you heard about the trick they use in fruit shops?

If they want to make money from a large load of lettuce they divide it into two. They put half in a “bargain bin” and charge something like $3 a kilo. They put the other half at the quality end of the store and charge $6. The well-heeled and uncertain pay $6. Those with less money and keener for value pay $3.

It earns the shop much more than if it had just charged $6 (if mightn’t have been able to shift all the lettuce) and much more than if it had just charged $3 (rich folks would have kept the extra $3 in their pockets). It also makes more than if the shop had just charged a single price somewhere in between, such as $4.50. Well-off customers would have still hung on the extra dollars and some needy customers would have still been priced out.

The technique is called price discrimination. It may be retail’s most clever invention, and it’s everywhere.

Arnotts once made a near-identical but cheaper brand of biscuits called Sunshine. It placed the packs at the bottom of racks where the well-heeled wouldn’t look but the bargain hunters would.

Restaurants in Manly quietly ask whether patrons are locals before offering cheaper prices. They don’t want to scare off locals looking after their dollars but they do want to get the most out of visitors primed to spend.

The trick in price discrimination is to hide what you are doing. And to let someone else do the work of sorting your customers.

Sometimes they’ll do it themselves. Computer manufacturers offer “cash backs” with expensive machines. Money-conscious buyers send in the certificates (it’s one of the reasons they buy the machines). Well-off buyers don’t bother.

Banks offer discount or honeymoon rates to customers who switch but not to those that stay. They figure those who don’t move don’t much mind paying more, unless they threaten to leave in which case they are quickly looked after. Phone companies are masters of the manoeuvre.

General practitioners are in a very good position to assess for themselves the paying potential of their patients... In a just-published study of 267,000 medical records Meliyanni Johar of the University of Technology finds low-income patients are typically bulk billed while high income patients are charged 15 per cent more.

New technology is being applied to the task. This newspaper has reported that Australian web-based retailers charge higher prices to customers from wealthier suburbs. Amazon has experimented with charging its regular customers more. The online customers don’t know it’s happening: they are only presented with one price (which is sometimes a higher price if they are accessing the web from an Apple machine).

One of the easiest ways to divide up your customers is to let the government or an educational institution do it for you. Cinemas don’t charge less for students out of the goodness of their hearts. They do it to fill cinemas without cutting everyone’s price. If they are at risk of filling their cinemas with full-paying customers they often suspend their discounts. McDonalds offers a seniors’ discount. It does it not because it is partial to seniors but to free-ride on the work the government has already done issuing cards to price sensitive customers.

The easiest way of all to price discriminate is to brand an entire country. DVDs are region-coded in part to make it hard for Australians to take advantage of the cheaper prices in the United States and Indonesia. Nescafe attempted to cut off supplies to Aldi when it had the temerity to import lower-priced Indonesian jars labelled "For sale in Indonesia only." For many years Australian music companies succeeded in making it illegal to import legally-produced cheaper versions of their own songs. These days although it is legal to import music at overseas prices iTunes won’t let you. If you’re from Australia it’ll charge $20.99 for an album. If you’re from the US it’ll charge $12.99. If you make the mistake of getting an Amazon Kindle delivered to an Australian address each eBook you buy from then on will cost more than if you had had it delivered to the US.

The consumer group Choice says one of the Microsoft software development packages is so expensive here it costs $8500 less to buy it in the US. It is worthwhile paying someone’s to fly the US, buy the package and fly back here.

(Except you would have to pay Australian prices for the flight, often double the price of tickets bought overseas.)

Why would international commerce discriminate against against an entire nation? “Willingness to pay” is one of the answers the Treasury comes up with in its submission to the parliament's IT pricing inquiry, due to report soon. Affluent and not too concerned about value, we’ve globally classified as soft touches.

At home, there’s always the risk we’ll see through the ruse of someone selling the same product for two different prices. So retailers will often roughen the product up, metaphorically punching and bruising half the lettuces so they are genuinely worse than the other half. In the US white goods retailers are said to take hammers to some of their fridges so they can sell them as “shop soiled”.

Australian first computing mainframes were given big brains and then hobbled for entry-level customers. When the customer wanted an upgrade a technician would arrive, charge for the extra memory, and then remove the hobbling device while no-one was watching.

These practices offend our sensibilities. But, appallingly, they are what our own government’s new $37 billion national broadband network is planning in the prices it charges retailers. It wants to hobble the speed for ordinary users and remove the block for users who pay a higher price.

The constraint is artificial. There is nothing to stop it giving all Australians the truly phenomenal speeds of which it is capable. If it wants to charge for usage it can charge for data.

Former Telstra economist John de Ridder has told the Competition Commission its thinking is mired in the past. It is imposing scarcity where none exists, “building a motorway and then only using one lane”.

Unless we are given what we have already paid to build, most of us might never know what its truly capable of.

In today's Sydney Morning Herald and Age







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Buzzword Beach Ball: How they're brainstorming the NBN

WORKSHOPPING THE NBN

. Each session 3½ hours per department

. Warm-up energiser games including “Buzzword Beach Ball” and “Human Knot”

. “Provocative questions” including “What would we do if this organisation was run by Cate Blanchett?” and “What would Kerry Packer do in our situation?”

. Case studies “to get the juices flowing”

. An “ideas generation tree” to structure thinking

. An “ideas prioritisation matrix” in which post-it notes are stuck on different parts of a white board

. Subsequent assessment using McKinsey's “nine-box framework”

Using the NBN to improve government service delivery, a practical guide for government agencies. Department of Broadband, Communications and the Digital Economy



“What would Kerry Packer do?”

That’s one of a series of “provocative” questions being asked of public servants nationwide at a series of workshops aimed at “harvesting ideas” about how to get the best out of the national broadband network. Others ask what Apple would do, what Cate Blanchett would do and the approach they would adopt if they were part of the AFL.

The glossy 144-page “practical guide for government agencies” prepared by the department of broadband, communications and the digital economy includes an “ideas generation tree” and “idea prioritisation matrix” for helping public servants work out which parts of their jobs could be better done using the NBN.

The first step is a three-and a-half-hour workshop for each department beginning with an “energiser game” to get participants “excited and involved”. Among the games are “Buzzword Beach Ball” in which public servants stand in a circle and throw around an inflatable beach ball shouting out a pieces of jargon. The aim is to “bond over a shared hatred of corporate jargon”. Another game is is “Human Knot” in which public servants stand in a circle and join hands randomly before attempting to untie the knot without letting go of hands. “Believe it or not, this can be done,” the NBN guide says. It warns facilitators the games sometimes fail when they are introduced apologetically. “If we open up a game with sufficient confidence, participants will usually trust that there is a point to be made,” it says.

Organisers are asked to provide one flip-chart or white board per six participants and half a post-it note pad per person along with pens and “ample” supplies of food, coffee and water... Ideas developed in the sessions will be tested by a four-box matrix that will ask who they will help, how they will help, what they will cost, and what risks they will run. They will later be assessed using a “nine-box framework” developed by McKinsey and Co.

The guide says each workshop should take about one month to prepare and should be run annually.

In today's Canberra Times

Using the NBN to Improve Government Service Delivery




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There's an NBN information kit. Turnbull opens the box.

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NBN Shmen-BN - we're connecting to the net as never before

And we're doing it through broadband

The national broadband network may be a decade away, but already 91.2 per cent of Australian businesses are connected to the net. Of those, an impressive 99.1 per cent connect by broadband rather than dial-up.

Even in the agriculture sector, where a lower 88.5 per cent of businesses use the net, 98.3 of them do it via broadband.

The annual Bureau of Statistics survey finds Australia’s smallest businesses the least connected. So-called micro businesses employing four or fewer people have an 89 per cent connection rate (99 per cent via broadband). Mid-sized businesses employing up to 19 people are 93 per cent connected (99.2 per cent via broadband). Big business employing 200 or more are all connected (99.7 per cent by broadband).

Five years earlier when the then Labor opposition was drawing up its plans for the national broadband network only 81 per cent of businesses were connected to the net, although even then 82.5 per cent did it via broadband.

The big change has been in the use of the net...

Five years ago only 30 per cent of Australian businesses had websites. Today it is 42 per cent. Among businesses employing 20 or more people it is 74 per cent. Five years ago only 37 per cent of businesses placed orders via the net. Today it is 51 per cent.

The proportion of businesses capable of receiving orders via the web climbed from 21 to 28 per cent. A record $189 billion of orders were taken by the web during 2010-11, up $46 billion on 2009-10.

The sectors making the most use of the web for taking orders are wholesale trade and manufacturing, where more than 50 per cent of businesses engage in e-commerce. The sectors using the web least for transactions are agriculture and health care and social assistance. But even in those legard sectors e-commerce is far more prominent. Five years ago just 2 per cent of health care and social assistance businesses took orders via the web. Today it is 13 per cent.

The ABS measure of orders taken by the web is conservative, excluding regular orders made via the internet for which the original commitment to purchase was made using other means.

In today's Sydney Morning Herald


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Build the NBN if you must, but please don't destroy working assets

Wednesday column

The Optus high speed cable internet network is a national asset. Comprising 25,000 kilometres of coaxial cable strung across 550,000 poles in Sydney, Melbourne and Brisbane supported by 7000 kilometres of fibre the provided Telstra with its first genuine competition, putting its own wires direct into half a million homes.

Telstra fought back with FoxTel, Optus got burnt and has probably never recovered the cost of stringing the cables. But from an economic point of view what’s important is that the asset exists. Its costs have been sunk. What Optus has now is an asset that costs relatively little to operate and can deliver peak download speeds of 100 Mbps - far faster anything on Telstra’s copper wires.

Right now it has 496,000 customers. It is within connecting distance of another one million meaning that for very little cost Optus or a buyer of the network could provide a very fast very cheap internet service to as many as 1.4 million households - a service far faster than ADSL.

Only a vandal would destroy such an asset. Only a seriously confused regulator would allow it happen.

NBN Co has asked the Australian Competition and Consumer Commission to let it pay Optus a reported $800 million to shut the network down. The only precedent for the destruction of infrastructure on such a massive scale is the $4 billion NBN Co is to pay Telstra to rip out its copper network, transfer its customers to the national broadband network and remove the internet from the cables it uses to deliver FoxTel.

In no other industry would the ACCC approve such an agreement not to compete. In no other industry would it countenance a bribe to decommission working infrastructure.

Mid last year it approved the Telstra deal. This week it published a draft decision approving the Optus deal.

In terms of national assets the Optus decision is arguably worse than the Telstra decision...
Telstra will decommission its copper phone lines street by street as the NBN cables are switched on. While there will be a loss of competition, copper probably isn’t able to compete with fibre over the long-term. By contrast the Telstra and Optus coaxial cables are as good as new. They were strung up in the last half of the 1990s. They are already fast and capable of being made faster. They cost almost nothing to maintain. They are something that should not be destroyed wantonly.

The Telstra coaxial cables won’t be. It has only agreed to disconnect the internet from them. It could put it back as soon as changed legal or political circumstances allow. The Optus coaxial cables are scheduled for destruction. The ACCC’s decision will have physical consequences. It should not be taken lightly.

And yet the ACCC gives every indication that its decision could have gone either way. It was “finely balanced”, according to chairman Rod Sims in Monday’s statement.

Its decision to approve the agreement was based on weighing carefully “clear public benefits” against “a potentially large but less clear detriment”.

The main “clear benefit” is odd. The Commission says the agreement will “avoid the cost of operating the Optus network to provide a service the NBN is also able to provide”. Would we apply it elsewhere? Should Virgin shut down its airline network to avoid the cost of operating a service Qantas is also able to provide? Should Woolworths shut down its network to avoid the cost of operating a service Woolworths is also able to provide? Of course they shouldn’t. We normally value competition.

Some will argue that wiring up houses is different. Frontier Economics, the consultant used by Optus in its submission to the ACCC says fixed broadband services are a natural monopoly - they shouldn’t be provided twice. But Optus cable network is already in place. It costs next to nothing to keep it in place. It is NBN Co which is planning to duplicate it. Given its plans and the rate at which it is duplicating infrastructure right now, its complaint against “inefficient infrastructure duplication” is simply strange.

In truth is competition that worries NBN Co, not inefficiency. It is paying $800 million to remove a competitor, not out of a public concern about inefficiency.

With its last big fixed line competitor out of the way the only market restraint on its prices and quality of service will be wireless internet, and it’s on to that as well.

The Optus agreement given a preliminary tick by the ACCC prevents Optus from advertising wireless data services within the area served by its existing cables in a way which is “expressly critical of or makes any express adverse statement about the performance or functionality of the NBN where such a statement is misleading or deceptive or involves the making of a false or misleading representation in contravention of the Australian consumer law”.

The ACCC waived it through because it essentially meaningless, requiring Optus to do no more than obey the law. But it indicates how deeply concerned NBN Co is at the prospect of competition, or as it puts it “cherry picking”. Competition would force it to provide value, and its national pricing structure would force it to provide it to all Australians. Its $36 billion cost base won’t allow it. That’s why it needs to destroy perfectly good working infrastructure. It’s why I think the ACCC needs to think again.

In today's Sydney Morning Herald and Age



DEPRESSING UPDATE:

ACCC Authorises NBN CO Optus HFC Subscriber Agreement


STEPHEN KING'S WELL-JUDGED ASSESSMENT:

"Optus is being paid $800m to shut down a tax-avoidance scheme"

The ACCC has authorised the NBN-Optus deal. So where do the public benefits come from? As background, remember that the ACCC can only authorise an otherwise anticompetitive agreement if the public benefits outweigh the public detriments. I have previously expressed my skepticism about this.

So where are the benefits? The Box 1 on page 27 of the decision has the answer. And it illustrates the problem of the hidden cross subsidies built into the NBN.

Suppose that the cost of providing broadband services to Optus’ broadband customers is lower on the NBN (formally, incremental costs are lower) but for some reason the NBN charges Optus (and other broadband retailers) a wholesale price that exceeds Optus’ own incremental cost. Then, in the retail marketplace, Optus will undercut the NBN and keep its customers despite it being cheaper to service them on the NBN. Hence, the customers must be forced to the NBN to achieve the incremental cost savings (albeit at the cost of creating an allocative loss as the end users face higher prices).

So the question is – why is the NBN charging a wholesale price that is so high that it can be undercut by an inefficient competitor? The ACCC give two reasons. First, that the NBN must recover its fixed costs (which presumably Optus have written off). Unfortunately, if this argument is correct it undermines the benefit test. If, taking new investment into account, it is less costly to continue using the Optus network then the best outcome would be to not role out the NBN in areas covered by the Optus network. Of course, this is what the NBN is threatening, so taking the NBN at their word, if the fixed costs of the NBN rollout eliminates any incremental cost advantage, then the agreement should not be authorised and Optus can service that part of Australia. Of course the ACCC may not believe the NBNCo …

The second argument is more convincing. Excessive pricing by the NBN. It is cheaper to provide services to the Optus customers using the NBN but the wholesale prices that the NBN will charge are so over inflated that this cost gain will be more than eaten up by the NBN monopoly pricing in the Optus service regions. In this case, the Optus customers must be forced onto the NBN to save the relevant costs, albeit to then be exploited by the NBN monopoly pricing.

Now normally the ACCC would roll around the floor laughing if someone put this sort of argument to them. However, in the case of the NBN, monopoly pricing in city areas is necessary to create a uniform national price. The city will subsidise the bush. So the monopoly pricing is really just a hidden tax and, of course, the customers must be forced to pay this tax.

So in brief the ACCC has authorised the NBN-Optus deal because (a) it believes that the cost of servicing the Optus customers is cheaper on the NBN and (b) it can’t be left to the market to sort this out because the NBN prices are so inflated by a hidden tax that the Optus customers would probably stay with Optus.

Hmmm. So Optus is being paid $800m to shut down a tax-avoidance scheme?

Well, that is what happens when you get bad policy. I have no trouble with a uniform national broadband price. But have the NBN set prices to reflect cost. And then provide a transparent subsidy to those consumers who the government believes should receive a lower price. Don’t hide the tax – it just leads to problems like that faced by the ACCC.


RELATED READING: Why the ACCC should NOT authorise the NBN-Optus arrangement
Former ACCC Commissioner Stephen King



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