Age:?Ǭ†Telstra set to abandon major cable upgrade

In the aftermath of the Government’s decision last week, Telstra’s immediate task will be to rethink its investment in cable after it emerged that regulatory changes could include forcing the telco to divest the network which passes 2.5 million homes and businesses.

Wow. Just wow.

Should the Government decide to force Telstra to divest the cable network, Merrill Lynch said it could be folded into the proposed national broadband network, which would mean that fibre-optic cables would not have to be rolled out to many homes and businesses in the cities.

The broker said the new company proposed by the Government to run the national network was the “only logical buyer” of Telstra’s city cable network.

More wow.

I wrote earlier in the week about how the numbers don’t stack up for the NBN when you consider the need to repay the cost of the rollout. The key presumption in that post was that the NBN had to be offered at a competitive rate to encourage uptake, but that competitive rate would never cover costs.

But what if it simply can’t be offered at a competitive rate to cover costs?

$200/ month is the figure from AAPT: News.com.au

Paul Broad, chief executive of Australia’s third largest telco, AAPT, is convinced broadband bills will rocket to at least $200 a month under the Government’s plan and says consumers simply won’t pay.

The Opposition put the figure at $150 earlier in the week, and noted rightly that the profit would have to be bigger than Telstra’s to cover costs (news again)

Opposition Leader Malcolm Turnbull questioned the commercial viability of the project suggesting it would need an annual return of $6 billion, The Advertiser reports.

“Now that is substantially more than Telstra’s entire profit,” he said.

“If as the industry analysts say, if this would require households who are currently paying say between $40 and $50 a month for broadband, to pay $150 a month for broadband, where is the evidence households will do that?” he asked.

I’ve got no problems with the maths in either, but I have serious doubts on the marketing logic: there’s no way in the world the NBN is going to ask $200 a month for access.

Zero. Zip. Zilch.

Take the economics out and it’s a pure political decision. Conroy and Rudd might be dumb, but they’re not dumb.

But here’s the other consideration: the NBN is a WHOLESALE network. We’re talking access to retail costs really, not wholesale costs. Image $200/ mth wholesale access + the retail margin on top.

Not happening.

Which leaves us with a black hole, because it has to bring in this sort of money to recoup its costs, let alone make a profit.

However.

There is one scenario that might make it work. Not at $200. Maybe not at $150. But it could work at $100-$150.

Bundling.

Triple play phone, data and tv.

Gizmodo Australia found only 20% of people would pay over $100 for NBN access…but for internet access.

If say Optus or iiNet offered unlimited calls, cable TV and high speed internet for say $150/ month, people might pay.

But that consideration is made on today’s competitive environment.

2018 on the other hand??

Steve Murphy in the Business Spectator:

The 21st Century infrastructure equivalent of the Snowy Hydro is what K-Rudd says of his new Broadband plan, but will we end up flushing as much money down the fibre optic drain as we do water down the Hydro.

The problem is we don?¢‚Ǩ‚Ñ¢t know and the Government can?¢‚Ǩ‚Ñ¢t tell us with any degree of precision because it is yet to conduct a feasibility study. That?¢‚Ǩ‚Ñ¢s right, K-Rudd and the team don?¢‚Ǩ‚Ñ¢t know if what they?¢‚Ǩ‚Ñ¢ve announced is feasible.

I did some digging, the Government doesn’t use the words feasibility study…but it’s an accurate description. Point one of the NBN rollout (source)

Commence an implementation study to determine the operating arrangements, detailed network design, ways to attract private sector investment

but wait, there’s more:

The preliminary estimate is that the enhanced NBN network will cost up to $43 billion…

The Government’s objective is to achieve 90 per cent coverage of the FTTP network, and remaining coverage to be delivered through wireless and satellite technologies, within this funding envelope. Initial advice to the Government is that this objective is achievable, but this estimate will be subject to an implementation study.

Two questions

1. Does the $43billion include the cost of repayment of debt, or is it simply the cost of the actual rollout?

Whether the Government directly borrows, or offers infrastructure bonds, both come with interest that needs to be repaid. The official release says “will invest” which could suggest that the $43 billion figure is to be spent on the rollout, not the repayments. If this is the case, the $43 billion could actually be something like $45 billion.

2: Why doesn’t the NBN include planning for increased international access?

The NBN includes

implement measures to address backhaul ‘black spots’ through the timely rollout of fibre optic transmission links connecting cities, major regional centres and rural towns – delivering improvements to telecommunication services in the short term

But no mention of international pipes. We already have the problem where say a 20mbps ADSL connection here is the equivalent of maybe a 2mbps connection in San Francisco because of the distance and congestion in the connections that pull the data across the Pacific.

100mbps internal connections mean little if there isn’t increased capacity on the international backbones. Yes, you’ll be able to access sites hosted in Australia quickly, but sites outside Australia are another matter.

Cost per household of NBN (at 100% rollout): $5,063 per house.

We don’t know if this includes the cost of connecting each home. The policy says “connect each home” etc, but given this is a wholesale network, there may feasibly be an actual physical connection cost (+ equipment, unless the Government is handing out free modems/ network devices) for the average punter.

But that aside, when will it cover its costs?

At $50/ month with 100% takeup rate: 101.26 months. Nearly 8 1/2 years.

At $100/ month at 100% takeup rate, divide by two: 50.63 months. 4.2 years.

But then we have the problem that this is a wholesale network, not retail. Those reselling the network will want a margin, and it will need to be competitive with alternatives, some already being rolled out today.

At $25/ month wholesale with 100% takeup: 202.52 months, or just shy of 17 years.

At $50/ month with 100% takeup rate: 101.26 months. Nearly 8 1/2 years.

But then we need to consider that the network will most definitely not have 100% take up. In fact, 100% is an impossible figure. Knowing the rate of take up though in 2018, given we don’t know what the competitive landscape will be, is at best a guess. There are two considerations: competition and overall demand. We know the NBN will have competition from at least Telstra, possibly other companies by 2018 (and well before then.) Second, we know that not everyone takes up new technology (there are still people using Dial-Up today!). The demand builds over time, so you never get say 75% of the market demanding the option immediately; a quick look at broadband stats for Australia shows that demand for a new tech builds over time, often driven by increased competition and downward pricing.

Here’s some calculations based on wholesale rates

$25/ month at 25% takeup: 810.08 months, or 67.5 years
$50/ month at 25% takeup: 405.04 months or 33.75 years

$25/ month at 50% takeup: 405.04 months or 33.75 years
$50/ month at 50% takeup: 202.52 months, or just shy of 17 years.

Now we’ve made some presumptions on wholesale pricing vs retail. The wholesale price could be higher but the higher that price, the less appealing the network becomes, so you decrease demand. You’d also have to consider that Telstra with its competing network isn’t going to sit back and let the NBN undercut it by a huge margin either.

Conclusion

What the figures show is that the NBN may never cover its costs. The counter argument is that this is a nation building exercise and a huge investment by the Government, but that has a rather important flaw: the Government is building the network through a separate company they’ll majority own until sometime between 2020-2030. That company will have private investment as well, so it will have a duty to cover its costs somewhere along the line. Note also that the Government is talking about issuing infrastructure bonds; those bonds will offer repayment with interest. The money to repay these has to come from somewhere.

The problem is that the earliest the NBN might recover its costs, even under the most generous model, is 8-10 years. Realistically we’d be looking at 15 to 30 years, possibly longer. People may argue that the NBN will still be of great service in 2018, but does anyone really believe that this will still be state of the art tech in 2038 or beyond, and that nothing else will have come along that does it bigger, better and cheaper?

The numbers just don’t add up.

Update: should have added, these calculations also presume that the project will come in at cost. Government projects rarely do, so the starting cost of the network could be higher again, making it even harder to repay.