Is speed NBN Co’s enemy or friend?

NBN Co have got themselves into a bit of a pickle lately with complaints over the cost of the CVC charge becoming louder and louder.

At the heart of this issue is the need for NBN Co to achieve its revenue objective of $52 per month per connection which will give them total revenues of around $5 billion in 2020.

In its last half year results NBN Co’s CEO Bill Morrow highlighted the need to sell higher speed services to increase the average revenue per user (ARPU).

But all the focus is on the cost of the CVC with RSPs complaining that the high cost is causing them to provision less bandwidth resulting in congestion during peak periods.

At the core of this problem is NBN Co’s need for retail broadband plans to have higher prices for higher quality broadband (ie. higher speeds and higher usage limits). NBN Co is expecting the ARPU to rise over time as more applications and services require higher quality broadband. Without this increase in ARPU for higher quality services it is unlikely that the revenue targets set by NBN Co will be achieved.

However, NBN Co has also been messaging to the market that higher speeds are not that important. After the change in the technology mix to FTTN and HFC (as opposed to FTTP), NBN Co has been very loud in saying that higher speeds are not in demand. It has for instance made it very clear that Australians do not have a need for Gigabit services. Of course politics is behind this “no need for speed” messaging so as to justify the move from FTTP to FTTN and HFC.

NBN Co wants higher speeds to increase revenue but is also saying that speed is not really important.

Naturally the market is confused!

Higher speeds are also linked to higher downloads. If customers pay for higher speeds it stands to reason they will also consume more data and hence NBN Co will also achieve higher revenues.

At the moment RSPs are focussed only on selling broadband at the lowest price point they can sustain. This comes from the need to manage a transition from previous ADSL and cable broadband services in a way that minimises risks of market share loss.

Naturally consumers don’t want to pay more at the best of times. The confusion, controversy and contradictory messages from NBN Co makes it even harder for the RSPs to sell higher quality broadband.

The result is most customers going for lower plans. Why lock yourself into a 24 month contract for a higher speed plan when there is no clear guarantee you will get the higher speeds because of technology, congestion and political uncertainties?

NBN Co needs to re-assess its whole message to the market. Does it want to provide a high quality network that drives higher quality applications and services that RSPs can sell at higher prices?

If not then NBN Co will have to be satisfied with lower ARPUs as RSPs demand lower prices (eg. CVC) as they compete with each other on price alone.

The end result of the latter scenario is that Australia will have spent billions of dollars building a network that is reduced to a lowest common denominator marketing message that promotes basic broadband at the cheapest price.

Of course it doesn’t have to be this way.

The first step is for NBN Co to recognise that speed is its friend not its enemy.