This is another post in a series of posts on the ACCC telecommunications Market Study.
In this post I will finish off commenting on NBN Co’s supplementary submission which I covered in my previous post.
This supplementary submission was lodged after the ACCC hosted a stakeholder forum to hear views from the industry on the issues facing the telecommunications sector. A summary of the stakeholder session produced by the ACCC is available here.
In its supplementary submission, NBN Co re-inforced many of its points from its earlier submission in November 2016.
NBN Co still does not believe it has substantial market power
NBN Co continues to claim a range of substitutes threaten NBN Co’s business. Fixed wireless networks from Spirit Telecom and Superloop along with users relying totally on mobile broadband services are already constraining NBN Co. 4G and 5G improvements are likely to increase this trend.
A range of non NBN Co fibre operators (TPG, Vocus, LBN Co, Opticomm, OPENetworks and Spirit are listed) are constraining NBN Co with predictions of 380,000 active connections by 2022.
Despite the nascent and small natures of these constraints (380,000 active connections is less than 5% of NBN Co expected total active connections), NBN Co wants the ACCC to protect it further by extending the existing monopoly protection regulations the ACCC put in place to infrastructure providers with less than 12,000 end users and bring fixed wireless and mobile operators into the Regional Broadband Scheme to help fund NBN Co’s loss making networks.
RSPs are not playing ball in retail markets
NBN Co again has a shot at Telstra, Optus, TPG and Vocus for having significant pricing advantages in retail markets because of their self-owned backhaul networks to NBN Co’s PoIs. As in its earlier submission, NBN Co raises the potential of these “vertically integrated retail providers” creating a margin squeeze on their “non-vertically integrated” competitors. Again the implication is that the four major RSPs are extracting economic rents from their self-owned backhaul networks (rather than suffering their own margin squeeze).
Not surprisingly, the old chestnut of allowing NBN Co to enter this market and provide aggregation services to smaller RSPs to a smaller number of capital city PoIs is raised to enable more competition.
The RSP “land grab” and focus on simply shifting ADSL and cable customers rather than upselling the NBN gets another expected run.
Response to concerns raised in industry forum mainly focus on CVC pricing
However, the majority of the submission is reserved for responding to concerns raised during the Market Study Forum hosted by the ACCC and in particular the controversy over the CVC pricing.
My previous blog covered part of this as well.
NBN Co lays out a detailed 7 point list of reasons why the CVC pricing approach it is taking is justified.
1.NBN Co is incented to set CVC prices efficiently of its own accord
NBN Co argues that the limitations placed on it by the Special Access Undertaking ensure that it will price the CVC effectively. It is in NBN Co’s interests to set the price so as to ensure adequate demand for its services. NBN Co “should not be subject to intervention” as it will be motivated “to set a fair price ensuring adequate demand and cost recovery”.
In particular NBN Co states (emphasis added) :
nbn‘s incentives to price appropriately to achieve its permitted returns through its CVC pricing are clearly already operating effectively, especially during this current loss accumulation phase.
Or in other words – “everything is going to plan just trust us!”
2. NBN is pricing efficiently
NBN Co highlights examples of such effectiveness. Firstly, it has made recent changes to the CVC pricing structure via the “access seeker-specific dimension based discount model”. It is too early to assess the long-term impact of this new model but initial indications are that it is having the desired effect with increases in CVC capacity per service of 10% on average.
Secondly, more pricing reviews are being undertaken through the Product Development Forum with rebalancing of AVC and CVC charges being considered. Interestingly an increase in the CIR component is being considered to ensure the quality of retail experiences.
The CIR consideration may involve video services being handled like voice services with a higher quality of service traffic class than normal broadband. There are special considerations in the current NBN product model that allows RSPs to bundle voice services with broadband services and ensure that the voice data packets have priority over normal broadband data packets (ie. each AVC has 150kbps of TC-1 bundled for voice).
For video NBN Co is probably looking at bundling an amount of TC-2 traffic with each AVC. This may need to be as high as 5 Mbps for High Definition over the top video. RSPs would need to mark these traffic streams appropriately which may be difficult if they don’t have relationships with the content provider that allow them to identify the traffic (eg. Content Delivery Network dedicated links).
To avoid cannibalising some of its future business revenue it would probably need to do some tricks such as making the TC-2 highly asymmetric or even just one-way.
However, this will not reduce the cost of the CVC paid by RSPs as TC-2 CVCs cost the same as TC-4 CVCs. It actually may increase the overall cost because RSPs will need to dimension separate headroom for TC-2 and TC-4 traffic in their CVC planning which means more bandwidth in total is required than if just the current TC-4 CVC is used.
A rebate on CVC charges for video TC-2 traffic linked to AVCs (like that used for TC-1 voice traffic) would likely just detract from ARPU and be the same as discounting CVCs overall. Why go to all the cost and pain of these design changes if a straight forward CVC discount would achieve the same goals?
A move to CIR for video traffic may increase the quality (especially where the NBN has access technologies subject to congestion such as HFC, Fixed Wireless and Satellite) but it would not reduce the cost without a reduction in the CVC charges.
NBN Co says it is willing to experiment with pricing and “will continue to look for ways to align its interests with access seekers’ interests”.
So while everything is “operating effectively” we have got more ideas that will help everyone coming soon.
3. Countervailing power of customers
NBN Co, echoing previous points, claims that the concentration of buyers of its services (ie. Telstra, Optus, TPG and Vocus) puts it at a disadvantage in negotiations and that this should “obviate the need for concern” regarding CVC pricing.
Competition from existing and potentially new infrastructure providers also constrains NBN Co’s ability to price the CVC in a non-efficient manner.
The ACCC is again being asked to consider that NBN Co does not have substantial market power due to competitors and the market power of its customers. It is hard to feel any sympathy for NBN Co in this line of argument, however it continues to make it over and over again.
4. Consequences of undue attention on NBN pricing
Its’s not all our fault – blame the RSPs!
NBN Co highlights it has only two levers to pull in order to meet its shareholders (ie. the Australian Government and by extension taxpayers) objective to avoid losses on its investment.
RSPs who are seeking lower prices are simply looking to increase their profits at the cost of the Australian taxpayer. This argument seems to rely on the dominant RSPs acting as a cartel and refusing to pass on these lower costs to their own customers. A big claim for NBN Co to make about the Australian industry.
NBN Co asserts that RSPs are looking for it to fund a “race to the bottom” in retail broadband pricing while the RSPs focus on “aggressive marketing campaigns to retain and attain market share”.
These two claims appear to be totally contradictory. One one hand RSPs are looking to boost their profits by not lowering their retail prices and on the other hand there is a “race to the bottom” through marketing campaigns that are too aggressive.
Only one of the above claims can be correct – but NBN Co throws in both just in case.
5. Willingness to pay and margin squeezes
This is the point I covered previously about margin squeezes which you can read in detail here.
6. Common misunderstandings about the effect of CVC pricing
NBN Co discounts criticism that the multi-technology mix (MTM), with its lower speeds, justifies the lowering or removal of CVC pricing compared to the original setting under the FTTP technology model.
Interestingly, in this argument, NBN Co does recognise that “slower speeds can result in lower usage”.
The recognition that slower speeds result in lower usage does imply the reverse is also true – higher speeds can result in higher usage. Of course, the opposite its also true – higher usage results in higher speeds. These factors work both ways. It is unclear to me what point NBN Co is try to make here.
But NBN Co highlights that :
“[A]ny speed issues on MTM are likely to be far more short-lived than the period over which it will need to recover its initial losses through a CVC charge”.
Or perhaps to paraphrase, if there are “speed issues on the MTM” that warrant a reduction in the CVC, this is just transitory. Speeds will improve at the end of the legacy co-existance period and NBN Co is also looking to deploy G.Fast technology on FTTC, FTTB and FTTN networks which will speed things up to justify the price of the CVC.
This last point gives credence to the point it was trying to disprove – that the slower speeds of the MTM do make it harder to justify the current CVC model. It all seems very circular!
7. Inappropriate benchmarks for pricing constructs
NBN Co takes umbrage at the comparisons with Singapore and New Zealand wholesale access networks where CVCs are not part of the pricing structure.
NBN Co is facing higher initial financial losses that need to be recovered than these other markets due to its mandate to cover all Australians. In particular the costs of the fixed wireless and satellite networks are key drivers of these initial losses.
Singapore and New Zealand do not have the same extent of “non-commercial” services as Australia’s NBN Co and hence the CVC is in some way a response to earning higher revenues to cover this requirement.
This places an interesting slant on the CVC – it links it directly to the extra costs and on-going provision of non-commercial services on the satellite and fixed wireless networks.
The levy proposed under the Regional Broadband Scheme of $7.10 per month on non-NBN Co infrastructure providers was calculated to compensate NBN Co for these same “non-commercial” services. The CVC is on average raising $15 per month per service.
If there is a direct link between the CVC and paying for the fixed wireless and satellite networks then the cost of the CVC should be reduced by about half. It should also not increase over time which is NBN Co’s plan to get to its target ARPU of $52 per month.
Perhaps Australia’s taxpayers would be willing to support the cost of broadband to regional and remote areas directly through general taxpayer obligations like they do with roads, health, education and other services. A write-off of NBN Co’s losses on these “non-commercial” services would achieve this goal and allow a reduction or even a removal of the CVC cost.
Recovery of the costs for these “non-commercial” through industry specific levies and higher CVC costs drive up the cost of broadband services for everyone. This is leading to a new network that is already “congested” and not being used to its full advantage. The hidden cross-subsidy at the heart of the NBN is not a smart approach to creating national infrastructure for the 21st digital century.
The fact that NBN Co had to provide a supplementary submission to the ACCC market study after the forum in July 2017 highlights some of the dissatisfaction that exists in the industry with a number of NBN Co positions and the overall NBN policy framework.
The CVC pricing issue is clearly the most contentious and seems to be the lightning rod for most of the protest.
However, the other bigger take-away may be that NBN Co seems to be all alone in the industry with little, if any, support from other participants. This position was previously occupied by Telstra as the wholesale infrastructure monopoly supplier. Now it is NBN Co that is the subject of industry pressure.
The monopoly has moved from one player to another but the industry problems seem to be all too familiar. Complaints over margin squeezes, abuse of market power, costs of subsidising regional services have long been a part of Australia’s telecommunications industry and the NBN appears to have changed very little.
The big test is whether the ACCC will take up the challenge to get to the root cause of these issues (i.e the national infrastructure monopoly) in its review or will the problems of the last 20 years continue to retard Australia digital infrastructure development.