It is interesting, but sad, to see the blame game that is going on in the telecoms industry.
As with so many of the nbn problems, at the core it is a problem created by politicians. This one goes back to the original nbn policy, and it was the Labor government that created the CVC monster. As we reported from the start, we very much supported Simon Hackett’s criticism of this wholesale charge which, as foreshadowed six years ago, is now creating some of the problems that we are faced with today.
With hindsight, while Simon addressed the correct problem, his win was not enough to have a positive effect on the situation six years later. But that also has to do with the fundamental change from FttH to FttN that happened two years later. An FttH model would have provided the nbn company with a range of other revenue options and in that scenario the CVC would not have become the stumbling block it is today.
Without going into technical details, the CVC is part of a complex pricing policy of the nbn company. This CVC charge results in retail prices for the truly high-speed broadband products that are well above prices charged for comparable international products.
The reality of broadband, however, is that most customers decide which broadband package they will buy based on price. They have very little sympathy for complex wholesale price calculations; in general they are not interested in the cost details involved in what they buy. If they believe the price is too high they don’t buy it, and this pricing elasticity issue has been evident in the broadband and internet industry for well over two decades. Politicians can fabricate a price but they often fail to understand the market realities.
So what is happening now is that as the wholesale prices offered by the nbn company are too high, customers are not buying the higher-speed broadband packages that would differentiate the NBN from previous DSL and HFC broadband services. This results in disappointment. Also, add the many technical problems that customers experience – mainly because the current rollout is using ageing existing infrastructure (also politically motivated) – and it becomes clear that all is not well in NBN-land.
But, rather than addressing the fundamental underlying issue, companies are now blaming each other, as none of the players are brave enough to point the finger at the political problem. Companies are always extremely reluctant to involve themselves in political discussions.
And so the retail service providers are blaming the abovementioned wholesale prices that they are being charged by the nbn company. This company is owned by the government and it is mandated to follow government policies, so the company on its own cannot make the changes that are needed to make higher-speed broadband packages more affordable. While they might discuss this with the government behind closed doors, if the government sticks to its policies the nbn company has no room to manoeuvre.
So the only thing it can do is to blame the RSPs for not buying more capacity from them in order to create better quality broadband products. It is accusing them of deliberately keeping prices low (and thus broadband quality down) in order to get as many customers as possible onto their service – the so-called land-grab issue.
But wait! Is that not what we wanted to create? Maximum broadband competition at a retail level? I would say that policy at least is working.
These RSPs operate in a free and open market and they are subject to market forces of which a very critical one is the price that customers are prepared to pay. The higher-speed packages are clearly available from all those players, but consumers choose not to buy them because they can’t afford them.
Arguing that to make the failed government national broadband network policy work RSPs should simply increase the price, to help nbn earn more money from the higher priced services, doesn’t make sense in a competitive market and simply will not work.
The only solution for the government is to realise that their government-led rollout is not simply a commercial exercise. If it were based on commercial principles the rollout would first start in markets where they can charge a premium price. The government must realise that they can’t burden the nbn with an unrealistic return on investment.
In an open and competitive retail market that works according to open market principles RSPs will not increase prices if they know that their customers will not pay them. Therefore you can also not burden the RSPs with higher charges in order to solve problems created by politicians.
Take those ‘social’ costs out of the equation and treat that part of the investment as a national interest investment. This will then allow nbn to create the correct foundation to charge the RSPs commercially realistic wholesale prices, and from that lower cost basis these retail providers in turn will be able to start selling competitive high-speed broadband at affordable prices. There are plenty of indications that there is a high demand for such services if the price is right.