October 1 2016
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NBN prices facing crunch time as telcos agitate for cheaper speeds

Lucy Battersby

Consumers will have to pay more to use the NBN in coming years unless the government-owned company lowers speed prices, telcos are warning.

But if NBN Co lowers its prices too much, it's revenue forecasts may drop, making it harder to secure funding to finish the roll-out.

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Pressure has been building between NBN Co and telcos ever since it introduced a connectivity virtual circuit [CVC] charge of $20 per megabit per second [Mbps] per month. This price was approved by the competition watchdog and comes on top of an access charge of about $24 per line per month and inter-connection fees.

In the pipeline: NBN won't be profitable until 2022. Photo: Glenn Hunt

But telcos say the CVC charge is now holding back the super-fast speeds that consumers and politicians wanted to see.

Average provisioning across the industry today is just 824 kilobits per second [Kbps] per user per month. (The actual experience is faster than this, because we use the internet for just a few hours each day).

Although NBN reduced CVC prices to $15.75 in June, it would still cost about $637 per month to supply 100 Mbps at all times of day, according to one source. Consumers won't pay this price, so telcos provide enough to get 100 Mbps during quiet times and consumers get slower speeds at peak times.

The industry is eager to speak out about pricing problems and are publicly calling for NBN to reduce the CVC down to as low as $4 per Mbps per month.

Telcos won't promote faster speeds unless they can afford to deliver those speeds. Photo: Alex Ellinghausen

NBN will talk to telcos next month about 're-balancing' prices, executive general manager of pricing at NBN Co, Sarah Palmer, says.

"As a wholesaler, we are acutely aware that we are only going to be successful if our retailers are successful. And they are going to be successful if Australian consumers are getting fast broadband quicker and using it more," Ms Palmer said.

NBN's corporate plan includes revenue forecasts that assume the CVC price will decrease over time, but Ms Palmer won't put a dollar figure on it.

"The commitment to reduce CVC price as usage grows is absolutely baked into fundamental principles of NBN and it's all about making sure that broadband is affordable for homes and businesses," she says.

One looming threat is a mini-NBN being built by TPG, which will connect hundreds of inner-city apartment buildings. TPG plans to charge a CVC fee of just $4 per Mbps per month.

TPG's share price took a huge dive recently after analysts estimated NBN's high CVC prices will eat into its healthy profit margins. TPG sells internet plans without data limits, which means it's customers need a lot of CVC.

"We would like to see the NBN CVC price be between $5 and $8 per Mbps," TPG chief operating officer Craig Levy says. TPG has no plans to introduce data limits or raise prices at this point in time, he added.

Chief executive of $3.8 billion telco telco Vocus, Geoff Horth, says NBN should dismiss the CVC entirely but raise the access fee above $40. This way NBN could still achieve the monthly $52 average revenue per user [ARPU] needed to become profitable by 2022.

"It just doesn't make any sense to have a CVC charge, full stop. People are either going to have a lesser experience than they should be having, or the retail price is going to have to go up," he says.

And if prices go up too much, consumers will choose mobile broadband over NBN.

Telcos won't promote faster speeds unless they can afford to deliver those speeds, he adds.

NBN Co has flagged plans to cut CVC prices down to $11.50 for bulk buyers and will soon start a trial of charging based on each telco's average needs, rather than industry-wide needs.

But some telcos do not want to see access prices go up.

"We are supportive of improvements to the current pricing structure that would be competitively neutral and ensure that low usage and 'voice only' customers aren't disadvantaged," a Telstra spokesman said.

Aussie Broadband founder Phillip Britt says his company earns a modest profit on NBN services, but far less than re-selling ADSL on Telstra's copper network.

"CVC pricing has to come down. It is not sustainable at current rates."

"They are building a network that they want utilised [but] it's not going to be utilised to its full potential at the current pricing," Mr Britt says. "I can see a time when the industry has to raise prices."

Telecommunications analyst at New Street Research, Ian Martin, says it is 'inevitable' that retail prices will rise.

"Can [service providers] develop products that people are prepared to pay the money for, given the potential for speeds and capacity and downloads on the NBN? If [consumers] are not, then what is the point of the NBN? We should have just stuck with incremental improvements to the copper network," Mr Martin said.

Until the NBN came along internet prices were based on the cost of using a $10 billion network. From now on prices will be based on using a $50 billion network and it is "inevitable that some of that is going to be reflected in [retail] prices," Mr Martin said.

Optus' head of regulatory affairs, David Epstein, says the CVC pricing model was designed pre-Netflix and needs to change. He believes it is possible to design prices that get speeds flowing faster yet still allow NBN to make a profit.

"We are very firmly of the belief that if there is a re-balancing and reconfiguring of the way that NBN charges, that it can meet its costs," he said.

Macquarie Telecom's national executive for industry and policy, Matt Healy, says the current pricing is "nowhere near sustainable".

"The discounts are too small and take to long to kick in. It needs a radical re-think otherwise the true consumer benefits of the NBN will be illusory."