The Great Game | How NBN has outflanked the telco industry

There has been a big three-way game going on in the Australian telco industry between NBN, the retail service providers (RSPs) and their users. Come Oct 31st 2018 the final act will play out and all the signs are that NBN will win.

The TL;DR for consumers is that the price of internet will likely be going up by at least 20%. However the good news for consumers is that the quality of their service should be maintained. We will not be returned to the highly congested days of 2017.

How did we get here?

NBN has always needed to get its ARPU (Average Revenue Per User) up to at least $52 to make the project financially viable. However it was struggling to get this as high as $43. The first cause was that many telcos were selling the cheaper nbn12 (12Mbps) service, particularly to less technical consumers who just wanted “an internet connection”. The second cause was that under the original pricing mechanism, telcos were allowed to skimp on paying for bandwidth (CVC) onto the NBN network. This also allowed them to keep the price down (the large telcos have always found it easiest to sell on price) at the cost of poor quality, congested, networks.

To make matters worse for NBN the RSPs were able to land the blame for the poorly performing network on NBN – consumers were only to happy to blame the FTTN technology for example. There was lots of politics and the ACCC announced it would start monitoring network performance of the major carriers. NBN needed to find a fix to both it’s financial issue and its political one. NBN needed to find a way to force the RSPs to pay for more bandwidth.

The game begins

So at around this time (Oct 2017), NBN announced they wanted to encourage RSPs to move people up to the little used nbn50 (50Mbps) speed tier. A program they called “Focus on 50”. They agreed to discount the nbn50 to the same price as the nbn25 until May 2018, however, and this was the clever move, they also agreed to boost the bandwidth (CVC) they were selling to the RSPs by 50% at no extra charge.

Miraculously all the congestion problems went away. The ACCC announced that after doing some measuring there didn’t seem to be much of a problem after all. The nbn50 now became the standard speed that most people bought and even those that did not, they benefited from the extra CVC bandwidth being provided. NBN knew that once consumers got used to all the extra bandwidth they would not give it up easily.

At the same time as starting “Focus on 50”, NBN also announced the new optional “Bundled” speed tiers. They were “bundled” in that instead of buying a connection (AVC) and bandwidth (CVC) separately, they were purchased together. They included into the nbn50 tier 2Mb of CVC bandwidth – about double the bandwidth that most of the carriers had been purchasing before Focus on 50, but at a price that meant it was significantly cheaper than buying the two separately. However the RSP is forced into buying that bandwidth. Then to totally sweeten the deal, they extended the Focus on 50 discount to Oct 31 and added double the amount of bandwidth included with the bundles (to encourage RSPs to move over) until the same date.

In another clever move by NBN, they effectively forced RSPs to have to choose between the old pricing and the new bundled pricing. An RSP could run both pricing, but it would mean splitting their user base which destroys much of the economics of different types of users cross subsidising each other.

Really only the nbn50 is a good deal on the bundles, all the other speed tiers end up being more expensive. The nbn12 and nbn25 bundles are the same price as the nbn50 bundle (thus making them more expensive) and the nbn100 and above bundles are significantly more expensive than their unbundled counterpart. However because typically 75% of an RSPs users are on the nbn50 speed tier, the incentive to move to the bundles is still strong.

However this will have a significant effect on the consumer pricing. I believe the days of an internet connection costing less than $100 a month will be over by Oct 31st. The prices of nbn100 and above will go up significantly (roughly $30/month for included 2.5Mb of bandwidth). There is nothing in theory stopping an RSP going back to the previous pricing, however it will also mean that they will return to the days of congestion that we saw in 2017. It is unlikely consumers will put up with this and will just agree to stump up the extra money.

Given the impending price rise, it would appear to make sense to get into a contract at the current price. However I would advise against this. While an RSP cannot change the price on you, they can constrain your bandwidth. They will not be able to afford to put you on the bundle plans, so will leave you on an old unbundled CVC with much less bandwidth. So you may find yourself stuck in a contract with a poorly performing internet connection.

What does this mean for Launtel and its users?

We have always provided significantly more bandwidth than most RSPs, so in a way this is just the other RSPs being forced to do what we have always done. Given that we already provide this extra bandwidth, we don’t expect to see any significant price rises for our users.

However I still don’t believe the 2Mb of included bandwidth is enough long term. We believe an RSP needs to provide at least 3Mb to provide a highly performing, no download limit network. This figure will only rise over time, leading to more congestion.

Under the bundle pricing further CVC bandwidth can be purchased and we will continue to do this. This means that we may be more expensive than the major providers but very much providing a superior product for those consumers that care about the quality of their internet.

Damian Ivereigh – CEO Launtel

Further reading:
ITNews – NBN Co to create a class war on its network
ITNews – NBN retail prices are starting to rise