Storms are coming | NBN based internet industry in strife

With the impending rollout of the NBN Bundles which will be effectively forced on the whole industry by the end of October 2018, I feel it is appropriate to talk about the issues that the smaller RSPs and their users will be facing over the next 6 months.

In a nutshell as the rollout of the NBN nears completion we are seeing more and more users being forced to move over to the NBN. This has resulted in a margin squeeze (long predicted by industry giants such as Simon Hacket of Internode fame) between the higher wholesale prices of the NBN and the resistance by users to pay significantly more for their internet. Unfortunately this is a crisis brought on by the telco industry as a whole with its long obsession with selling products based on price alone. This in the past has lead to some extremely sharp practices, including deceiving customers into signing contracts for very poor quality products. The ACCC has had to step in and limit some of these excesses, which I applaud.

Unfortunately the smaller RSPs are, and will be for the foreseeable future, bearing the brunt of this squeeze. They typically have higher costs because they do not have the scale to connect directly to the NBN and instead have to go through an aggregate wholesaler (Vocus, Optus, TPG, Telstra or Wideband) who will want a slice of their margin. The smaller RSPs also have limited capacity to cross subsidise with either business traffic or with other products such as mobiles. These smaller providers know that if they raise their prices they will lose customers. If they are stuck, due to contracts, with buying a certain amount of bandwidth from their upstream wholesalers, then this revenue loss goes straight to the bottom line.

I am seeing retail prices being offered by the smaller RSPs that are completely unsustainable – without a good margin in there to pay for support staff, billing, data centre charges, etc., some I believe have to be running at a loss. We have seen some RSPs raise prices and/or cut the products they are offering and generally it hasn’t gone well. Speaking personally we have seen the growth in our residential business slow considerably by having to increase our prices.

My concern is that we will see many smaller RSPs go to the wall as the larger players with their significantly greater capital, lower fixed costs and ability to cross subsidise can ride out the storm a little bit longer before they too will have to raise their prices.

So what advice can I give to help ride out this storm? For RSPs it has to be to look after your customers, connect with them, tell them what you’re up to, find something other than price that makes you unique. Be open and transparent. Don’t treat your users like cattle to be herded around and discarded when no longer needed. Resist the urge to compete on price, because someone, somewhere will always find a way to do it cheaper than you. Concentrate on what makes you different from the bigger companies – be nimble, be pro-active, provide awesome service, have a great network.

For consumers I suggest you ask what is important to you about your RSP and the service they provide. Are you sure that it is worth changing provider because they have just announced a price rise or there is another provider out there doing apparently the same service for $5 cheaper a month. Ask your provider about their network, how much bandwidth they are allocating per client (2.5Mbps is great, 1Mbps is too little). Can they increase and reduce their bandwidth as they need to. If you see a cheap price, ask why. If there is no reasonable explanation it is probable that it is unsustainable and they will be getting into financial strife soon.

It is tempting to ask them what upstream provider they use (if any), however you need to be able to understand their answer. It actually depends on how they are buying their service. If it’s “Layer 3”, then they are acting like a travel agent for an airline, they have no control over the quality of their network at all. If it’s “Layer 2” then they are acting like an airline, leasing planes – they have much more control over the quality of the service but they have to be careful that don’t fly with empty seats. There is a final type, which includes Launtel, where they connect directly to (and buy from) NBN and just lease space on other provider’s fibre links. This type of RSP fully control their network, it is also the cheapest to run, but has significant setup costs and the RSP either has be pretty large or limit the areas in which they offer services.

So if you are looking for a new provider, ask some deeper questions, choose carefully (don’t do it completely on price) and whatever you do don’t get into a contract – there are just too many changes coming along – you may find your RSP has been bought out or connected to a service that has had it’s bandwidth constrained (performs poorly) to contain costs.

Damian Ivereigh
Launtel
16/08/2018