FTTP roll out without having to pay for it

I have written in a previous blog about how we need to get FTTP rolled out all across Australia. As far as I am concerned this is an economic imperative. However the biggest argument against doing this is the cost – is the country prepared to put up the capital required to do it? I believe this is a sound investment in our economy, but how about we arrange for it to be done for “free”?

To understand how this works it is important understand what NBN actually is. At it’s core NBN is a construction company who rents out the products it builds. This is no different from a hotel developer who spends a lot of money building a hotel in the hope of being able to rent out rooms by the night for many years to come.

Now it is clear that the owner of a five star hotel can clearly charge more per night than the owner of a three star hotel. An enterprising investor could use this fact to do a deal with the owner of a three star hotel who is currently turning away customers that want a five star hotel: “if I pay for the renovation of your rooms, could you give me whatever you earn extra on your room rates?”.

This is actually a good deal for everyone involved. The hotel owner doesn’t have to find the capital to upgrade his hotel, the investor just has to provide the capital to do the upgrade (not the entire hotel) and gets a return on his investment without having to get involved in running a hotel. Finally the customers are happy to pay extra because they get a higher quality room. A few rooms can even be left un-renovated for the budget clients.

The NBN is like the hotel owner with the 3 star hotel whose customers want to pay more for a faster service than NBN is currently able to provide. Can we use the same method to allow outside investors to pay the upgrade?

Currently NBN provides two main ways to pay for upgrades. The first is a single premises tech switch where NBN charge whatever it costs them to install FTTP to that premises. This is the most expensive method because a lot of infrastructure must be upgraded to get that first premise connected. Prices in excess of $20,000 are not uncommon. There are some equity issues when the next person gets it a lot cheaper because the first person has paid for most of the upgrades.

The second upgrade method is an “area switch”, this is where the entire area typically serviced by a single FTTN cabinet is all upgraded. This is actually the cheapest way to do it, per premises – around $2500 – however every premises must be done.

Right now when a tech switch is done NBN actually gets two bites of the cherry. They charge for the upgrade itself AND they then are able to charge extra for the higher speeds sold, that they would have never been able to sell without the upgrade. I do not believe this is intentional on NBN’s part, but it is important to see how this is paid for.

So if NBN were willing to give up that extra revenue it earns from the higher speeds (100/40 and above). This is revenue that it couldn’t have got anyway without the tech switch. This revenue can be used to give a return to an investor.

A superannuation fund (or other investor) stumps up the money for the area switch and anytime a higher than 50/20 service is sold by NBN (via an RSP), the extra revenue over the 50/20 price ($45/mo) is remitted to the investor. Initially the revenue from the faster speeds would be quite low (not many people take 100/40 and above), but over time this is only going to increase – we are talking a 40 year investment.

At which point NBN could even turn around and sell “high speed revenue” rights to the areas that are already on FTTP. It would be a way of at least partially selling off NBN.

So let’s run some numbers using the NBN’s new bundled pricing.

Right now in a typical area about 25% of people take a 100/40 or above. For the moment let’s ignore the speeds higher than 100/40 and say they all take 100/40 – bundled revenue is $65/mo – revenue remitted to investor is 65-45 = $20/mo per connection.

So let’s take an area switch of say 500 premises.

Upgrade cost: 500 x $2500 = $1.25m. Revenue from that area: 500 X 25% X $20 = $2500 per month or $30,000 per year – a 2.4% return on investment. Not great, but not bad either. However from here is where it get’s interesting.

Once upgraded to fibre more people will take the faster services because they will actually get the speeds! Also business districts would likely have a much higher takeup rate and of course over time people will slowly move up. Let’s say the takeup rises to 100%, now we are looking at 4 times the revenue – a return of 9.6%. Now that is a rate of return that super funds would get really excited about. That is way in excess of what toll roads produce. Don’t forget this is a seriously solid investment, it is government backed and it is infrastructure in the ground – it’s not going anywhere and there is no way we’re not going to need it the future (there is no tech that comes even close to the capacity of a light pipe).

All the above hasn’t consider what happens when people take faster than 100/40 (250 and above), then on the current pricing the revenue keeps climbing. However I would argue we need to bring the price of gigabit right down (it is too high at the moment – around $180/mo).

There you go, that’s how we get Australia upgraded to FTTP without spending an extra cent of government money or people having to pay for their upgrades.

Damian Ivereigh
26 August 2018