Submission to ACCC DTCS 2018 consultation
Damian Ivereigh, CTO, Launtel Pty Ltd
12th April 2018

[NB:
DTCS – Domestic Transmission Capacity Service – “Backhaul”
LTIE – Long Term Interest of End users – “Consumers”]

I own and operate Launtel, a relatively small NBN service provider in Tasmania. Almost our entire market is in Tasmania so we are heavily affected by the pricing of both intra-state and across Bass Strait bandwidth.

I have two points I would like to make:-

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1Gb limit now too low given current traffic
The current maximum of 1Gb, we believe, is now too low a limit for the DTCS to not apply. We are currently purchasing 2.5Gb and there is no way we could be considered a large provider able to negotiate good rates from the cable operators. In the NBN space it is not unreasonable to allocate 2Mb per connection – this puts 1Gb at just 500 customers.

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“Wet section” uplift to Tasmania does not promote competition
We believe that currently the large uplift of pricing for the “wet section” across Bass Strait (while intended to promote competition in the cable operator market) has had the opposite effect in the retail internet market. We strongly believe the 2016 DTCS determination has failed the LTIE test for Tasmania.

No new players have entered or show any significant signs of entering the cable market

The cost of laying new cables across Bass Strait is extremely high, yet the bandwidth market in Tasmania is not large (approx 600Gb) – most of which is not supplied under the DTCS anyway (I.e in blocks larger than 1Gb). For a new entrant to lay a new cable to Tasmania, they would have to be confident that the market will grow to accommodate them and they would not just be taking business from the existing operators. Without a growth in overall bandwidth it would simply lead to higher overall costs (capital etc) being paid for by the same amount of bandwidth sold.

We believe this is such a massive barrier to entry that we are unlikely to see a new operator enter the market. In other words the “wet section” uplift does not, in practice, actually create more competition in the cable operator space.

National pricing leads to poor outcomes in the retail space for Tasmania

Most (if not all) national RSPs have standardised retail pricing across Australia. Generally the differences in backhaul costs to different places is considered minimal enough that they can just be spread across the RSPs entire business and the same retail price is charged. However, this backhaul cost is not true with Tasmania; where the costs are often many times higher. In this situation the RSP must either have a lower quality network in Tasmania (more congested or less redundancy), decide not to offer services to Tasmania, or deliberately run at a loss (i.e. Tasmanian internet connections are subsidised by mainland ones).

As a small RSP in Tasmania we are faced with this same choice, except that the last option of running at a loss is not available to us given that we have no mainland portion to provide for that cross subsidy. We are therefore left attempting to compete against companies that are either making a loss or at least running with much smaller margins. We have had to restrict our services to those willing to pay more or support a local business.

High prices leads to reduced bandwidth purchases

One of the biggest barriers to the overall reduction in price in bandwidth to Tasmania is the relatively low amount of bandwidth purchased. Given that much of the cable operators costs (or required returns) are fixed regardless of bandwidth sold (in other words the incremental costs per Mb are very low), anything that can be done to increase bandwidth purchased overall will improve the competitive situation. This has occurred repeatedly on the Mainland. Having a high DTCS price for Tasmania does the opposite.

Current DTCS pricing leads to poor LTIE outcomes in Tasmania

We contend that this extra cost of bandwidth across Bass Strait negatively impacts the LTIE either directly or indirectly. Directly by being sold a poorer quality network or inability to access some providers; and indirectly by having to pay more for their internet.

The soon to be implemented NBN 50 bundle is setting the benchmark for the standard residential grade NBN connection. It includes 2Mb of CVC and is being sold by NBN for $45/month. Let us assume that IP Transit or peering costs $10/Mb on average.

We note that the 2016 DTCS price for 500Mb from Hobart to Melbourne is $12,202/month ($24.40/Mb). The same sized “tail-end regional” connection is $2,762/month ($5.50/Mb).

The direct cost price of providing the NBN50 bundle to a regional area is: 45 + 2*(5.50+10) = $76/month

The direct cost price of providing the same bundle in Tasmania is: 45 + 2*(24.40+10) = $113.80/month

That is an increase of $37.80 – almost 50% – in the direct costs that someone (RSP or end user) has to pay per connection per month.

It should also be noted that we have been finding that, to offer an “unlimited” (no data cap) connection, becoming the standard on the mainland, requires in excess of 3Mb per customer – this widens the gap in the above calculation even further.

As bandwidth demand increases, Tasmania is in danger of becoming stranded as a high priced and/or poor quality internet region of Australia. This is particularly ironic given that is has the highest penetration of NBN FTTP and thus should have some of the best internet!

Evidence for our submission

Launtel opened residential services in October 2017, priced similar to the market. After rapid growth, by January it was clear the growth was not sustainable at the current prices. We had to reprice the 50/20 (the entry level internet) at $105/month for a 750GB download service – well above the market.

Aussie Broadband initially opened up services in Tasmania in September 2017, by April 2018 the whole of Tasmania is on “stop-sell” awaiting a bandwidth upgrade. This has been slated (according to their website) for 31st July – a significantly longer period than normal. Phil Britt (CEO) has written on Whirlpool that Telstra charge “drug money” for the link – https://forums.whirlpool.net.au/archive/2716701#r56143304 and they are expecting to negotiate for better pricing.
Phil Britt has stated that they have no plans to upgrade to do the same 10Gb links or provide redundant links that they are doing on the mainland due to their cost – i.e. they are providing a lower quality network.

Damian Ivereigh
CTO Launtel

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

When the NBN was first floated one of the primary goals was to “level the playing field”. Telecommunications usually favours the large player due to the amount of capital required for infrastructure. For 20 years Telstra called pretty much all the shots in the Australian telco industry and played a game of cat and mouse with it’s arch-nemesis the ACCC. Telstra was famous for favouring its own retail division over any of its wholesale customers for example. While NBN (along with the structural separation of Telstra) has done much to level the playing field, there have been a number of smaller, apparently less significant, decisions that seem to be going in the opposite direction.

Phil Britt of Aussie Broadband has publically criticised a proposed extension of the time before NBN will force telcos to switch off their old “special services”. Firstly I would like to point out I fully support Phil’s position, but I would like to add some meat onto the bones. Yet again we see the big telcos manipulating NBN to their own ends at the expense of Australia.

So why should you care? If your NBN is delivered over FTTN (Fibre-to-the-node) technology, which is the case for the vast majority of Australians, then a delay here will mean that you will have slower, less reliable internet for longer.

One of the downsides of FTTN is that it uses the same copper that is also used for phone lines, ADSL and also these “special services” – predominantly a phone technology called ISDN used by many businesses. Unfortunately when you run two copper cables next to each other, there is a tendency for the signal to jump from one cable to another – this is called “crosstalk”. The higher the frequency of the signal, the more that this is a problem and FTTN uses very high frequency signals. This crosstalk causes interference.

During the migration period when people are both using the old technology and the new FTTN technology (called in NBN parlance “co-existence”), to reduce this interference NBN have reduced both the frequency range and the signal power of the FTTN nodes. Because of this people have reduced speed and a less reliable internet connection.

Under the original FTTP rollout, there was an 18 month migration period when all the regular services (phone and ADSL) were forcibly migrated across to the NBN. There was actually no technical reason for this (copper and fibre run just fine side-by-side), it was purely a political and economic one. At the time the remaining copper based “special services” were the can that was kicked down the road to be dealt with later. However under the FTTN technology a decision to delay has real consequences.

Under FTTN the same 18 month migration period exists for phone and ADSL. We were all looking forward to the co-existence period ending after 18 months and people’s connections being turned up to full power, however because of these special services NBN still hasn’t turn off the “co-existence” mode at the node and is now talking about delaying it again.

So why would the big telcos be requesting a delay on this? As usual it is all about money. Firstly a telco typically earns more money on the old legacy services than the newer NBN ones. Secondly a telco has to engage with their customer and help manage the process for migration, this of course costs money. Thirdly whenever there is a network change, it typically is a time when a customer will re-evaluate its choice of supplier.

Indeed the biggest barrier to competition in the telco space is sheer customer inertia – if a service is basically working most customers are, quite reasonably, nervous to make any changes. This is unfortunately due to their experiences with the major telcos who regularly stuff things up during migrations.

The large telcos would very much like their customers just to do nothing and keep buying from them. However they are doing this at the expense of the quality of the internet for the rest of us. They have had plenty of time (years) to plan and execute this, if they are still not ready, then clearly they don’t want to be ready and are using this as yet another way of keeping the more nimble challenger telcos off their turf.

Damian Ivereigh
CTO Launtel
19/09/2018