Notes from 2022
This is Part 5, where we discuss in brief the economics of the NBN,
and why it simply doesn't stack up in its current form.
Part 1 focuses on the cultural deficiencies
Part 2 focuses on the failings of FTTN.
Part 3 deals with the HFC network and ways
in which it can be salvaged
Part 4 explains why the LTE network was poorly
thought out from the start.
Part 6 hammers home the fact that all of this
is a result of shameless and disgusting short sighted political manoeuvring
by the Liberal Party to protect the interests of Rupert Murdoch and other
corporate friends such as Telstra.
An NBN retrospective - Part 5.
One of the major hurdles to the NBN being a profitable enterprise is low
Average Revenue Per User (ARPU). The cause for this is multi-faceted, and
I make no pretences that I am an economist so this section will be short,
however there seem to be two major causes for NBNCo’s money troubles:
High bandwidth costs make high-speed plans unfeasible
High speeds are unattainable over most technologies
The cost of purchasing bandwidth on the NBN is very high compared to
other wholesale networks. NBNCo’s pricing structure involves two access
charges, billable to RSPs: the Access Virtual Circuit (AVC) and Connectivity
Virtual Circuit (CVC).
The AVC is a per-connection charge, essentially the equivalent of the traditional
line rental. AVC is charged based on the link speed between the end user and the
RSP’s network and can be considered the “base cost” of providing an NBN service.
For example, a 50Mbps downstream/20Mbps upstream (50/20) AVC provided over FTTP
or HFC costs an RSP $34 per month. This is not the only cost to the RSP, however.
Per the Wholesale Broadband Agreement (WBA), the AVC charge only covers the speed
of the connection between the end user and the handoff to the RSP’s network. Using
the plumbing analogy, the AVC charge determines only the size of the pipe between
the end user and the POI. The RSP must also pay for the data sent across that connection.
CVC is a very controversial and divisive topic. CVC is a charge billed to RSPs based
on how much data they transfer over the NBN, and currently costs $17.50 per Mbps per
POI. A few years ago, most RSPs were engaged in a pricing race to the bottom in
order to try and capture new customers during their transition to the NBN. This led
to many severely under provisioning CVC at the POI, causing excruciating peak hour
slowdowns even on FTTP. Again using the plumbing analogy, CVC determines the size
of the pipe between the POI and the RSP’s own network. In order to keep costs down,
RSPs were under sizing the pipe for the amount of flow, and as such the pipe was
The ACCC eventually intervened, forcing RSPs to advertise the “typical evening speed”
for each service, which is a decent indicator of whether or not the RSP has purchased
enough CVC from NBNCo. This of course led to RSPs actually purchasing enough CVC,
as none wanted to be seen selling 100/40 AVCs which could only realistically hit 25/5
during peak hour. This stopped the race to the bottom price-wise, and now most RSPs
offer very similar prices for equivalent services.
Part of this under provisioning scheme remains today, however. One may have noticed
that a 50/20 AVC would, naturally, require 70Mbps of CVC to use to its full potential
and as such should cost $30+(70*$17.50). But the typical 50/20 service costs
around $70 a month, not $1,259 a month. This is because RSPs use statistics to
minimise the amount of CVC they must purchase at each POI. The key assumption
is that not everyone is going to be saturating their connection at the same time
24/7, and so RSPs can provision enough CVC to satisfy average peak demand across a
given POI, rather than trying to provision enough bandwidth to satisfy constant
The average amount of CVC provisioned per AVC across the NBN is around 2.3Mbps,
up from around 1.8Mbps during the worst of the pricing war. If we assume a
provisioning of 2Mbps CVC for a typical 50/20 service, then the NBN cost-price
of such a service is $691. NBNCo are attempting to bring this figure up to 2.5Mbps,
however this problem is indicative of a wider issue with NBNCo’s pricing scheme,
which is acting as a huge barrier to uptake of higher speed plans.
The cost of bandwidth is fixed. That is, it costs NBNCo the same whether you
download 1GB or 1TB. Thus, CVC is a manufactured cost. CVC was conceived in order
to help fund the rollout by minimising the impact on the public treasury and is
essentially a bandwidth tax. It also served a political purpose; the
Liberal Party would attack the NBN for being an unprofitable venture and so
CVC was used to ensure that the network would be profit-making early in its
life to pre-emptively quash such an angle from its detractors.
Under the original FTTP plan, the CVC charge was to be gradually lowered and
then removed as NBNCo’s costs fell. The key to making this work was that FTTP’s
maintenance costs are extremely low, and beyond the initial rollout, overheads
would be somewhat fixed outside of upgrades and emergencies. However, in late 2013,
plans changed. With the change to FTTN/HFC/FTTB/anything-that-isn’t-FTTP, NBNCo
could no longer rely on the assumption of low and fixed overheads. FTTN and HFC are
extremely expensive. Telstra’s old copper network alone costs NBNCo around $1bn a year
simply to keep running, let alone fault fixing and upgrades.
The reality is that the change in rollout plans has precluded the elimination of
the CVC charge, as was originally planned and has locked out much of the rollout
footprint from being able to attain even the currently available high speed plans.
Broadband prices will continue to remain artificially high simply to cover the
inordinate expense of maintaining this failed, dilapidated, stillborn network while
also trying to generate the 7% ROI expected of it.
Read the epic conclusion in Part 6.