Would you pay $200 a month for 100Mbps?
The promise of a hyper-fast, state-sponsored national broadband network was mitigated by the high consumer cost to access it, a telecoms industry conference was told last night.
Speaking at the Telecoms World conference, senior analyst with stockbroking firm BBY Mark McDonnell said the oft-touted $43 billion cost of what he said was an "inherently inefficient" Federal Government-funded network "doesn't appear to be based on any detailed study".
McDonnell said there was a risk that the Government was buying what it should otherwise lease.
"There is no clarity around the underpinning assumptions or about the kind of network or industry arrangements implied," McDonnell said.
His revenue models predicted that for the network operator to be reasonably profitable, consumers would need to pay $200 a month, a figure dismissed by Deutsche Bank analyst Sameer Chopra and ridiculed by Primus Telecom managing director and chief executive officer, Ravi Bhatia.
McDonnell took a swipe at Broadband Minister Senator Stephen Conroy saying that while the minister and other NBN proponents "ridiculed the proposition that consumer prices up to $200 a month would be needed for broadband to cover the costs but avoid giving any statements about what it could or should be".
He said on these figures the network would need to pass about 8.5 million houses and 1.5 million businesses, assuming 10 percent return on assets a year and operating costs of about a third of the capital costs. In such a scenario, operator NBN Company or NBNCo would seek about 15 percent a year profit after tax.
"These are far from aggressive return expectations," he said.
He said that rather than build infrastructure ("pits, poles and ducts"), the Government through the NBNCo should consider leasing Telstra infrastructure.
"As a lower-cost alternative it may be more cost-effective and faster to market if NBNCo would buy Telstra's facilities assuming they agree to sell or those of other utilities."
McDonnell criticised what he called the Government's "high-risk" strategy of deploying a national network with speeds of 100Mbps to each house and business.
"No one has yet provided any real evidence relating to unmet demand for 100Mbps broadband delivery for the household," he said. "No one from Government has been able to give any clarity as to the prices consumers or wholesale customers would be expected to pay."
He said such infrastructure investment was an answer in search of a question that didn't consider the alternatives such as wireless and DOCSIS 3 cable modems, the ancillary costs such as finance for such a project or even if there was a demonstrated need for it?
"There is no clarity around whether the putative $43 billion is simply the construction and deployment costs or does it make some allowance for the startup losses of NBNCo?" he said "How many months or years of losses are being funded by this notional $43 billion capital commitment?"
And he warned the final cost could blow out once interest payments were considered.
The Government was "placing a higher policy value" on competition than "productive efficiency" by rolling out an "inefficient and complex" network that duplicated infrastructure, McDonnell said.
Suggesting that the NBN was "irrational", "emotionally charged" and "lacking in any measure of financial or commercial rigor", McDonnell said it was "one thing to invest for future growth, quite another to create a new network for provision of future services for which there is little meaningful definition or defined demand".
"When it comes to risk, this is about as high risk as it gets," he said.
But the BBY analyst's figures were disputed by Deutsche Bank telecommunications analyst Sameer Chopra, who said the wholesale access price will be closer to $30 a head and about $50 at retail.
Chopra said the NBN should be completed for about $25 billion or $27.5 billion once finance costs were considered, including the $11 billion "gift" from the Government.
"That's not a big number in the scheme of things," Chopra said, referring to the Government commitment. NBNCo would be EBITDA positive in its fifth year and NPAT profitable by its seventh, he said.
Primus Telecom managing director Ravi Bhatia said he already spends about $200 a month on pay TV, a landline and internet access. And he said that if traditional finance models were applied to water supply systems or at the start of the Steam Age, we wouldn't have running water or railways, respectively, today.
"If you sit and calculate using traditional financial models, it doesn't make any sense," Bhatia said, dismissing McDonnell's projections.
"We don't even know what technology will exist (to take advantage of the network).
"Who could have made a financial model for the steam engine?"
Bhatia went on to criticise Telstra tangentially: "Are we going to be held back by one company? That's the question we need to answer."
And he dismissed wireless as a replacement for cables and ducts because it was a shared resource that degraded quickly as more people used it and bumped up against physical laws of nature.
"It's total BS," he said.