NBN cost model 'entrenches' Telstra, Optus

Small-to-medium national ISPs 'dead' without sub-wholesalers.

Internode managing director Simon Hackett has claimed as few as five national ISPs have the scale to pay for a direct wholesale feed from NBN Co based on publicly available cost models.

Hackett told delegates of the CommsDay Summit in Sydney that any ISP with fewer than 250,000 customers nationally would only exist in an NBN world if they took a sub-wholesale feed from the likes of Telstra or Optus.

He said that the costs for an ISP to interconnect directly with NBN Co's network at a national level were particularly "insane" for access seekers with less than 10,000 customers across Australia.

Hackett produced calculations that showed connecting 10,000 customers to an entry-level NBN voice and data bundle - 12 Mbps with 30 GB quota - and sufficient backhaul bandwidth would cost $106 a user a month to provide.

The numbers were better for an ISP with 100,000 customers nationally but still likely to make it hard for such an ISP to compete against larger operators.

"Even with 100,000 customers, you are paying a few dollars more a month and a 'few dollars' is what breaks ISPs," he said.

"One hundred thousand customers doesn't sound like a small ISP but it's enough to make you uncompetitive."

The quarter-million sweet spot

The sweet spot in NBN price models appeared to be 250,000 customers nationally. Any less and the overheads to keep those customers connected to the NBN would quickly make the ISP uncompetitive against its larger peers because the monthly wholesale costs cut margins or exceeded what the ISP could realistically recoup in service fees.

A national ISP with 250,000 customers would pay around $30 a user a month to keep customers connected directly to the NBN, Hackett said.

That consisted of a base service cost of $25.82 and a $1.46 fee that Hackett said the ACCC had added to ISP costs through its decision to decentralise NBN points of interconnect.

"The input cost is not lower than the total cost so it's not insane," Hackett said.

But it still pegged NBN overhead costs at some $10 million a year plus GST - out of reach for many ISPs.

And if 250,000 customers was the economic cut-off to take a direct wholesale feed from NBN Co, only five ISPs in Australia would be able to afford the direct feed, Hackett said: Telstra, Optus, iiNet, TPG and Internode.

That went against the "feeling of rhetoric" from NBN Co, which expected "dozens" of ISPs to take direct wholesale feeds of its Layer 2 service, he said.

"Anyone smaller than us can't survive the NBN cost model," he said.

"At 10,000 customers it's insane to connect to this [NBN] network at a national level. This is why [Optus and Telstra] wants to sell wholesale services to 10,000-customer ISPs because [those ISPs] are dead without it.

"Optus and Telstra Wholesale are the only paths through which smaller national players will exist in the NBN world.

"The middlemen will be more deeply entrenched than ever because there will be nowhere else [for small-to-medium ISPs] to go."

The cost disadvantage for smaller national ISPs would be further entrenched because the NBN sub-wholesalers would add their own fees that retail ISPs would have to pass on.

Hackett said that a 250,000 cut-off point was "way too high", believing NBN Co should try to make it possible for national ISPs of 10,000 customers not to be priced out of taking a direct NBN feed.