The fee that is breaking the NBN

It's the "biggest challenge affecting the NBN", if you ask Australia's retail service provider industry.

Forget nodes and distribution points, three innocuous letters - CVC - pose one of the largest problems to the NBN's business model and the future viability of the network.

'Connectivity virtual circuit' is not a phrase the wider public is likely to be aware of, but it has a huge impact on whether end users will adopt - and more importantly, use to its full capacity - Australia's national broadband network.

At the recent CommsDay conference for the telecommunications industry, that three-letter acronym was all anyone could talk about.

Superloop CEO Bevan Slattery labelled it "galactically stupid". Optus' David Epstein said NBN had failed to keep up with modern broadband usage, and Vocus COO Scott Carter called it the "missing piece of the puzzle" to the success of the NBN.

It's not a new problem. RSPs have for many years complained about the fee they are charged to purchase bandwidth on the NBN, which (until yesterday) sat at $17.50 per Mbps of traffic per month, regardless of how much was bought.

Under-provisioning of CVC to save costs was in February labelled by NBN as the cause of service issues in the Macquarie and Newcastle areas of NSW for FTTN users.

The CVC model, RSPs argue, poses the very real risk of the NBN becoming unaffordable for both RSPs and customers as end users demand the higher download quotas required to service the ever-growing adoption of streaming products - a "bandwidth tsunami", as Carter termed it.

For example, calculations last year by NBN blogger Kenneth Tsang show that a 12/1Mbps plan on the NBN could grow to cost over $150 per month if the current approach to CVC remains.

The national network builder has heard the concerns, and this week moved to address an issue which has quickly gotten worse with the meteoric rise of streaming services like Netflix.

A new tiered system - what NBN is calling dimension-based discounts - will be trialled for the next two years to see if it fixes the problem. This approach sees CVC charges fall per Mbps as more bandwidth is purchased.

The move was cautiously welcomed by the industry, but many argued it didn't go far enough.

The Netflix effect

Popular streaming service Netflix arrived down under after much anticipation in March last year.

In the three months following its launch, Australia posted its largest ever increase in data downloads on record, according to the Bureau of Statistics.

Fixed-line subscribers downloaded 1.35 million terabytes of data in the three months to June 30 last year - a 40 percent rise on the same time in 2014.

This week, the ABS said data downloads continued to rise through the back half of 2015, up 50 percent on 2014 to 1.71 million terabytes.

If it wasn't clear before, the immediate takeup of Netflix made it painfully obvious that NBN's approach to charge RSPs the same amount per Mbps regardless of volume was no longer sustainable.

As Tsang points out, Netflix suggests 5 Mbps of bandwidth is needed to stream in HD, meaning RSPs would need to buy 5 Mbps of CVC to guarantee adequate service per household - a cost of $87.50 per customer.

That's just for CVC alone. Adding in all the other fees RSPs are levied to provide services on the NBN would bring the total wholesale cost of an average 12/1 Mbps service to $161.50 per month.

Coupled with margins needed to make the service profitable for RSPs, it hardly makes the plan affordable for end users.

NBN itself has admitted that total average monthly usage per end user on the network had jumped from 75 GB last February to 128 GB currently.

Under the new pricing structure, NBN will charge $17.50 for the lowest tier - 0 to 399 kbps - decreasing down to $11.50 for the highest tier, 1600 kbps and above.

Given the most popular tier is 700kbps to 848kbps, RSPs on average will see their CVC charges drop to $15.75.

But if you ask Australia's second largest telco and NBN reseller Optus, it's not enough.

Optus head of corporate and regulatory affairs David Epstein said despite the changes, NBN was still stuck in an "old internet model" that encourages underprovisioning, causing speed issues and punishing high usage.

"The CVC pricing construct effectively drives RSPs to reduce end user costs by provisioning their networks to achieve a minimum level of acceptable speed through the peak period, rather than to maximise peak throughput," he told the CommsDay conference.

"In effect, CVC pricing forces RSPs to have little or no throughput headroom in peak times, leading to adverse customer outcomes."

Superloop CEO Bevan Slattery labelled CVC pricing "galactically stupid", noting that connecting to an NBN point of interconnect (PoI) was more expensive than buying bandwidth internationally.

"The cost of international capacity, I think, is going to remain cheaper than the CVC charges," he said.

"So international capacity for the next five years or 10 years is going to be cheaper than the CVC charges.

"There is no way it should be cheaper to get connected from nextdoor to the PoI next door than it should be to go transcontinental. That's just crazy."

Average usage

The new model would also "hamstring" some companies by judging individual RSPs on what the rest of the industry was doing, RSPs say.

The new fee structure determines price tiers by average usage across NBN's entire RSP partner base, rather than tailoring pricing to individual RSPs.

The network builder said the industry average model allowed it to get the price changes implemented more quickly and effectively, but said it may look at moving to a tailored model down the track.

However, NBN's RSP partners argue this should have been the first approach.

"We cannot have a CVC model that doesn't reflect the user base I have in my business," Vocus chief operating officer Scott Carter said.

"We need an RSP dimension-based pricing model for CVC. Solve that last piece of the puzzle, and the cog on the right will really start spinning. At the moment it's holding back migrations of customers who potentially could or should be on an NBN service today.

"But the reality is we can't afford to move them into that environment until we get certainty about the future."

Success of the NBN

The core issue with the current model hits right at the centre of the NBN's premise: customer take-up.

The success of the NBN depends entirely on end users adopting services and using the network to its full capacity. To achieve this, speeds, pricing and reliability are key.

While the new pricing model goes some way to addressing this by lowering the cost of provisioning more bandwidth to bring it more in line with current broadband usage levels, RSPs say, the affordability problem remains.

"Australia does not get the benefits of the NBN unless we have mass market adoption of NBN services. That needs to be the primary role," Carter said.

"Customers are being sold the vision of high-speed services on the NBN, and in periods of high demand, like the evening peak, these demands are increasingly hard to meet because of the relatively high price of CVC," Epstein said.

"And that's not likely to change, notwithstanding foreshadowed alterations to CVC charging in the near future. You need a pricing model that unlocks the capability of the NBN without penalising customers for using that capability.

"People have heard about the Kool-Aid, but they want to be able to afford to drink it."