ACCC casts doubt on future NBN profits

The ACCC has urged the government to reconsider the requirement for NBN Co to recover its costs and turn a profit.

In a draft report [pdf] on the communications sector unveiled today, the Australian Competition and Consumer Commission cast fresh doubt on NBN Co’s “medium term” economic prospects.

In particular, the commission recommended that the government “consider whether NBN Co should continue to be obliged to recover its full cost of investment through its prices".

“We consider further work could be done by the ACCC and the Department of Communications to examine this issue and in particular possible options that may provide NBN Co greater flexibility regarding its cost recovery objectives,” the ACCC said.

It put three potential options on the table: “direct budget funding arrangements for non-commercial services, debt relief measures, or an asset revaluation".

NBN Co’s business model has been firmly in the political spotlight since NBN Co CEO Bill Morrow warned last week that the network may never turn a profit.

But the prospect of an asset revaluation or writedown has already been dismissed repeatedly by the government, with communications minister Mitch Fifield confirming last week that remained the case.

On the issue of direct budget funding for future upgrades of the fixed wireless and satellite portions of the network, the government has also said it is against the idea.

It wants to instead fund these uneconomic areas in future using a $7 levy on NBN and NBN-like services. The levy is yet to pass the senate, but has cleared most major hurdles.

That would leave “debt relief measures” as the sole option on the table.

The government last year loaned NBN Co up to $19.5 billion of taxpayer money to complete its network.

The loan principal is expected to be repaid in full by 2020-21, but there are doubts about whether NBN Co will be in a financial position to refinance the loan or otherwise meet its commitments.

NBN pricing roof

The ACCC has previously decided to let a pricing inquiry between NBN Co and retail service providers (RSPs) run its course before intervening any further in that area.

But the commission raised its own concerns that the current price model may be unworkable.

It said NBN charges “represent a significant proportion of service providers’ total costs of supplying broadband services on the NBN".

“For example, for a $60 retail plan (which many service providers claim is the limit of many consumers’ willingness to pay for broadband services), the NBN charges represent 72 percent of the retail price,” the ACCC said.

“As such, service providers (and retail prices for consumers) are highly vulnerable to any changes in these input costs.”

One of the main components of the price is the connectivity virtual circuit (CVC), a bandwidth charge which grows depending on network usage.

Currently, RSPs buy on average just 1.084 Mbps of CVC per user on the NBN.

NBN Co CEO Bill Morrow has said he wants to see RSPs double their combined purchase of CVC to at least 2 Mbps per user, given that would improve end user experiences and also resolve some of NBN Co’s profitability problems.

But the ACCC today said there may be a relatively low limit under the current price model of how much CVC RSPs can realistically purchase before supplying NBN services becomes unviable.

“Once CVC is more than approximately 4 Mbps per end user, for example, the cost of NBN charges alone will be more than $60 per month across all speed tiers,” the ACCC said.

“$60 is the price level that some service providers have stated may be the limit of consumer willingness to pay for broadband."

The commission said some service providers may find themselves unable to provide customers with "competitive and commercially viable" NBN offerings as consumer data - and therefore CVC - levels increase.

“While some service providers may be able to ride out a prolonged period of below cost retail prices, other service providers may need to merge to build scale or be forced to exit the market if they are unable to sustain competitive offerings," the ACCC said.