NBN is too expensive for the innumerate

A spirited multi-pronged assault has been waged on NBN pricing, pursuing a familiar technique to create a negative climate around the NBN project. David Havyatt explores the claims and finds them wanting.

David Havyatt.

It is nearly two months since the Australian Financial Review reported that the coalition was going to change its attack on the National Broadband Network to “focus on families and battlers rather than big-picture economics.” 

“When you bring home to people the prices they realise they can’t afford it and that is reflected in the take up rate,” the Nationals Senator Barnaby Joyce said at the time.

Since then we have seen attacks mounted on three separate fronts. And none of them stack up.

Internode prices

The initial assault was based on the release of Internode’s NBN prices.

Internode’s price structure started at $59.95 a month for a 12 Mbps (download)/1 Mbps (upload) service and a 30GB anytime quota. This is marketed as a ‘Bronze’ service.

To increase the speed to Silver (25 Mbps/5 Mbps) add $10, to Gold (50/20) add $20 and Platinum (100/40) add $40 a month respectively.  Once you have the fee for the speed add $20 a month to increase the download quota to 200GB, $40 to 300GB and $90 to 1TB.

The price points for the Bronze plans are exactly the same as Internode’s existing naked ADSL2+ offers. The difference was that the NBN prices didn’t include voice, whereas the naked ADSL plan does, for which you get $10 in call credits.

The coalition’s attack focused on the high price for the very high speed plans. The assertion was that the price for Internode’s “top end plans” had gone up, but it compared the Platinum 1TB plan with the ADSL 1TB plan without recognising that ADSL 2+ will not deliver the Platinum speed. 

The five percent rule

The Coalition’s next attack followed the release of NBN Co’s Special Access Undertaking Discussion Paper. The Coalition deliberately misrepresented that document by suggesting that NBN Co was seeking to be able to increase prices by the rate of CPI growth plus five percent in future years. 

In fact, the paper commits NBN Co to constraining price increases on the basic and the most popular access products to half of the increase in CPI each year. On top of this NBN Co has undertaken that all prices will merely reflect cost recovery overall.  The purpose of the CPI+5 percent constraint is to commit an upper limit to any individual price variations within the overall envelope.

Overview of NBN Co pricing commitments (Source: NBN Co SAU discussion paper)

Curiously, the overall pricing construct is very similar to the way Telstra’s competitors (FANOC) proposed in their undertaking for a fibre-to-the-node network.

In its assessment of the FANOC undertaking, the ACCC noted that “this ensures overall prices are set such that the regulated firm only recovers its efficient costs over the lifetime of the SAU, it does not specify or constrain the price path for individual services at specific points during the SAU.” (P.83)

The NBN Co undertaking is merely adjusting for one of the critical factors that resulted in the ACCC being disinclined to accept the FANOC undertaking. Mr Fletcher, as Optus’ regulatory chief when the undertaking was prepared, has been quiet on this point. Unfortunately his colleague Mr Turnbull isn’t prepared to let it go.

Downloads and monthly fees

The release of iiNet’s NBN pricing created a new dilemma.  The plans differ from the Internode plans in referring to the speeds as Standard, Fast, Faster and Fastest; and having different download limits specified as peak and off-peak. But the methodology is much the same.

The basic plan (12 Mbps down/1 Mbps up and 20+20GB) is $49.95 a month. To increase the speed to Fast (25/5) add $5, to Faster (50/20) add $15 and Fastest (100/40) add $20 a month respectively.  Once you have the fee for the speed add $10 a month to increase quota to 100+100 GB and $30 for 500+500 GB.

All of a sudden, NBN prices no longer seemed high at all, so the Coalition’s attack switched to comparing the download allowance in the NBN plan to existing basic iiNet plans by calculating the per MB charge at the “basic” level.

The table below shows iiNet’s three naked ADSL plans compared with their NBN plans. The NBN plans don’t include a VoIP line (iiNet charge $9.95 for it) while the ADSL do, so the monthly fee for comparison is adjusted by subtracting $9.95.

Table: iiNet’s ADSL and NBN prices compared

So the only way the NBN prices can be construed as being more expensive than the ADSL prices is the route Mr Fletcher chose, to divide the dollar fee by the number of Gigabytes in the basic plan. But the reality is that iiNet has effectively introduced a new basic plan. 

An iiNet customer today paying the effective $60 per month gets a 50 GB quota. For the same price on NBN they receive 100 GB.  The additional benefit is that there is a new lower entry price.

Context

Ever since the FttH strategy was raised, critics of the NBN have struggled with two issues; how can prices be cheaper after all the new capital investment and how can there be cheap prices from a monopoly rather than competition?

The capital challenge is mostly resolved by recognising the long time scale over which the large investment is recovered, whilst also considering the savings gained from the large annual capital expenditure cost for Telstra to maintain copper networks.

Meanwhile, we can’t necessarily assert that competition will always drive lower prices. While the ACCC has published an annual price index that shows prices declining since the introduction of telecommunications competition, the ABS index of communications charges inside the CPI index shows these declines are simply the continuation of a 30-year trend.

An econometric model presented to the 2010 Communications Policy Research Forum demonstrated that the entire decline in prices since the introduction of competition was better explained as a continuation of an “experience effect” than a reduced mark-up from decreasing industry concentration.

This effect states that every time cumulative production of a good doubles, the price will decline by a set amount (in this case 10 percent) due to the efficiencies gained through learning from prior experience.

We should anticipate more price changes and more FUD when voice-only plans are announced. And we’d be wise to do the sums before falling for overly-simplistic analysis of the plans.

What do you think of the NBN prices announced by iiNet?  Which service would you buy?