Telstra warns NBN Co will hit $55 ARPU 'by the end of FY23'

NBN Co's average revenue per residential user could hit $55 in FY23 if short-term price changes go through, $6 per user more than even the company’s “ambitious” forecasts, according to new modelling by Telstra.

The number is contained in Telstra’s submission to NBN Co’s wholesale price review, which iTnews has partially obtained.

Telstra - like other telcos - is underwhelmed by NBN Co’s latest price review proposals, which will almost certainly lead to higher retail prices for internet users.

How much higher is a key question, but Telstra said its models show planned price changes will produce a far bigger windfall for NBN Co than expected.

“It is clear that the proposed pricing will see NBN Co exceeding even its own already ambitious financial targets, taking a higher share of industry revenues, ultimately to the detriment of home and business broadband users,” Telstra said.

“We are concerned that NBN Co’s proposed pricing will lead to over-recovery of its efficient costs and overshooting of its corporate plan residential average revenue per user (ARPU) target of $49 by FY24.

“On the roadmap proposed, Telstra’s modelling suggests NBN Co’s residential ARPU will hit $55 by the end of FY23.”

NBN residential ARPU has been stuck at $45 for some time; an increase to $55 would produce a substantial price hike.

To check its own model, Telstra asked NBN Co to be “more transparent” and to share its internal assumptions and modelling, “including plan mix and expected usage growth rates, demonstrating how the charges in its pricing roadmap will recover but not exceed its efficient costs or corporate plan residential ARPU target.”

The telco also said NBN Co should also “adjust its pricing or implement a mechanism ensuring that its standard pricing will not lead to net payments exceeding its efficient costs and forecast residential ARPU.”

NBN Co's executive general manager of commercial Ken Walliss refuted the suggestion that residential ARPU could climb to $55, saying in a statement that the company's forecasts had "been consistent ... for many years".

"As reiterated in the most recent corporate plan 2021, 'residential ARPU is expected to grow to $49 during the corporate plan period' (2021 – 2024)," Walliss said.

"As outlined in our H1 FY21 financial results to December 31 2020, residential ARPU remained steady at $45 in the first half, and has been relatively flat for the last 12 months primarily due to the CVC boost that commenced in March 2020 and was extended to January 2021. 

"We remain on track to achieve our ARPU target of $49 by FY23."

In the short-to-mid term, while NBN Co’s variable cost connectivity virtual circuit (CVC) construct remains, Telstra suggested NBN Co should revise the amount of CVC bundled with each residential plan on a quarterly basis, and add “significantly more” each time to keep pace with data growth.

This is a common and long-running theme among retail service providers (RSPs) - that residential plans are substantially undercooked, leaving retailers to pay an ever-widening gap.

Telstra also wants NBN Co to change the way it charges for CVC, “which has to be provisioned in advance of expected demand, rather than simply charging RSPs for actual demand.”

“Daily peaks and troughs in demand are difficult to predict – pre-booking the right amount of capacity to cater for short-term, heavy-use events such as gaming updates is most challenging,” Telstra said.

“When too much capacity is provisioned to some circuits this imposes unnecessary cost. 

“When too little capacity is provisioned to other circuits, the broadband experience for end-users becomes congested and slow.

“The whole process is also needlessly complicated and resource intensive, for both NBN Co and RSPs.”

Ultimately, however, Telstra is hoping to see more fundamental changes to NBN Co’s pricing structure, which would dilute the current problems with CVC.

“Longer term, there must be a move to a better, lower priced, NBN pricing structure that removes the fundamental disconnect between the current uncertain CVC/overage charge based regime, and the affordable unlimited retail plans that customers demand,” it said.