TPG Telecom has captured the essence of internet industry frustration with the NBN, lamenting a decade spent discussing the “inefficiencies and complexities” of NBN pricing with little to show for it, and no substantive changes on the horizon.
The commentary is contained in the first part of TPG’s response to NBN Co’s latest pricing review, which offers two ways to increase NBN prices while delaying any substantive changes until FY24.
From the outset, this is a price review that no retail service provider (RSP) - or indeed internet user - is going to be greatly excited about.
And TPG in its submission to NBN Co - obtained by iTnews - expresses clear frustration at NBN Co’s long-term inaction on price, despite almost all its RSPs being on the same page regarding the need for change.
“TPG notes that NBN Co and RSPs have been having the same conversation about the inefficiencies and complexities inherent in the NBN two-part pricing construct since at least 2011,” TPG said.
NBN Co’s wholesale prices contain a fixed cost component (the aggregated virtual circuit or AVC) and variable cost component (the connectivity virtual circuit, or CVC).
Both components are bundled together by NBN Co in various ways; however, the bundles often do not contain enough CVC, and therefore RSPs must buy extra (known as ‘overage’).
The unknown costs exert pressure on margins and retail prices, and RSPs have wanted NBN Co for some time to move to a single flat-price structure.
NBN Co, however, doesn’t want to entertain these conversations over the short-to-mid term.
It is instead offering RSPs a meagre choice: pay more variable overage (“option one”, or agree to a $2 fixed component price hike and still pay for overage but less of it (“option two”).
For TPG, neither option is particularly palatable, but it is leaning towards option two, which is likely what NBN Co wanted when it tabled the proposals.
“NBN Co is using its pricing power in an opaque way, presenting choices that are not choices at all,” TPG said.
“TPG assumes that NBN Co is incentivising RSPs to prefer option two.
“However, while NBN Co benefits from increased certainty on revenue inflow (compared to more difficult to forecast overage charges), RSPs still carry overage risk.
“The material difference between option one and option two from an RSP perspective is simply the difference in risk premium paid for a higher or lower level of overage risk.
“Neither option is objectively good.”
If pressed, TPG said that “option two is preferred over option one”.
“[But] TPG believes neither choice is optimal as the inclusions are inadequate,” it said.
As others have repeatedly pointed out over the past decade, TPG argues the effective pricing of NBN services “should decrease year-on-year, preferably by holding headline prices but increasing CVC inclusions.”
“As a general rule, an increasing usage of a predominantly fixed-cost (or upfront ‘sunk’ cost) infrastructure should lead to consistently decreasing unit prices over time in a competitive market, not an increase as is being proposed by NBN Co,” TPG said.
Further, assertions by NBN Co that it has progressively reduced its CVC prices over the years to the benefit of RSPs and consumers “mischaracterised what has occurred over the last ten years”, TPG said.
“The reality is the CVC construct provides automatic increases in costs for RSPs,” it said.
“NBN Co then periodically reduces CVC prices to mitigate the impact of these changes but ensures that some of the overall cost increases go to NBN Co’s bottom line.
“Gradual overall cost increases for RSPs are not a reduction in prices.
“TPG is concerned that NBN Co is proposing to continue with this CVC pricing subterfuge.
“Indeed, the current pricing proposal adds to the ever-increasing complexity of NBN pricing, masking the ongoing drive to increase RSP costs per end user.”
Like other RSPs, TPG is tired of NBN Co’s constant price “discounts” and bundled offers, which make it hard to predict future take-up or usage with any certainty.
“One of the key drivers of take-up rate of different speed tier products has been short-term marketing incentives provided by NBN Co,” TPG said.
“Given this, it is near impossible for TPG to provide guidance on future speed tier mix without knowing details about NBN Co’s ... roadmap.
“The market is already so distorted, no reasonable forecast can be made as RSP decisions are driven by NBN Co’s short-term incentives.”
Only by properly addressing the embedded problems with pricing will the network achieve its potential, argues TPG.
“NBN Co can spend a lot of resources circling around the secondary and tertiary issues, but if its products are not attractive on price, nothing else will have the material improvement in the take-up rate that NBN Co is seeking,” the RSP added.
Vocus, Optus joins calls
Vocus is also focusing its own pricing review requests on longer-term change.
It is unclear what the company’s position is on the immediate two options on the table, though Vocus’ retail chief executive Antony de Jong referenced the likely outcome, as iTnews did last month.
“The only certainty established by this NBN pricing review is that retail broadband prices will consistently increase to keep pace with NBN’s increasing wholesale costs,” de Jong said in a statement.
“To set NBN pricing in the best interests of Australian consumers and businesses, and to support a sustainable and competitive market for retailers, NBN must abolish CVC and introduce flat-rate speed tiers to meet a range of different customer needs.”
A portion of Vocus’ submission to NBN Co, obtained by iTnews, similarly points to the repeated conversation between RSPs and NBN Co over the years.
“NBN Co’s stated objectives of providing ‘certainty, value and simplicity’ closely reflect Vocus’ submission to the 2019 pricing review, where Vocus called on NBN Co to fundamentally reform its wholesale pricing to be affordable, predictable and simple,” Vocus said.
“However, NBN Co’s wholesale pricing regime - and the amendments suggested in its  review paper - do not achieve these objectives.”
The content of Optus’ full submission to NBN Co is unclear, but vice president of regulatory and public affairs Andrew Sheridan rounded on the proposals.
“The direction of the current, short-term options will lead to poor outcomes for consumers and for the industry, as the cost to connect to the nbn will likely increase while prices remain constant,” Sheridan said in a statement to iTnews.
“NBN Co should be transparent and own these cost increases which are intrinsically linked to the substantial benefits of having this national infrastructure.”
“For the benefit of customers, NBN Co should engage with industry on a price reform overhaul - this should not be put off until 2023.”
An NBN Co spokesperson said the company is "open-minded and will be pragmatic about alternative wholesale pricing constructs which could deliver beneficial outcomes for customers and the industry."
"NBN Co views the proposed 24-month wholesale product and pricing roadmap as a baseline only," the spokesperson said.
"It will not prevent us from introducing a new wholesale pricing construct if required, providing it supports our ability to reinvest in the network.
NBN Co added that it had "delivered significant value for customers, as well as increased certainty and simplicity for retailers" in its past two pricing consultations.