NBN technicians

Gigabit NBN: demand is there, but NBN pricing isn’t

It’s not that there’s no demand, it’s that NBN’s pricing model makes it impossible for providers to put any gigabit services to market.

There’s a common misconception that there is “no demand” for gigabit Internet services in Australia. After all, if there’s no actual customer taking up a gigabit service on the NBN — how can there possibly be any demand?

Apparently, despite providers around the world actively and successfully selling gigabit connections to speed-hungry residential customers, Australians are so “agile” and “innovative” that they see no need for higher speed connections that our counterparts in the rest of the developed world seek for.

At least that’s what the latest spiel from The Australian may lead you to think.

Of course, the paper is absolutely correct in saying that the only NBN customers on gigabit connections are “trial” connections by service providers. But what the article neglects on is the context: why Australians are always seemingly so special compared with the rest of the world. A inhibitive pricing model.

Where did the pricing go wrong?

I’ve written extensively about the issues with the NBN Connectivity Virtual Circuit (CVC) pricing model. Effectively, providers have to buy virtual bandwidth capacity (CVC) that’s shared across all^ the users from a single retail service provider (RSP).

If a provider buys only 100Mbps of CVC: at any point in time, the sum of all traffic across all users from that RSP will be capped at 100Mbps. It doesn’t matter if the provider has 50 x 100/40Mbps connection, the maximum the provider can transfer across all users is 100Mbps.

The problem is that it is set at an artificially high price to ensure revenue to the NBN company.

This means, to even consider offering gigabit plans, a provider must have enough customers at each point of interconnect to need at least 1Gbps of CVC… which comes in at $17,500 ($17.50 per Mbps before GST).

NBN will soon be introducing dimension-based discounts which will give more generous CVC discounts to providers who buy more CVC on a per-user basis, but it still puts 1Gbps residential plans in the realm of impossibility.

Let me be clear —it’s not that there’s no demand for gigabit plans in the residential market. It is that it is too cost prohibitive and far too risky for providers to offer gigabit services to consumers due to the NBN CVC pricing model.

Under the current pricing model, which to be fair to the current Government, was brought in when the NBN was first introduced by Labor… the NBN rollout must reach critical mass at each point of interconnect and have a significantly reduced cost per Mbps for CVC in order for NBN plans with speeds higher than 100Mbps to start showing up.

Providers overseas, for example AT&T, are offering gigabit services at USD$70 which converts to around AUD$100. With the current CVC model at an arguably high 1:100 contention ration (i.e. 10Mbps of CVC allocated for a 1Gbps connection), NBN costs alone would be over $300. That doesn’t even include interconnection, peering or backhaul costs.

I’ve argued in the past for a different style of dimension-based CVC pricing, where a proportional CVC contribution is paid per end user to make up for the revenue. In turn, NBN will manage the contention.

This would allow providers to offer 1Gbps plans to consumers before the rollout reaches critical mass, and increase the short term revenue for the project if there are more users who take up higher speeds. But such a radical change can’t happen without substantial industry consultation.

Regardless, it is a self-fulling prophecy to say that “there is no demand for gigabit services” when in fact the NBN pricing model is designed to prohibit gigabit services for residential connections.

^ effectively all customers serviced from the same NBN point of interconnect. There are limitations to how many users can be placed on a single CVC and which technologies can share a common CVC, but for all intents and purposes — this is irrelevant for this discussion.

Where’s the demand?

Even if the pricing issue is tacked… you might ask — why would there be demand for gigabit services? QHD content on Netflix only utilises 25Mbps of bandwidth; what applications possibly require more than that? While I can’t possibly accurately predict future applications, there is one obvious demand for high speed: productivity.

As “cloud” storage and computing becomes more and more widely used, there is increased need for burstable Internet connections. As a budding geospatial geek, say I need to transfer a large dataset from my computer to a cloud processing service (conceptually, backing up a large number of photos or videos to cloud storage would be an identical situation).

It would take me no less than 12 hours to transfer a 500GB raster dataset over a 100Mbps connection to my remote server. With a 1Gbps connection, this would reduce to just over an hour.

In this example — I don’t necessarily need the 1Gbps at all time. Perhaps on average, I need no more than a 25Mbps connection. But the productivity gains in having a burstable connection that can reach gigabit speeds when I need it to can be enormous. Rather than sitting and twiddling my thumbs for half a day to wait for my data to be uploaded, and another 12 hours to download it again, I can save some 20-22 hours all up simply by having the connection “on standby” (so to speak).

Infrastructure networks are rarely designed on an “average consumption” basis. If roads and highways, or water and power infrastructure were designed on what happens on “average”, traffic congestion, blackouts and water shortage would be a common problem during peak times.

Good power infrastructure, for example, is designed to cope with sudden demands for electricity. There is phenomena known as “TV Pickup” in the United Kingdom where there is a sudden increase in electricity demand during TV ad breaks — thanks to a large number of people simultaneously turning on the kettle across the UK.

Final words

So, this isn’t simple demand and supply here. Demand is not only driven by users… it is also a function of the NBN’s price structure.

The fact of the matter is, there is far more to the lack of gigabit services than meets the eye initially.

If we are indeed serious about the innovation nation, I call on both side of politics to put down their swords and look seriously at pricing reform for the CVC.  I seriously hope for some bipartisanship… if not at the technology front, then certainly at the pricing policy front.

NBN: Dimension-based CVC explained

Price signals to more high capacity plans and less network congestion

The NBN pricing discussion has hit full swing again.  The company responsible for building the National Broadband Network, nbn, has just pushed ahead with its proposed “dimension-based” discount on its controversial “Connectivity Virtual Circuit” (CVC) charge.

CVC is a virtual charge imposed by nbn to service providers in order to bring traffic from the “NBN network” to the service provider network (and vice versa).  This bandwidth is shared amongst all of the users on the same provider’s network aggregated at the 121 NBN points of interconnect.  You can read more about the threat of the CVC charge on nbn’s success here.

The newly introduced dimension-based discount sees greater discounts for service providers who purchase more hand-off capacity between the “NBN network” and the service provider’s network on a per-user basis.

The discounts being implemented will range from $0.50 to up to $6.00 per Mbps of CVC, depending on the average amount of CVC purchased per user.

Band-aid to solving two problems

Congestion

This discount is a very significant signal to service providers.

CVC “skimping” is a known problem for many NBN customers, whose Internet connection can grind to a halt during peak hours due to insufficient CVC bandwidth.  Especially with its widely unpopular Fibre to the Node network, NBN simply cannot afford to have negative perceptions about the performance of its network — whether it is provider-induced or indeed, NBN-induced.

This discount not only encourages ISPs to buy more CVC (reducing skimping and improving performance), it will also encourage ISPs to sell higher-speed or higher-capacity plans.  More on that in a bit.

But first — why will it solve congestion? Simply because in many cases, it is cheaper for providers to purchase more bandwidth (thereby decreasing congestion) than to retain their old per-user allocations.

Take an example service provider who provisions on average anywhere between 583 to 600 Kbps of CVC bandwidth per user.  It becomes cheaper for the provider to purchase more CVC than to use the existing bandwidth allocation:

CVC provisioned per user

CVC rate per Mbps
(with dimension-based discount)

CVC rate per user
(A) x (B)

583 Kbps

$16.25

$9.47
(same as 601 Kbps)

600 Kbps

$16.25

$9.75
(same as 619 Kbps)

601 Kbps

$15.75

$9.47

619 Kbps

$15.75

$9.75

Despite purchasing more CVC (601 to 619 Kbps), the CVC rate per user is either cheaper than or is equal to the old CVC rate thanks to the discounted rate.

Higher capacity / speed plans

This discount also encourages providers to sell more higher value plans.

A provider who exclusively sells low capacity plans will naturally have a lower amount of CVC-per-user provisioned.  This means their CVC discount is less, costing them more on a per Mbps basis than a provider who sells a more diverse set of plans.

In contrast, a provider who sells more high-speed or high-capacity plans will have a greater CVC discount. This allows them to sell all of their plans marginally cheaper than the exclusive low capacity provider, even if they’re allocating the same CVC per user.

Thus, providers who diversify and increase the customer base to have more high usage users will benefit the most from these pricing discounts.

So what’s the target CVC-per-user?

Looking at the price modelling, it’s evident that nbn is targeting around the 1 Mbps and 1.25 Mbps per user mark.  It offers the largest and most generous discounts at the 1150 Kbps mark, shaving a whole $1.42 per user by simply increasing the CVC-per-user by a mere 1 Kbps.

Reverse engineering NBN’s 2016 half-year results by combining ARPU and AVC speed tier breakdowns — we can estimate that the current CVC allocation per user across all providers is around 800 kbps.

Importantly, however, this excludes the initial 150 Mbps of CVC that NBN provides for free to service providers at each point of interconnect.

AVC Tiers (Mbps) Percentage (HY2016) AVC+UNI Cost (ex GST)
12/1

33%

$24

25/5

45%

$27

50/20

6%

$34

100/40

16%

$38

Avg AVC/UNI Revenue per user

$28.19

Price component Revenue per user per month
ARPU (HY2016)

$43.00

Avg AVC/UNI Revenue

-$28.19

Avg CVC/NNI Revenue

$14.81

Estimated Avg CVC^

~835 Kbps

^ excluding initial 150Mbps credit per provider per CSA. Assumes an NNI cost per user to be ~20¢.

Of course, the way that NBN constructs its product means that providers will always want to purchase more CVC. Whether or not they can afford it is another problem.

Going forward, NBN must maintain an open dialog with service providers to ensure that the pricing is adaptable to the bandwidth demands of Australians.  Whether it’s a complete rethink of the pricing structure or continual discounts — this pricing model is vital to the success of the network.

Revenue targets: why NBN should be doing more to promote higher speeds

By actively discouraging users and downplaying the need for high speeds, nbn’s media strategy is killing its own business case

(opinion) The national broadband network is all about bringing ubiquitous, high-speed broadband to all of Australia — regardless of where you live.

However, with the shift to the multi-technology mix and in the introduction of the Fibre to the Node technology into the network — nbn is doing its best to downplay the importance or the need for speeds beyond 25 Mbps download in order to justify its technology-of-choice.

Yet, as the company reveals itself, it will rely heavily on these downplayed high-speed users 5 years time in order to meet the required revenue targets to make their Multi-Technology Mix work.

nbn’s own figures: 100/40 Mbps expected to be most common by FY2021

By the end of the rollout, nbn expects more customers will take up the 100/40 Mbps speed tier than any other speed tier on the national broadband network. (nbn has only provided FY2021 figures here, but end of rollout is expected to be the end of CY2020)

According to their own figures provided at Senate Estimates this year, 30% of all fixed-line customers are expected to take up the 100/40 Mbps tier followed closely by 29% taking up the lowest tier — 12/1 Mbps.

(N.B The following calculations assume a 100% take-up.  While the latest corporate plan only assumes a 73% take-up, magnitude (and weighted %) should not be materially affected.)

(FY2021) FTTN FTTP HFC Aggregate
% takeup Approx. premises % takeup Approx. premises % takeup Approx. premises Approx. premises Weighted %
12/1 Mbps 31% 1,395,000 25% 600,000 28% 1,120,000 3,115,000 29%
25/5 Mbps 26% 1,170,000 27% 648,000 28% 1,120,000 2,938,000 27%
25/10 Mbps 10% 450,000 4% 96,000 2% 80,000 626,000 6%
50/20 Mbps 11% 495,000 7% 168,000 5% 200,000 863,000 8%
100/40 Mbps 22% 990,000 35% 840,000 35% 1,400,000 3,230,000 30%
250/100+ Mbps 0% 0 2% 48,000 2% 80,000 128,000 1%

Source: nbn AVC profile – Question on Notice 118 (Senate Budget Estimates, May 2015)

100/40 Mbps accounts for most revenue by FY2021

But if you look at revenue figures, in user access (AVC + UNI) revenue alone, the 100/40 Mbps users account for $1.47 billion dollars per year.  At an average 1:80 contention ratio, it could amount to a total of $2.32 billion in revenue if current CVC costs of $17.50 per Mbps is retained.

The expected revenue in the 100/40 Mbps tier is expected to be double of the next highest tier in revenue terms — the 25/5 Mbps.

(FY2021) Approx premises (millions) AVC per month AVC revenue (annual, bn) CVC 1:80 revenue (annual, bn) Annual revenue (AVC + CVC, bn)
12/1 Mbps 3.12 $24.00 $0.90 $0.10 $1.00
25/5 Mbps 2.94 $27.00 $0.95 $0.19 $1.14
25/10 Mbps 0.63 $30.00 $0.23 $0.04 $0.27
50/20 Mbps 0.86 $34.00 $0.35 $0.11 $0.47
100/40 Mbps 3.23 $38.00 $1.47 $0.85 $2.32
250/100+ Mbps 0.13 $70.00 $0.11 $0.08 $0.19

Source: AVC and CVC pricing based on nbn’s price list released on 2nd November 2015

While magnitude of pricing may be altered due to pricing changes and lower overall take-up, assuming take up profiles are met — the importance of promoting higher speed plans cannot be understated.

If nbn knows what’s good for them, they shouldn’t be focusing energy on discrediting the need for speeds beyond 25/5 Mbps.  Those are simply short-term political defences which could eventually harm the revenue capabilities of the company in the long term.

It is more important than ever to promote the higher speed tiers to customers who can access the speeds, given the MTM rollout by nature will prevent some customers who want the higher speeds from getting it (I’m looking at you, FTTN).

Beyond 100/40 Mbps

Unlike the 2012 Corporate Plan which predicted ~10% of customers will take up a 250/100 Mbps service by 2020 — nbn is now predicting that by fiscal year 2021, the take up of services above 100/40 Mbps will only be at 2% for both FTTP and HFC (0% for FTTN) — or in real premises figure, around 128,000 homes or businesses.  This amounts to roughly $190 million dollars in annual revenue.

This is a substantial downgrade in forecasts and it seems the only explanation that nbn is giving is that there is not current demand for speeds above 100/40 Mbps:

“… the services that we sell, 80 per cent is 25Mbps or less, yet we offer up to a gigabit per second … this is an indic­ation, right, of what people actually are willing to pay for and what they really need.”

Bill Morrow, June 2015

Yes, the company is using current take-up information to model demand in 2020.  It seems nbn might be having some trouble understanding the broadband demand and the market in Australia.

Are executives aware that there are currently no service provider who provides speeds above 100 Mbps on a residential connection? (There are 100/100 Mbps symmetrical plans using the 250/100 tier)

There is a few reasons behind this, but firstly, nbn‘s own CVC pricing is the key inhibitor in enabling these services.  Saying “market is speaking in Australia” but not recognising they are they key inhibitors in the market is a bit of a self-fulfilling prophecy — right?

You might as well jack up all nbn access costs to a million dollars per user and say: “The market is speaking! By 2020, no Australians will want any broadband from nbn!“.  It will most undoubtedly be a true statement if the company decided to go with it.

We also need to understand the extreme costs of buying backhaul to the nbn Points of Interconnect ruled by incumbent monopolies.  Plus, there’s the high cost of IP transit in Australia (that’s the cost of connecting to the actual Internet) compared with places like the US or UK because of the large bodies of water that separate us from the rest of the world.

However, market competition means that the latter of the two (backhaul and IP transit) will likely fall as demand increases.  But CVC costs?  That’s entirely controlled by the nbn as it’s not a competitive market.

So whether or not Australia will want gigabit speeds is almost entirely dependent on nbn, and judging by the tone used by this management, it seems they neither want to promote the speed nor get the revenue — which is a pretty stupid strategy in my opinion.

Concluding thoughts

So… dear nbn,

Stop dissing users who demand high speeds.  As a taxpayer who’s tax dollars are being used to fund the project, I want it to succeed in the long term — not just politically in the short-term.

According to your own numbers, the take-up of higher speed services is paramount in ensuring the return of investment to the Government and in turn, the taxpayer.

Saying there is no demand for speeds beyond 100/40 Mbps is another one of those dangerous, broad statements that reflect the short-sightedness of the company.

When telcos worldwide are spruiking to their customers about the wonders of gigabit connections, we are special in Australia.  We are somehow unworthy, and “unneedy” of these higher speeds.

Let’s play common sense, and promote things like any sane, commercial company would.  After all, we all just want this investment to succeed.

Just how fair is nbn’s proposed Satellite Fair Use Policy?

Simple maths shows 2x more per-user capacity compared with interim satellite, but only 0.7x more data allowance is proposed.

After revealing the proposed restrictions and fair use policies to help manage traffic and congestion on nbn Satellite service, some residents have taken to Whirlpool Broadband Forums to express their concerns.  The primary concern being that a 75 GB 4-week rolling average limit doesn’t translate to 75 GB of “anytime data”.

According to the draft Fair Use Policy, nbn will — in addition to limiting the maximum usage per service to 75 GB on the standard CVC Class 0 — also limits the ISP-wide 4 week rolling average download and upload during peak periods (from 7am to 1am the following day, local time).  Currently, the base CVC Class 0 is proposed to be 15 GB download and 3 GB upload.

This means, if the Fair Use Policy isn’t altered before the final satellite product release, a service provider would have to either carefully balance a number of lower capacity plans with higher capacity plans to maintain an average of 15GB, or offer one plan that provides close to 15GB with around 40GB of off-peak data up for grabs for all users.

CVC Class AVC+CVC Fee
(25/5 Mbps)*
User data cap
(4-week rolling avg)
Peak Period Download
(ISP 4-wk average)
Peak Period Upload
(ISP 4-wk average)
0 $27.00 75 GB 15 GB 3 GB
1 $45.00 100 GB 20 GB 4 GB
2 $67.00 150 GB 25 GB 5 GB

Realistically, however, we can expect RSPs to oversell slightly given the 15 GB limit is averaged across the ISP using the assumption that a portion of their users will not reach the 15 GB limit.


Comparing increased capacity with Fair Use Policy

But just how fair is this 15 GB / 3 GB averaged limit being proposed by nbn?  Let’s see how it compares with the current nbn Interim Satellite Service and nbn Fixed Wireless network.

Per-user allocated capacity

Firstly, let’s check how much satellite capacity is expected to be assigned to an end user.  Since nbn imposes minimum customers-to-CVC (AVC-to-CVC) ratio (so RSPs can’t hog virtual capacity), we can calculate these numbers by dividing the CVC capacity by the maximum and minimum customers.

Estimating the per-user allocated capacity on the draft NBN satellite service FUP
Estimating the per-user allocated capacity on the draft NBN satellite service FUP

As seen above, this averages out to be around 125 kbps per user on CVC Class 0, 145 kbps per user on CVC Class 1 and 190 kbps per user on CVC Class 1.

CVC Class Maximum CVC (Mbps) Average per-user capacity allocation (kbps)
0 475 125
1 550 145
2 735 190

In comparison, the dimensioning of nbn‘s Fixed Wireless network allocates roughly 500 kbps per-user and 40 kbps on the current nbn Interim Satellite Service (ISS).  In light of this, let’s compare the percentage difference in capacity on the various CVC Classes compared to Fixed Wireless and ISS:

CVC Class Per-user capacity (kbps) % of ISS capacity (40 kbps) % of FW capacity (500 kbps)
0 125 313% 25%
1 145 363% 29%
2 190 475% 38%

So, the standard CVC Class 0 product has roughly 2 times (or is 313% of) per-user allocated capacity on the Interim Satellite Service.  It is also roughly a quarter of the capacity on the NBN Fixed Wireless network.  How do the Fair Use Policies for the ISS and Fixed Wireless compare numerically to the proposed Long Term Satellite?

Fair use policies

Interim Satellite Service: nbn‘s fair use policy for the Interim Satellite Service is structured similarly to the proposed Long Term Satellite policy.  Currently, the cap at a per-AVC (or customer) basis is 50GB.  313% of that would bring it to ~150GB, rather than the 75GB proposed.

But as we have said, this limit means little given the bulk of downloads generally occur during peak time.  While nbn doesn’t have a peak time average limit on the ISS, the company has mandated an ISP-wide averaged 9.7 GB download limit on a 4-week rolling average basis.  For this model, let’s assume that ~90% of traffic occurs during peak time — coming to an estimated ISP-wide averaged 8.7 GB download limit on a 4-week rolling average basis.  313% of that would bring us to ~27.6 GB, compared to the 15 GB proposed.

In summary, while per-user assigned capacity has increased by around 2x compared with the ISS — data limits in the fair use policy have only increased by a mere 0.72x.

Fixed Wireless: nbn‘s fair use policy for the Fixed Wireless network is straightforward.  RSPs must maintain, on average across their user base, less than 200GB download (let’s consider download only).  Like the ISS, there are no limits on peak/off-peak usage… but let’s assume that 90% of traffic is carried during peak time (meaning ~180 GB download).  If we take 25% of the Fixed Wireless fair use policy, we get 45 GB per month of peak time data per month.

Having calculated that, however, it’s important to remember that Fixed Wireless is a fundamentally different product.  Given it has far more capacity compared with any satellite product, there is more room to wriggle when it comes to the fair use policy limits.  However, for completeness sake, while the per-user capacity on the LTS is around 25% of Fixed Wireless — the data limits in the fair use policy are a mere 8.3%.

CVC Class % of ISS capacity % of ISS FUP (1) % of ISS FUP (2) % of FW capacity % of FW FUP (1)
0 313% 172% 150% 25% 8%
1 363% 230% 200% 29% 11%
2 475% 245% 300% 38% 17%

Table: % of per-user allocated capacity when compared with ISS capacity and FW capacity, and compares this with the % of the various data allowances set in proposed Fair Use Policy
(1) refers to the ISP-wide 4-week rolling average, (2) refers to the per-AVC cap (50 GB on ISS, not applicable for FW)

The summary

nbn appears to be very conservative when it comes to allocating data allowances on the Fair Use Policy.  Comparing to the Interim Satellite Service, per-user capacity has increased by between 2x to ~3x (depending on which CVC Class you choose).  However, ISP-wide peak-time data allowance only increases by between ~0.72x to ~2.5x (again, depending on CVC Class being compared).

As the writer doing the analysis, I believe there is scope for nbn to increase limits currently proposed in the draft Fair Use Policy.  Ideally, if service providers can buy two times more CVC capacity compared with what they can do on the ISS — they should be able to offer customers around the same amount more data… but I’m not going to sit here and pretend that using capacity can be calculated using simple maths.

Real networks are far more complex beasts, and simple calculations do not necessarily reflect how real networks behave.  But I believe a simple scale projection, as I’ve done above, would aid the public gaining some perspective on how little data caps have increased in comparison to the new satellite’s extra capacity.

All is not lost:

Some service providers who are helping nbn test their satellite systems before the Q2 2016 launch are actively working with nbn to get the best Fair Use Policy possible.  In the words of Paul Rees, the managing director at SkyMesh:

“We’re doing all we can to get the best FUP for customers that provides decent Data Allowances that don’t wreck LTSS performance at peak times.”

“The FUP hasn’t been set in stone yet, those numbers are just part of a draft document. So let’s have some calm, and save the ‘going nuts’ until the FUP has been formally decided.”

Wise words, Paul.  We wish you all the best in your pursuit.

NBN working on AVC trunking project to overcome 121 POIs

For a small fee, nbn could allow small service providers tap into its transit network to drive up backhaul market competition

nbn, the company responsible for building the National Broadband Network, has reportedly been working with smaller service providers in developing a so-called “AVC trunking” service.

Currently, service providers are required to connect their network with nbn‘s 121 points of interconnect located around Australia in order to service all of Australia.  This puts smaller service providers who do not have existing backhaul networks at a big disadvantage.

This AVC trunking project aims to allow smaller Tier 2 service providers to take advantage of nbn‘s inter-POI (point of interconnect) transit network by paying a small fee to terminate Access Virtual Circuits (AVCs) from smaller or more remote Points of Interconnect to larger depots located in capital cities.

ACCC seeks feedback from small providers

The Australian Competition and Consumer Commission (ACCC) has interviewed a number of small service providers to obtain feedback regarding nbn‘s AVC trunking project.  It’s understood that feedback from small service providers has been overwhelmingly positive.

Paul Rees, Managing Director of the ISP SkyMesh, has noted on Whirlpool Broadband Forums that: “Unless the ACCC approves this scheme, or the larger providers start offering backhaul at realistic prices, we’ll never make it to Tasmania, the Northern Territory or far north Queensland. If the ACCC is serious about maintaining competition on the nbn™ network, they will approve [CVC Trunking].”

A consolidated backhaul market

When the NBN was first established, NBN Co had preferred a 7+7 Point of Interconnect model where service providers would connect to major interconnection points in capital cities to service an entire state.  However, after lobbying from major backhaul monopoly providers from the likes of Telstra and Optus — the ACCC favoured a dispersed 121 Point of Interconnection model.

Since the ACCC decision, major acquisitions by TPG and M2 have resulted in significantly reduced competition in the backhaul market.  Most notably, TPG’s acquisition of PIPE Networks and AAPT, plus the recent Vocus-M2 merger sees almost all major backhaul providers aligning with a company with a consumer retail front.  This could allow the companies to increase wholesale backhaul costs to their competitors to lock out retail competition.

By opening up nbn‘s inter POI transit network to the AVC trunking project, it could drive backhaul competition especially to regions with less transit competition such as Tasmania and Northern Territory.  The implementation of any such project would be subject to approval by the ACCC.

NBN to consult on dimension-based CVC pricing

NBN may do away with the current per-Mbps connectivity virtual circuit charge for a tiered option.

In their latest Product Roadmap for October 2015 — the company responsible for building the National Broadband Network, nbn, has indicated that they will begin consulting with service providers to change the way the controversial Connectivity Virtual Circuit (CVC) charge is structured in November.

Connectivity Virtual Circuit (CVC) is a virtual charge imposed by NBN to service providers to offload end user’s traffic from the NBN network into the service provider’s network.

After their first round of consultation in July last year, the company had decided to drop the from $20.00 per Mbps to $17.50 per Mbps (excluding GST).  The company will now conduct a further consultation for introducing Dimension-Based Pricing for CVC for “eligible customers”.

Dimension-Based Pricing would effectively provide service providers tiered of Connectivity Virtual Circuit based on NBN’s modeled usage.  As an example, standard internet connections may use an average CVC tier where as a more bandwidth-heavy application would use a higher-capacity CVC tier.

This is in addition to the cost of physical interconnect connection between the provider and NBN (called the Network-Network Interface, NNI) plus the cost that NBN charges for the link between your home and NBN’s point of interconnect (known as the Access Virtual Circuit and User-Network Interface, AVC/UNI).

The company also revealed in their Product Roadmap that they will begin consulting service providers about their future Fibre to the Distribution Point product offering in November.

[Product Roadmap – October 2015]

How the NBN could transform mobile transit

4G/5G mobile growth will not undermine the NBN business case.  It should actually help boost NBN revenue.

(opinion) Phone towers aren’t magical.  They need to be connected back to a datacentre in order to process calls, send texts and most importantly — connect you to the Internet.

There’s no doubt that one of the greatest cost barriers for mobile phone companies to increase coverage is the cost of backhaul to mobile phone towers.

Telstra has always had a natural advantage in the mobile coverage race due to its extensive fibre network laid out between its telephone exchanges.  Optus is not too far behind, but certainly lacks the robust network Telstra has especially in rural areas.

But let’s think for a moment about Vodafone, or potentially a theoretical fourth national mobile carrier which may or may not start with the letters TPG.  The National Broadband Network can play an extraordinary role in helping these companies not only expand their network coverage size, but also create denser and higher bandwidth coverage to ease congestion.

Dark fibre vs managed services

Traditionally, a carrier may opt to roll out their own fibre to a tower — but that could come at a huge capital cost which may not be viable for carriers with comparatively lower subscribers.

Alternatively, they may rent dark fibre or purchase a managed transit service from the likes of Telstra or Optus and pay back a recurring fee for the amount of bandwidth they want delivered through the service.  Unfortunately this means even if only a small number of customers are connected to a tower at a given time, the carrier would have to pay for the full bandwidth they’d purchased from their transit provider.

How the NBN could change the game

But the NBN could change all that, and this could mean enormous transit cost savings for leaner carriers who don’t own as much transit network infrastructure.

Early last year, the company revealed that it began conducting trials for “Cell Site Access” — giving mobile carriers like Vodafone access to the National Broadband Network to connect towers.

AVC+CVC works well for mobile transit

The two-part access and connectivity charge (AVC+CVC) that nbn currently uses means that the carrier can pay for a relatively low cost for a high bandwidth Access Virtual Circuit (say 100+ Mbps) at the tower but only pay for the bandwidth at a regional level (Connectivity Serving Area, CSA) at the point of interconnect (POI).

This means that no matter how many towers they put up, as long as the overall bandwidth that gets transferred across the mobile network doesn’t change, there will only be a minimal cost difference in terms of transit between towers.

Of course, the equipment costs will still exist — but carriers could increase their cell density in a metropolitan area or regional centres by installing small “towers”, but only have to pay some $40 in monthly cost for connecting the towers to the NBN Point of Interconnect.

Great for dealing with peak demand at venues

The flexibility of the two-tier AVC-CVC model for mobile carriers means that if “mobs” of people aggregate at a particular location say for a sporting event — the carrier could simply increase the low-cost AVC component to cope with the peak demand at that particular location.  That, of course, assumes that overall data consumption doesn’t increase which is probably not true from experience.  But it means that carriers will not have to pay massive premiums for high-bandwidth transit during the entire year, when it can cater for occasional high demand by paying a little more in the access component over an NBN transit solution.


I think there is massive potential for NBN to shake up the mobile transit market.  Once the NBN is built, the infrastructure will be there to support high density microcells in built up areas and also for carriers to expand their coverage in more regional areas at relatively low cost.

I guess the point I’m trying to make is that growth in mobile doesn’t necessarily undermine the NBN.  4G and 5G networks will still need high bandwidth transit to carry all that data from the tower back to the carrier’s data centres… and it seems the NBN is an obvious candidate for some carriers.

I’m really quite excited to see what mobile carriers may do in the future with the NBN, and I’m sure nbn wouldn’t mind having some extra revenue given current circumstances with the MTM cost blowout.

CVC remains the single biggest threat to NBN

Standard 12/1 mbps plan could rise to over $150 if pricing model doesn’t drastically change

Despite the debate about technology used, the cost of NBN’s CVC remains the single biggest threat to the NBN’s success.

While the availability of high-speed, unlimited broadband grows in developed nations around the world, the future of “unlimited broadband” in Australia is becoming increasingly bleak.  The use of applications requiring greater amounts of bandwidth grow in households is partially to blame, but the country transitions to the NBN – the way nbn designs their pricing structure will also be increasingly important.  Currently, the NBN pricing structure is far too cost prohibitive for the amount of traffic the network is designed to carry.

What is this CVC thing?

Connectivity Virtual Circuit (CVC) is a virtual charge imposed by NBN to service providers to offload your traffic from the NBN network into the service provider’s network.  After a discount introduced at the start of the year, NBN charges $17.50 per Mbps of traffic shared across the ISP’s customer base.  Initially, the cost was $20 per Mbps.

This is in addition to the cost of physical interconnect connection between the provider and NBN (called the Network-Network Interface, NNI) plus the cost that NBN charges for the link between your home and NBN’s point of interconnect (known as the Access Virtual Circuit and User-Network Interface, AVC/UNI).

The Netflix effect

It became pretty obvious after the launch of Netflix in Australia that the current pricing structure is unsustainable.  With the high-bandwidth of the NBN, customers expect to stream movies and TV shows with plenty of remaining capacity to do additional work in the background.

To be able to deliver a HD stream, Netflix recommends 5Mbps of bandwidth.  To be able to guarantee at least a single stream to every household, ISPs need to purchase 5Mbps of CVC per household:

$17.50 × 5 Mbps = $87.50

This neglects costs like the actual cost of connecting you to the Internet (Backhaul/IX costs) and link between your home and NBN’s point of interconnect – which start at $24 for 12/1 Mbps. Backhaul and IX costs depend on the ISP’s deals with backhaul providers and the volume they have – but consider $10 per mbps a reasonably conservative estimate. So, for a typical 12/1 connection that can consistently deliver at least 5 Mbps:

Cost element Cost
CVC – 5 Mbps $87.50
AVC/UNI – 12/1 Mbps $24.00
Backhaul/IX Costs – 5 Mbps $50.00
Total $161.50

Since a typical 12/1 NBN plan costs far less than the $161.50, you can understand where the compromise lies –  CVC, IX and backhaul.

While you wouldn’t necessarily expect that all users will simultaneously watch Netflix at the same time, the number of simultaneous streamers is growing exponentially.  ISPs also need to prepare for “extraordinary” events like when Netflix released the entire season of Orange is the New Black – a far greater proportion of users will be watching Netflix at the same time for an extended period of time.

Future of small providers

With the high CVC costs, small providers will find it increasingly hard to compete with larger providers like Telstra, Optus, iiNet and TPG.  These providers either have enough traffic volume (or own their own backhaul infrastructure) to lower costs in the backhaul or IX component to offset the high CVC.

Smaller providers still need to “rent” capacity from backhaul infrastructure providers such as Telstra, AAPT, PIPE and Nextgen Networks.  With even large providers like iiNet feeling the pinch, it’s no wonder that smaller ISPs are beginning to struggle.  Even with the scale of a large customer base, current consumer cost expectations are simply unsustainable.

What’s a solution?

nbn™ could continue dropping the CVC charge as demand increases, however, it faces the risk that service providers will continue to skimp out on CVC – thus lowering revenue.

The good news is the company has also begin conducting a second round of industry consultation to help overcome the problem.

For me, one solution I can see feasible, is to replace the CVC cost with a standard capacity charge (which guarantees a certain ratio of CVC to AVC) comparable to current industry contribution to CVC per user.  Then, provide capacity boosts for users and applications that require a greater capacity.  This guarantees “minimum” revenue for nbn™ and increases capacity to suitable levels for service providers.

Alternatively, I could see increasing the user-connect costs (AVC/UNI) and drastically cutting CVC costs as a possible solution.  This would also guarantee revenue to a certain extent, while retaining the control of contention with service providers.

Whatever happens, the nbn™ pricing model needs to change drastically in order for Australia to remain competitive in the 21st century.  Otherwise, we’ll continue to be slowed down by a “virtual” cost-prohibitive charge by our nationwide broadband network.

It’s official: NBN Co lowers CVC charges

It’s official. NBN Co released details of their amendment to the Wholesale Broadband Agreement signed by Retail Service Providers, revealing that they will lower the cost of their CVC (connectivity virtual circuit) “from $20.00 per Mbps to $17.50 per Mbps effective 1 February 2015”. In their letter to service providers, available on the NBN Co website, the company says they are “pleased to advise that it will reduce the CVC recurring Charge”.

The CVC is a product purchased by service providers, allowing a fixed amount of data (or bandwidth) to pass through from the NBN network to the ISP’s network. End users within a common point of interconnect share a common CVC to pass the data between networks. If an inadequate amount of CVC is purchased, end users may find their connection to slow drastically during peak hours.