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.

Kenneth Tsang

I'm the author of jxeeno™ blog and co-founder of I'm a bit of an #NBN and public transport geek. You can normally find me juggling work and my studies at UNSW where I'm currently completing a degree in Geospatial Engineering.

  • David Connors

    Where did you get the 1:80 contention ratio figure from?

    • Matthew Rath

      IIRC in the case of FTTN each node can hold 2 ISAMs with 2 trunk fibres per ISAM. These come in different flavors however the biggest one is 192 ports.

      Therefore 192 / 2 = 96 ports per fibre line.

      He specifically said ‘average’ contention ratio.
      A 1:80 contention ratio is reasonably conservative given that he also stated the following.

      “The following calculations assume a 100% take-up.”

      • David Connors

        The contention has nothing to do with the nodes or backhaul from them. He is talking about CVC which happens within the POI.

        • Matthew Rath

          My understanding –

          AVC = Access Virtual Circuit. per prem / speed tier basis, anything from the last aggregation point (in terms of the provider) to the end prem (last mile, access portion of the network). These costs are levied from ISP’s pretty much directly to the end consumer because ultimately it is they who choose their speed tier.

          CVC = Combined Virtual Circut. Is the wholesale price of traffic aggregation / management. This is not just including fibre within the POI but extends out to the last aggregation point (node, GPON cabinet, etc) but not past it.

          If providers couldn’t reserve bandwidth on a per ‘node/user’ basis in that area (which is how you mediate contention, finding the righ balance). How then would it be managed? What you think each provider pays for the full bandwith capabilities in every FSAM connected to a node regardless of if the area has 2 subscribers or 50?

    • tsangk

      1:80 is a common contention ratio for residential connections. Having said that, whether it’s higher or lower — the magnitude of the revenue figures would not be changed. 100/40 will remain the highest projected revenue tier by FY2021.

      • Mathew

        Your calculations are only true if you assume that contention ratios are the same for all speed tiers. However if we assume (as Telstra’s marketing appears to) that quota is the most important criteria in selecting a plan, then users are willing to sacrifice higher speeds for a larger quota. The impact of this is that the contention ratio for a 12Mbps plan will need to be significantly lower than for a 100Mbps plan. For example a person streaming HD netflix video will consume the same bandwidth on 12Mbps & 100Mbps plans, however the usage ratio will be significantly higher 5:12 versus 5:100.

  • ikt123

    > Of a >1m who can have Gbps speeds today, less than 30 have taken up

    What? Where did they get this information from?

  • Mathew

    Totally flawed argument. NBNCo’s increase in revenue will come from CVC charges. If you bother to read the NBNCo Corporate Plans published by Labor you will see that CVC pricing started at $20Mbps/Month when the average data usage was 30GB/Month and falls to $8Mbps/Month when the average data usage reaches 540GB/month. The price falls by 2.5 times, while the average data usage grows by 18 times, which equates to a growth in revenue from CVC of 720% when accounting for price falls.

    Reducing AVC pricing would encourage greater take-up and will encourage customers to move to faster speeds. Moving to faster speeds will naturally result in customers downloading more (e.g. the QHD stream instead of SD).

    • tsangk

      I don’t get your point? I’m arguing that nbn’s media strategy should be focused on promoting higher speeds — a point you seem to agree on? but also not at the same time?

      Also, irrespective of the adjustments in cost per Mbps on CVC over time, the take up of higher speed tiers (vs lower speed tiers) will result in higher revenue. That is, buying 200 Mbps of CVC will always be more expensive than buying 100 Mbps of CVC. That is why the company should be spending money on promoting higher speeds, is it not?

      Finally, reducing AVC pricing may help in the short term, but will do little to encourage higher speeds because it’s the CVC product that’s causing the bottleneck for Retail Service Providers. Service Providers will only increase their speed and allowance offerings if nbn actively lowers the CVC pricing as traffic demand increases or changes the product construct altogether.

      • Mathew

        Reducing AVC pricing will attract low usage customers who otherwise might find 4G a reasonable alternative, especially when their plan already includes a data allowance. Customers on higher speed plans will download more (QHD streams versus SD) meaning that they purchase higher quota plans resulting in more revenue for NBNCo resulting in the price of CVC falling.

        Lowering CVC pricing will force an increase in AVC pricing which will discourage people from connecting meaning that only high usage customers connect meaning that RSPs have to run lower contention ratios forcing costs up, resulting in slower growth in quotas and more people leaving the network.

        What you need to realise is that the cost of the network build is fixed, so if you reduce the price of one revenue stream (CVC) then the price of another revenue stream (AVC) will need to increase. A common marketing technique is to provide what the customer requires for free or very cheaply in order to sell them consumables / a service each month. Examples of this include razor blades, capsule coffee machines, mobile phones, etc.

        • tsangk

          Ah yes, I see what you mean. I think I’ve been a bit ambiguous as to how I feel the CVC-inhibitor should be resolved because I completely agree with your point about lowering CVC pricing.

          Note, I’m not saying the the CVC price should fall drastically below their required rate for expected revenue or increasing the AVC pricing. In fact, I’d much prefer changing the product construct as a whole. nbn could sell a sensible dimension-based capacity change for each AVC at various levels of “contention” ratios as set by them.

          (Note: this article — )

          When we move to higher “gigabit” speeds: CVC is an inhibitor because of its pricing (yes) but is also inhibiting for its construct. For gigabit connections because unless RSPs can be guaranteed to have a hundred or so other gigabit customers in the same connectivity service area — it is a guaranteed massive investment risk at this pricing.

          Shifting to a dimension-based capacity charge means nbn can tap into increased revenue earlier (there’s no need to wait for naturally lowered CVC charges to introduce higher tiers) and yet, still ensure a steady revenue stream as required to build the network.

          I do still have my doubts about lowering AVC. In the short-to-medium term, majority of customers will take up the lower speeds. The nbn projected ARPU, and thus revenue is based on heavily on these low speed customers who take up a very small portion of the “CVC pie” per user — so to speak.

          Herein lies the risk that while AVC may be lowered, mobile-only customer take up may not increase to the extent that is required to cover the lowered AVC. How can one guarantee a lowered AVC = more take up? I don’t think anyone can necessarily.