A Telstra spokesperson provided the following statement yesterday: “We strongly support the Government’s plan to transform Australian into a leading digital economy. The nbn will be a vital part of this and we’re determined to keep working with NBN Co as constructively as possible.
“However this current proposal simply does not do enough to reduce the costs and complexities that retailers and customers are facing. That’s why we’ve made suggestions to NBN Co that would improve certainty, increase value, drive simplicity and support digital inclusion across the community.”
So, today, I asked for more information on what those suggestions would be, and Telstra kindly supplied the Executive Summary of its submission, which is reprinted in full below:
Telstra welcomes the opportunity to respond to NBN Co’s 2021 Pricing Review (Pricing Review). Broadly speaking, we support NBN Co’s objectives to achieve certainty, value, certainty, simplicity for end-users, and to improve Australia’s digital inclusion. The post COVID-19 environment presents a critical opportunity to accelerate Australia’s transformation into a leading digital economy, and the NBN should make a vital contribution toward our achieving it as a nation.
With that goal in mind, it is disappointing the Pricing Review proposes only incremental adjustments to the wholesale broadband pricing regime. Our concerns remain that the proposed pricing will continue to substantially increase the average costs to supply fixed broadband in Australia and perpetuate the need for retailers to make complex and uncertain CVC provisioning decisions, driving investment away from supporting the NBN and leading to poor outcomes for Australian consumers and businesses.
We appreciate NBN Co’s financial objectives are seen as a limiting factor for any significant change to pricing. That said, 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. Stephen Rue has recently stated to the NBN Joint Parliamentary Standing Committee on expected data growth that “there is no reason to assume that we won't see that 25 per cent per annum growth over the next three to four years”. [Proof Committee Hansard, Joint Standing Committee on the National Broadband Network, 20 November 2020, p.30.]
Yet the CVC bundle inclusions proposed by NBN Co in its Roadmap for the next 24 months come nowhere near to meeting this expected continued increasing customer demand for data.
Telstra believes much more needs to be done to deliver on the objectives of pricing certainty, value, and simplicity. 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. But more also needs to be done starting right now. In our view, these immediate steps should include the following:
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. https://zwww.nbnco.com.au/content/dam/nbnco2/2020/documents/media-centre/corporate-plan-2021/nbnco-corporate-plan- 2021.pdf, p56)
On the roadmap proposed, Telstra’s modelling suggests NBN Co’s residential ARPU will hit $55 by the end of FY23. This would be a highly detrimental outcome for consumers and the prospects for our digital economy. Providing certainty to retailers that this will not happen requires:
1. More transparency: NBN Co should share with industry its 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.
2. Certainty mechanism: NBN Co should adjust its pricing (see below) or implement a mechanism ensuring that its standard pricing will not lead to net payments exceeding its efficient costs and forecast residential ARPU.
In making these proposals, Telstra is in no way agreeing that NBN Co’s ARPU target reflects its efficient costs; we are simply trying to ensure certainty for industry and for end-users. Ultimately, ensuring our digital economy is sustained by affordable Australian fixed broadband reflecting NBN Co’s efficient costs likely requires a marked reduction to NBN Co’s current returns targets.
Australian consumers need quality fixed broadband that is affordable to use – and to use lots of it. To enable this, alongside all the investments retail service providers (RSPs) make to deliver a positive and secure customer experience on the NBN, NBN Co’s wholesale pricing needs to be aligned with the unlimited retail pricing plans customers buy.
This also requires wholesale and retail revenue growth to be generated by migrating customers to higher speed plans and other value-added offerings, rather than perpetually increasing costs to supply the same speed and quality of service. Neither of the Options 1 or 2 in the Pricing Review will achieve these outcomes. Instead, we propose:
3. Increasing bundle CVC inclusions more frequently: A three-monthly upgrade cycle for CVC inclusions will better align NBN Co’s wholesale pricing with growth in end-user data demand. Unlike NBN Co’s lumpy annual adjustments to the CVC inclusions in its TC-4 bundles, growth in average peak end- user demand is constant. More regular increases to CVC inclusions will prevent the current annual “seesawing” in RSP costs of supply, when overage costs are low at the beginning (due to demand being covered by the inclusions) and high at the end of the period (due to demand far exceeding the inclusions). More regular reviews of CVC inclusions also function as a mechanism to correct errors in forecasting demand.
4. Adding significantly more CVC into each bundle (for the same price): Telstra estimates that peak customer data capacity requirements will continue to grow at approximately 25% per annum, aligning with Stephen Rue’s recent statement to the NBN Joint Parliamentary Standing Committee on the data growth expected by NBN Co. Just to keep delivering today’s customer experience at today’s prices, we therefore anticipate a need for RSPs to buy significantly more CVC capacity than NBN Co proposes to include in its bundles (a mere additional 150 Kbps for its most popular 50/20 Mbps plan and 250 Kbps for its 100/20 Mbps plan under Option 1). It is simply not tenable for us to pay materially more in overage costs to NBN Co in order to do this.
At a minimum, the Pricing Roadmap needs to keep RSP overage costs of continuing to supply a quality fixed broadband service to consumers at sustainable levels (for the same bundle price paid today), while delivering returns to NBN Co no higher than its residential ARPU target. Broadly, we consider this would require that by the end of the Roadmap period (May 2023) at least 800 Kbps more CVC is included (in quarterly increments) above what NBN Co has proposed in its Option 1 for the 50/20 Mbps speed tier and at least 1.3 Mbps more CVC for the 100/20 speed tier. If, as is our strong preference (see below), NBN Co switches to more efficient and simpler demand-based charging, the amount of additional CVC required would potentially reduce to around 400 Kbps for the 50/20 speed tier and 700 Kbps for the 100/20 speed tier.
A major source of NBN pricing complexity is NBN Co’s approach of requiring RSPs to pay for capacity (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. 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. (cont)
The whole process is also needlessly complicated and resource intensive, for both NBN Co and RSPs.
5. Telstra proposes that NBN Co charges for actual usage, instead of paying for capacity which has to be provisioned in advance of expected demand (for as long as NBN Co continues to charge for CVC). In this way, RSPs could provision additional capacity across the entire network to cater for reasonable levels of extra demand, without worrying about being charged for unused capacity. At the same time, as the demand for network capacity compares reasonably well to forecast demand over time, NBN Co would continue to be able to successfully dimension its network to meet expected overall demand based on its own independent modelling and forecasting, just as it does today. The outcome would be simpler and more efficient – delivering benefits similar to those seen throughout the COVID-19 offer from March 2020 to November 2020 to RSPs, NBN Co and end-users.
Supporting digital inclusion
Telstra welcomes NBN Co’s engagement on the potential for a permanent offering to make the NBN more affordable for eligible customers on low incomes. If Australia is to achieve its goal of becoming a leading digital economy and society, there cannot remain a digital inclusion gap for those who cannot afford to participate:
• We urge NBN Co to act more quickly, where possible, than only after a Q3 2021 closure paper. Over the next 6-12 months a material number of voice-only customers on legacy technology will be required to migrate to the NBN. An affordably priced NBN broadband offer for eligible customers could make the difference between their digitally enabled future, or their permanent disconnection from the fixed network.
• We recommend a flexible offer available across all speed tiers up to 100/20 Mbps,rather than limiting it only to the 12/1 Mbps or 25/5 Mbps service. There is no ideal “one size fits all” broadband speed correlating to low-income status. A flexible offer allowing RSPs to reduce the cost of whichever plan best meets the needs of the customer would enable a range of diverse use cases needs to be met. If only a single speed tier is selected, it should at least 50/20 Mbps. This is the minimum speed necessary to support Australia’s digital future and must be affordable for all.
• We support a targeted offer, available only to the eligible low-income customers who need this support. We believe the best way to do this successfully, efficiently and respectfully to the end-customer without risk of e.g. privacy breaches, is for RSPs to do the customer eligibility validation – periodically providing any necessary evidence to NBN Co to verify alignment with the offer criteria.
• We do not support the offer only being limited to non-connected premises. Many customers on low incomes go without other essentials in order to connect to the broadband service they and their families simply cannot survive without. The unfairness of excluding these customers from the reach of the offer would in our view drive a backlash and/or distort customer behaviours so as to undermine much of the good it might otherwise do.
• The pricing assumptions need to be reassessed: The expectation that a cost of $18 - $22.50 would enable RSPs to offer a retail construct priced at $40 - $50 is unrealistic. As NBN Co is aware, margins on our entry-level NBN plans are already unsustainable at the current wholesale charge of $22.50. To enable RSPs to sustainably offer an affordable broadband product for low-income customers, the cost (including a reasonable amount of CVC) would need to be closer to $10.
• We appreciate the need to make the offer sustainable for NBN Co and we support the construct including a monthly data cap to this end. However, our preference is for customers to be able to select the plan with speed, data and calling inclusions that best meets their household needs rather than one size fits all. There are quite different needs for data between, e.g. seniors with basic browsing and email, and families with multiple school age children who access rich content to do their homework.
Keeping Australian businesses digitally competitive
Telstra strongly endorses the Government’s objectives to move more Australian businesses to the digital frontier. In the context of business bundles, this means Telstra supports products that minimise complexity and which enable a reasonable cost of access. The business bundles that were introduced in 2019 are complex and create confusion for RSPs and their customers.
This is only likely to worsen under NBN Co’s current pricing proposals, where the cost and CVC inclusions for the higher speed tiers is misaligned between residential and business services.
For example, from May 2021 - April 2022, the Business 250/100 bundle will cost $100 and include 3.5Mbps of CVC, whereas the residential Home Superfast 250/25 bundle will cost $68 and include 5.25Mbps of CVC. Such discrepancies risk disincentivising business take-up of designated business services.
Telstra strongly believes that NBN Co needs to simplify its business offering and ensure the value offered will help more Australian businesses connect to the NBN plans best suited to their needs.