How Netflix mania helps the NBN

Netflix arrival in Australia has caused a flurry of activity in the telecommunications industry and local media organisations have rushed to respond by launching their own media streaming companies. Foxtel has lowered its prices significantly and now gone online to meet the Netflix generated threat to its traditional cable offering. In Business Spectator what this means for the NBN is discussed and the picture is rosy if nbn can capitalise on the data boom.

Read the full story below

The long awaited arrival of Netflix on Australian shores has galvanised attention on the local media streaming market. Unsurprisingly, consumers are enamoured by the proposition of cheaper and timelier online access to content and NBN looks set to become the major beneficiary of the media streaming explosion.

The additional income from increased data usage will boost NBN's coffers at a time when the glacial pace of the National Broadband Network rollout is having a negative effect on projected revenue.

For the telecommunication industry, this streaming boom brings into focus its perennial gripe about NBN’s wholesale charges and the financial drain that bandwidth related charging has on the ability of service providers to deliver a reliable, congestion free experience to customers.

The very nature of how the telcos pays for bandwidth rather than data usage should be a warning that capacity and congestion problems are never far away. Without careful resource management the congestion issue will keep rising to the surface and hit the headlines.

With that in mind, should NBN be considering alternative wholesale price models or does the existing approach provide a fair and flexible outcome?

NBN pricing

NBN's uniform national wholesale product pricing aims to achieve the following objectives:

• Maintain uniform national wholesale access pricing
• Foster competition and innovation by offering access to qualifying customers, regardless of their size
• Provide simplicity, while offering the flexibility required by customers to differentiate their retail offerings in the market
• Deliver a wholesale service that will provide an appropriate return to NBN Co's shareholders and the Government 
• To meet these pricing objectives, our pricing is harmonised across the entry level product for the technology platforms used to roll out the NBN

In practice the objectives have been achieved by setting four charges that capture the number of customers connected to the NBN and the cost of providing bandwidth.

The NBN consists of 121 separate networks that include a facility called the Point of Interconnect (PoI) and one or more Fibre Serving Areas (FSA). Within each FSA, premises are connected by fibre to nearby nodes where traffic is aggregated and transported to larger nodes where the process is repeated until finally the traffic is transported from the FSA to the PoI over transit links.

FSA might be close to or many hundreds of kilometres from the PoI especially in areas outside the major cities.

Retail Service Providers (RSPs) pay monthly for a physical connection to the PoI and are required to pay an initial setup fee that varies depending on the distance from the PoI to the RSP’s customers.

In addition to the physical connection charges, RSPs are charged for an Access Virtual Circuit (AVC) for each customer. The AVC includes a speed profile (e.g. 12/1 Mbps) and connectivity from premises to the PoI. RSPs are also charged for a Connectivity Virtual Circuit (CVC) which provides data throughput from the PoI to Fiber Service Areas (FSA).

A cornucopia of price concerns

The streaming media data usage boom should be the catalyst for a further review of NBN's wholesale charges but the rationale for a review needs to be put in context with the many other changes happening around the periphery.

Over the past five years concerns have been expressed from a range of organisations about NBN’s product pricing. Since the last election NBN has also introduced a range of additional one off charges associated with green-fields and fibre on demand in areas that will now fall into the fibre to the node footprint. There has also been a significant price reduction to the CVC charge that was most recently set at $17.50 per month per Mbps from 1 February.

The Australian Communications Consumer Action Network (ACCAN) has expressed concern about the green field charge and that tenants are being charged for new NBN connections rather than building owners. This is a valid concern, given that the earlier on demand process has been dumped for an automatic connection process that occurs as an area is provisioned.

The government has also set in motion a review that aims to introduce an industry levy to pay for the additional cost of providing the NBN in regional and remote areas in much the same way that the Universal Service levy currently operates.

What this means is the internal cross subsidy being used now by NBN will be replaced by a transparent industry levy.

In 2012 Telstra was awarded a 20 year contract to provide the existing Universal Service and for the government to revamp the Universal Service to include data and other services such as community Wi-Fi, it will be necessary to renegotiate Telstra’s contract.

Meanwhile, Telstra continues to grumble in the background about the Australian Competition and Consumer Commission’s (ACCC) recent price determinations regarding its copper access network (CAN). Telstra’s argument that the cost of providing adequate service levels for customers remaining on the CAN is rising as customer’s transition to the NBN has so far fallen on deaf ears and rightly so because Telstra is being well compensated for the shift of customers from the CAN to the NBN. However, Telstra’s argument to the ACCC about NBN’s glacial rollout are likely to become more acceptable over time.

Improving product pricing

The emergence of streaming media operators means that more data is flowing across the NBN and increased throughput means increased CVC revenue. The industry argument is that as throughput increases the CVC charge should drop further and this is correct to some extent but the current state of the NBN rollout has reduced the anticipated new customer revenues. As a result, there has been significant cost added to the bottom line to gain Telstra’s acquiescence to the new agreement.

What this means is that product pricing is unlikely to change as quickly as the industry would want it to but there are ways that NBN can modify product pricing that should remove some of the concerns of the service providers.

Data throughput demands ramp up especially in the peak evening hours and as media streams require reliable connections with a minimum bit-rate there is an opportunity for NBN to utilise traffic class management for media streaming services and introduce a different CVC charge for what would be either Type 1 or Type 2 traffic, that includes fixed rate time delay sensitive services such as voice and assured rate guaranteed bandwidth services such as video.

As more video is streamed there is an opportunity to proportionately reduce CVC charges for video throughput.

For NBN to offer an improved product pricing structure there is a need for the existing NBN “Traffic Classes” to include an asymmetric managed traffic class other than the NBN’s Traffic Class 4 that is the lowest quality “best effort” traffic class.

Make CVC throughput charges per hour rather than per month can provide greater flexibility and permit service providers to reduce overall throughput costs. For NBN the most income occurs during peak hours so there is an opportunity to consider different time of day charges.

The alternative to the per hour CVC charge is to charge per gigabyte delivered, however, the latter option means that NBN would need to completely change the product pricing approach whereas moving to per hour charging is an incremental change.

The former Telstra chief economist John De Ridder recently stated that a per gigabyte charge “removes the ability of ISPs to introduce contention into the NBN Access Network and “lower barriers to entry”. 

Service providers should see the benefit in being able to manage media streaming separately to other data as customer complaints will tend to focus on delay sensitive services that are affected by congestion. Utilising a different traffic class for video will permit service providers to use the NBN‘s Traffic Class 4 for non-delay sensitive traffic and a higher contention ratio.

The initial goal of the NBN was to provide Australians within the fixed network footprint with a 100/40 Mbps NBN connection. Lowering the AVC charge and removal of the AVC speed tiers below 100/40 Mbps would increase uptake and usage. De Ridder summed up this argument when he stated “With [higher speeds and] more bandwidth bestowed on fixed customers, we may then see the innovations in new services and utilisation that the NBN was supposed to unleash.”

The cost of backhaul remains a concern that affects service providers and indirectly affects NBN as the level playing field that will promote competition is detrimentally affected if areas such as Tasmania cannot benefit fully from improved competition. The government needs to consider every alternative to drive down the cost of backhaul including an industry levy to normalise backhaul charges.

The media streaming boom provides NBN with an opportunity to reduce CVC charges while continuing to increase revenue at a rate that will reduce the rollout debt burden. But for this to occur there should be a broad review of product pricing to bring improvements through pricing flexibility and traffic type differentiation.

Mark Gregory is a senior lecturer in the School of Electrical and Computer Engineering at RMIT University.