NBN's a can of worms on pricing

NBN Co CEO Bill Morrow's statements in Senate Estimates last week are discussed in InnovationAus focusing on NBN Co's consultations on a new volume-based discount model that would be made available to individual Retail Service Providers (RSP) based on the RSP average data usage.

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NBN Co CEO Bill Morrow told Senate Estimates last week that NBN Co is consulting on a new volume-based discount model that would be made available to individual Retail Service Providers (RSP) based on the RSP average data usage.

The company is yet to explain how this pricing model will not discriminate against smaller RSPs.

Mr Morrow said that “a key part of the business model is naturally dependent on our pricing structure. We continue to consult with the industry on all of our product decisions, and CVC is no different.”

“Our CVC pricing has come down by more than 20 per cent over the past 20 months, from $20 in February 2015 to $15.75 now.”

“Part of this reduction comes with an industry average volume-based discount model, and we are now consulting on a discount model that moves this to an RSP average, allowing retailers to further differentiate their product offerings and pass along lower prices as users demand more data.”

The existing industry average volume-based discount model introduced last June reduced the Connectivity Virtual Circuit (CVC) charge, and was welcomed by consumers as it was anticipated that retail service providers (RSP) would move to lower their monthly plan charges and offer more data.

However, the anticipated downward movement in monthly plan charges and increased data availability did not materialize as expected. In part, this is due to RSPs struggling to adjust to the sudden boost in data usage attributable to Netflix entering the Australian market and other factors like high backhaul charges.

Criticism of the National Broadband Network (NBN) pricing model has been growing and the volume-based pricing model is being compared with the connection-based pricing model being utilized by Chorus in New Zealand.

The Chorus approach has led to a significant uptake of the 100/20 Mbps connection speed tier, whilst the NBN Co approach has resulted in Australians languishing on 12/1 Mbps or 25/5 Mbps.

NBN Co’s existing pricing model is designed to reduce the amount paid by the RSPs to NBN Co as average data usage increases.

The problem with this pricing model is there is no incentive for individual RSPs to offer higher connection speeds to consumers, as the price paid for the speed tiers is not affected by the discount on offer from NBN Co as the industry average volume increases.

Currently the monthly price paid for an individual consumer Access Virtual Connection (AVC) charge to the NBN ranges from $24 per month for 12/1 Mbps through to $38 per month for 100/40 Mbps.

Add to this the CVC charge and the cost per month for an average customer connection is far more expensive than in New Zealand, where Chorus charges a flat fee of NZD$42 per month for 100/20 Mbps with no data usage limit.

NBN Co is required to maintain a uniform national wholesale access pricing regimen, which was a central tenet of Labor’s NBN plan that sought to prevent large RSPs from seeking discriminatory volume-based discounts from NBN Co.

Section 151DA subsection 51(1)(5) of the Competition and Consumer Act 2010 states that “for the purposes of this section, uniform national pricing of an eligible service supplied, or offered to be supplied, by an NBN corporation to service providers and utilities is achieved, if, and only if, the price-related terms and conditions on which the NBN corporation supplies, or offers to supply, the eligible service to service providers and utilities are the same throughout Australia.”

NBN Co's current 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

The RSP average volume-based pricing model identified by Mr Morrow could operate in the following ways.

Currently the industry average volume-based pricing model means that as average usage on the NBN increases across the industry all RSPs benefit from a lower CVC charge.

The RSP average volume-based pricing model could include a CVC base price and individual RSPs would pay an additional CVC charge based on the average data usage of its customers.

A variation to this model is to have a CVC base charge and additional CVC usage tiers that are discounted based on an industry average volume-based usage formula.

The more radical option is to move from a single CVC monthly charge to a number of usage tiers charged monthly.

The last two options could mean that a RSP that uses more data would select a higher usage speed tier and get a larger discount per Mbps per month by doing so.

Depending on how the CVC usage tiers are designed there could be a higher overall per Mbps per month charge for the lower usage tiers.

If the RSP average volume-based pricing model identified by Mr Morrow permits larger RSPs to get a cheaper CVC price per Mbps per month than smaller RSPs, it is likely that the ACCC will find the model to be discriminatory and not in the spirit of the uniform national wholesale pricing legislation.

Has NBN Co found a loophole that it is seeking to exploit or waiting in the hope that the government will be able to change the NBN-related legislation?

Before NBN Co is able to move forward with the RSP average volume pricing model a number of questions will need to be answered, otherwise NBN Co could breach Section 152AXD of the Competition and Consumer Act 2010, which states “an NBN corporation must not, in carrying on any of the following activities, discriminate between access seekers [when] developing a new eligible service.”

Mr Morrow told Senate Estimates that “if all goes well we hope to implement this change early in 2017. As data usage continues to increase over the network, we expect CVC pricing to drop further. In fact, with our forecast usage we see the CVC pricing approaching $10 a unit.”

Until NBN Co releases details of the RSP average volume-based pricing model, it is difficult to say exactly what NBN Co intends to do.

But for smaller RSPs, the warning signs are already there. Possibly the recent entry of MyRepublic into the fray could provide NBN Co an opportunity to rethink its next move.

Dr Mark Gregory is a Senior Lecturer in the School of Engineering at RMIT University