Utility pricing key to NBN viability: Analyst

Services on the National Broadband Network (NBN) need to be charged like electricity and water, telecommunications economist, John de Ridder has told a Senate Select Committee.

According to de Ridder, the assumption that NBN services will be sold based on a guaranteed end-user speed of 100 megabits per second (Mbps) isn't viable.

"People are not prepared to pay for speed," de Ridder told the hearing. "You could wind up spending $40 billion on a network where the capability is never used."

"Most people are thinking around speeds," he added. "I'm thinking 'No, no the utility pricing is around volume'."

de Ridder proposed a utility-based pricing system in a paper submitted to the committee, and is based on a scheme his consulting firm formulated in conjunction with PriceWaterhouse Coopers for TransACT's bid in the $4 billion NBN Mark I tender process. de Ridder affirmed the pricing system to the Senate hearing as "what Australia can do to set world's best practice".

Under the proposed pricing system, NBN Co would wholesale access at a fixed price to service providers, who could then pass that on to consumers with a margin profit and charge volume use as well. de Ridder suggested access pricing around $20 a month, with a data charge of $0.50 per gigabyte.

An analysis included in the submission paper showed that users were currently paying on average $54 per month for ADSL2+ services from the six biggest service providers, with an additional $0.50 per gigabyte for data use.

"For the broadband port, NBN Co will say to the ISP 'it's going to cost $20 for me to provide you connection to that port, and you'll also pay $0.50 a gigabyte for data transfer to the customer'," he said.

"Australia has the opportunity to not only be the world's best network, but also provide the world's best pricing model to support it. What you want is an access pricing regime which is consistent with that."

de Ridder said that his annual analysis of ADSL2+ costs showed data charges had dropped from $1 per gigabyte to $0.50 per gigabyte within a year. He forecast this could drop to as low as $0.02 per gigabyte within a few years.

Most ISPs resell Internet products on Telstra's copper network with some value-added services. These service providers offer ADSL2+ through their own DSLAM hardware set up at local Telstra exchanges which, according to de Ridder, recoup their cost within 18 months.

"They have a very nice business model with very high margins, but the future with this utility vision is that access will become a utility," he said. "It's going to look more like electricity distribution does today, where margins might be a third of what ISPs are getting today."

While service providers are supporting the NBN at the moment, de Ridder questioned this once pricing and regulation changes were in place.

"When the rubber hits the road and they're asked to pay real prices, watch them squirm," he said.

It is still unknown whether NBN Co has set wholesale access pricing for Internet service providers, despite the imminent launch of the Tasmania trial sites later this year.

"iiNet still have no idea of what, according to them, NBN is going to charge them for the wholesale," Senator Ian McDonald said during the Senate hearing. "It seems incredible that that could be the case when in a couple of months it's going to be operating."

However, iiNet chief regulatory officer Stephen Dalby denied claims that iiNet had no knowledge of pricing for the sites.

"We've been in discussions with the service agreement with the NBN Co for some time now, and that's a complex agreement," Dalby told Computerworld Australia. "We don't have an agreement, we haven't executed a contract. But I expect we will in a fairly short time.

"Even when the agreement is completed, it is going to be a confidential matter. We're not going to publish what our access prices are. If the regulator wants to get into the process - which is very possible - to make sure prices are reasonable, then that may become a public matter. But the agreement between ourselves and NBN Tasmania is a private, commercial agreement."

Dalby said that while pricing was not confirmed for the Tasmania NBN sites, consumer pricing would likely be similar to the ISP's current ADSL2+ offerings, as well as the prices currently charged to customers of its fibre-to-the-home service in Alamanda Estate, Point Cook, Victoria. The Victorian fibre service, which was set up separately from NBN Co, ranges in price from $49.95 with 10GB download quota and 25Mbps speeds to $159.95 for 180GB quota and the same 100Mbps speeds promised to Australian homes under the NBN.

Copyright © 2010 IDG Communications, Inc.

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