How NBN plans to raise speeds, reduce congestion AND cut prices
Can the national broadband provider pull off this miracle simply by changing wholesale prices? We investigate.
Fact: the National Broadband Network doesn't have a great reputation right now. Complaints abound about how much NBN services cost and whether it delivers the higher speeds for all Australians that the network hype promises. In the last month, we've seen both Telstra and Optus offer refunds to NBN customers because they can't actually get the speeds they're paying for on their plans. In the background, there's an ongoing congestion issue: when lots of people are using the network (say to watch Netflix after dinner), performance slows to a crawl.
This year, we've seen NBN Co variously blame these issues on the fact that consumers are cheapskates and will always buy the slowest, least expensive plans; factors outside of NBN's control such as lousy copper in buildings and dodgy Wi-Fi reception in homes; and service providers (the brands who actually sell the plans to Australians, like Telstra, Optus, TPG and iiNet) not purchasing enough capacity to make sure all their customers are happy.
None of that has made much difference to Australia's enthusiasm for NBN. In areas where the NBN is already available, less than 50% of potential customers have actually made the switch. Meanwhile, amongst those who have signed up, NBN Co's own figures show that only 16% are choosing the fastest plans (as of November 2017).
Most people opt for a 12/1 connection, which is no better than existing ADSL services and often worse, or a 25/5 connection, which might be a little better than ADSL2 or HFC – but only if your provider isn't suffering from a congestion problem. That means that customers aren't enjoying high speeds. It also means NBN Co isn't getting as much money, which isn't great news for a government-owned organisation which is ultimately supposed to be privatised at some point after the NBN rollout finishes in 2020.
Today, NBN Co has announced major changes to its pricing model which it hopes will be able to trigger a holy triumvirate of improvements:
- Encouraging Australians to buy the faster 50/20 and 100/40 plans.
- Changing wholesale prices so that those plans are actually cheaper.
- Changing wholesale pricing models so that congestion is no longer an issue.
In other words: NBN plans will be cheaper and better and we'll want to buy more of them. NBN Co's CEO Bill Morrow describes this as a "pricing evolution", but it seems like a much bigger change than that. Is such a three-point turn actually possible? To work that out, we'll have to dive a little deeper into what is actually changing.
The NBN's congestion problem: not enough CVC
To understand why congestion is such a big problem and why we tend to opt for the cheapest, slowest plans, you need to understand how NBN Co, as a wholesaler, sells access to individual service providers. An analogy may be useful.
Think of the NBN as a giant stove which is designed to boil water, with each customer being represented by a saucepan on a hotplate. As a customer, you can choose which kind of hotplate you want: anything from a turbo 100/40 to a bargain 12/1 (your options might vary a little if you live in a regional area, but some form of hotplate will be on offer). Your choice represents the maximum amount of hot water (speed) you'll possibly get. However, the actual amount of hot water you receive depends on how much water your provider can pour into your saucepan at any given moment.
NBN Co charges service providers a monthly fee for each saucepan that is placed on a hotplate. Better hotplates cost more. In NBN-speak, this is known as the access virtual circuit (AVC).
NBN Co also charges providers for the amount of water that's available. Providers buy this in bulk, with discounts for bigger purchases. Again in NBN-speak, this is known as CVC (connectivity virtual circuit).
The more water the provider buys, the better the experience for customers. The monthly fee you pay for the NBN is essentially made up of the wholesale AVC charge (the hotplate), plus a sum to help cover bulk CVC costs (the water), plus as much mark-up as the provider thinks it can get away with. As a business, it needs to make a profit, but if its prices are too high, customers will go elsewhere.
The congestion problem occurs because providers aren't actually guaranteeing that any amount of water will be available when you want it. To maximise their own profits, they try and buy as little water (CVC) as possible, on the assumption that not everyone will want to boil lots of water simultaneously. Providers are stuck with paying for the hotplate every month, but the less water they buy, the more money they ultimately pocket.
So what happens? If not many people are using the NBN, water will flow freely and you'll get boiling water as quickly as your choice of hotplate allows. If every customer does try to boil water at the same time, some people will only get a trickle. And the less water your provider has purchased overall, the worse everyone's experience will be. If your provider is a water cheapskate, you'll get congestion, and all providers are cheapskates to some extent. Wholesale CVC figures suggest that providers assume only 1 in 30 customers will be online at any given time right now. That's a lot of empty saucepans.
There's very little the average consumer can do about any of this, because providers don't tell you how much CVC they're offering. They might promise unlimited downloads and quote a theoretical maximum speed or speed range, but if they haven't purchased enough CVC to service your connection when you settle down for an evening of The Crown, nothing is going to work very well.
Under this model, there's no way a provider can guarantee the service you'll get because CVC can easily "run out". And providers don't want to buy more CVC because that eats into their profit margins, which are often fairly thin. Case in point: the basic wholesale AVC charge a provider pays right now for a slow 12/1 service is $24 a month. If they're charging consumers $30 a month (which some do), there won't be much around to pay for any CVC, let alone turn a profit.
Ultimately, this model, set up largely to ensure NBN Co itself would have a decent income, hasn't worked. Customers tend to want to switch to a plan that's priced similarly to their current broadband, which means most people balk at spending more than $60 a month. Right now, that's very unlikely to get you more than a basic 12/1 service if you want unlimited downloads.
To change that, NBN Co needs to make faster plans cheaper, and it needs to change the way CVC is charged for so that congestion is less of an issue. It made one attempt to lower CVC pricing earlier this year, but that didn't make enough difference and led to rumours of further changes. Now those changes have arrived, following what NBN Co has said is six months of consultation with industry. So what's happening?
The proposed solution: discounted prices and guaranteed capacity
NBN Co is proposing two main changes to try and encourage customers towards higher-speed plans:
- In the short term, temporarily cutting the wholesale AVC price for 50/20 plans so that they're the same cost as 25/5 plans, making it more appealing to sign up for a faster plan.
- In the longer term, introducing two new high-speed plans which have guaranteed CVC included and with a lower cost for additional CVC, so providers are happy to buy more and consumers don't have to worry about congestion issues.
Let's look at each proposal in more detail.
Currently, the monthly AVC cost for a 25/5 plan is $27, while a 50/20 plan is $34. From today, the 50/20 will be cut to $27, meaning that 50/20 plans should cost the same as 25/5 options. NBN Co is also planning to offer a 50% boost to CVC for those plans, meaning providers can offer more capacity even if they're not paying any more. The end result should be customers signing up for (or switching to) a 50/20 plan rather than 25/5, because why wouldn't you?
Those changes are happening immediately, so we should expect to see updated plan offers from many NBN providers in the coming weeks. Remember, the numbers we've been discussing are wholesale prices, so you'll still be paying more than those numbers. Plus, those discounts are a temporary measure and only remain in place until the two new plan options are introduced sometime in the first half of next year. So let's dive into those.
The new 50/20 and 100/40 plans will have a guaranteed amount of CVC included: 2Mbps for the 50/20 plan and 2.5Mbps for the 100/40. Returning to our saucepan analogy: you can guarantee that there will be a certain amount of water in the saucepan no matter what else is happening on the network.
NBN Co has also priced those options so that they're effectively cheaper than current models. The 50/20 plan is $45 a month, while the 100/40 is $65. The chart below shows what a provider would pay under the old and new models for those services, complete with included CVC. The 50/20 plan is 27% cheaper at wholesale; the 100/40 plan is 10% cheaper. In both cases, the cheaper plan should be better, because there is guaranteed CVC for each customer.
One obvious problem with this approach: it doesn't mean providers can buy no CVC at all. If you're paying for a 100Mbps plan, having a guaranteed 2.5Mbps of throughput isn't much chop. Indeed, that's not even enough for an HD service from Netflix. So providers will still need to pay for CVC to deliver those higher speeds (and ensure plenty of water for everyone). To encourage that, the price will be dropped from $14 per 1Mbps to $8. That's a 43% cut.
A weird low-speed diversion into landlines
NBN Co is also planning another change which I've avoided mentioning until now because it somewhat muddies the waters. The main aim of all these switches is to encourage more people to sign up for faster services. However, somewhat perversely, NBN Co is also planning to make its slowest service, the 12/1 option, cheaper. Currently, services pay $24 wholesale a month for it; that will drop to $22.
Even more perversely, the revised plan will include a guaranteed level of CVC, just like its high-speed siblings. However, that guaranteed level is an utterly miserly 50Kbps – barely enough to download an email at tolerable speeds, and way too low for any form of video. What that level of service does enable is voice calls over the Internet. In effect, this will be an NBN plan for people who only want a landline. (Note this option won't be available on the Sky Muster satellite, so NBN users in rural areas will not be seeing any major changes.)
So why is this happening? The answer is political reality: it's not possible to cut prices on more expensive services without also tipping your cap to bargain buyers. Everyone in Australia will have to switch to the NBN if they want a landline service, and there's a segment of the market, largely made up of retirees, which has little interest in going online, a lifelong habit of landline use and (often) a very limited income. This service is aimed at them, even though in reality many of them could get a better deal with a pay-as-you-go mobile.
To underscore that this option will be lousy for anyone who wants to actually go online regularly, the CVC charges for this plan will actually go up from current levels. NBN Co spells this out quite bluntly in its position paper:
Usage charges for the entry-level speed tier will increase significantly, recognising this tier is not suitable for a full high-speed broadband experience. This is consistent with industry practice for budget services, which have low fixed prices and high usage charges, and will encourage movement to higher speed plans for those actually using more data.
That means providers aren't going to be investing in decent capacity levels for the new entry-level options when they arrive. While we'll have to wait for actual plans to be announced for a definitive verdict, based on what we know currently this isn't going to be a sensible choice for many Australians.
Will the providers get on board?
The biggest challenge for this proposal is simple: it will only work if providers actually get on board, offer cheaper plans and start coughing up for more CVC. That won't necessarily be the case. Some might (for instance) choose to keep pricing on their entry-level plans the same, even though they will be paying less at wholesale for them.
One major issue is that when the new tiers are introduced, the old ones will also be maintained. So no-one will be forced to change onto a new plan, even though it may well be a better deal.
If you're already on a faster NBN service, chances are you'll have to hassle your provider to switch you to a better deal once the new options appear. That won't always happen, and it's conceivable that some may only allow you to switch by signing up to a new long-term contract. There may be provisions in the final agreement to ensure that doesn't happen, but those haven't been discussed in public so far.
While having a (small) level of guaranteed throughput will mean that faster services should be more reliable, someone who is paying for a 100/40 service still isn't going to be thrilled if they can only get one-tenth of that during peak hours. And right now there is no reliable measure of how much CVC any provider offers, so the only real basis for comparison remains pricing and data allowances. The ACCC is looking to regularly publish data on this in 2018, but until that occurs we're all still largely in the dark.
When will this happen?
The discounts for 50/20 plans are theoretically effective immediately, but everything else will take longer. NBN Co has announced this as a proposed pricing model, but it still has to go through another round of consultations with providers to make sure they're happy. That process is expected to take five weeks or so, so we won't have really firm timelines until after Christmas.
The final model will also need sign-off from the government (the NBN's sole shareholder), but it seems unlikely that NBN Co would be proposing this if it expected to meet resistance at that level. Pushing the notion that the NBN should be profitable rather than delivering the expected level of service doesn't sound like much of a vote-winner either.
The current assumption is that the new 50/20 and 100/40 plans, completed with guaranteed throughput, will be available in mid-2018. The discounted 12/1 plans aren't expected until the end of that year.
NBN Co's goal is that 50/20 will become the new "normal": the plan most people default to. Whether that happens will depend on providers offering those plans cheaply enough, and purchasing enough CVC so that everyone gets a reliable enough service that feels like value for money. We won't know that for almost another year. That's entirely typical of the NBN: everything's a waiting game, even for a network that's premised on high speeds. The saucepan isn't on full boil just yet.
Angus Kidman's Findings column looks at new developments and research that help you save money, make wise decisions and enjoy your life more. It appears regularly on finder.com.au.
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Pictures: Shutterstock, NBN Co