Rene Sugo, CEO of VoIP services company and ISP MyNetFone, believes RSPs will increase their National Broadband Network (NBN) prices once interim points of interconnect (POI) are removed, because current consumer prices are unsustainable.
Sugo told Computerworld Australia that while larger telcos are currently engaging in aggressive NBN pricing, he suspects current pricing models have been based on the use of interim POIs and do not take into account the eventual removal of the interim POIs.
“We don’t feel that these guys have priced a sustainable price for the future once NBN [Co] says you can no longer use the interim points of interconnect and you need to use the proper points of interconnect,” Sugo said.
"...we anticipate that retail prices will increase once the permanent POIs are rolled out ... because at the moment the majority of services are being delivered off interim POIs which have little or no bandwidth costs because these POIs are in capital city areas where the backhaul costs are negligible. The permanent POIs will be spread out geographically around Australia, so in many cases they will have a higher backhaul cost, which would have an impact on the price.
“I think you’ll see the cost to the consumer go up in 12 to 24 months once the full cost of the NBN has come through … once they realise … the cost of actually getting to all these regional sites to interconnect customers."
Sugo said it is still too early to tell how much consumer prices could increase once interim POIs are removed.
There are currently four interim POIs which companies are using to connect users to the NBN. Eventually, these interim POIs will be transitioned to 121 permanent POIs over the next three years.
The transition to permanent POIs could also mean regional Australia misses out, according to Sugo.
“Once the final POIs come into action they will be spread out through regional Australia, which has a much higher cost to build to due to the large distances involved,” he said.
This will result in higher consumer NBN prices, he said. It could also mean some NBN providers choose not to service regional areas at all, Sugo said.
"Some smaller players might opt to only directly service major areas," Sugo said.
Chris Coughlan, consulting director at Telsyte, said while it would be unlikely that NBN prices would increase, RSPs will incur costs to connect their points of presence (POPs) to the POIs.
"To offer a national service the RSP will need to connect to each of these POIs, some will be with be in the cities and others in regional Australia," he said.
The cost to connect the POPs to the POIs will depend on several factors, according to Coughlan. For example, the distance between an RSP's closest POP and the POI; the amount of transmission they need to and from the POI; and the number of transmission providers that service the POI, as this will create the necessary competitive market to enable competitive transmission pricing.
"The cost of this transmission can be significant and RSPs will need some scale, in terms of customers, off a POI to cover the fixed costs of servicing these customers. If they have doubts about their ability to build this scale, they may choose not to service some locations or buy through a wholesale intermediary, such as Telstra or NextGen, until they have the scale to justify going direct," Coughlan said.
"While costs for RSPs will increase as NBN Co moves from their city-based interim POIs to the final POIs, the RSPs would have been aware of this when they did their business case and set their retail prices. I very much doubt they will increase prices when this occurs."
However, Coughlan mirrored Sugo's statements that regional areas might be affected.
"Most RSPs will try and offer a national price and I can't imagine that the larger ones - Telstra, Optus, iiNet and TPG - will differentiate prices in regional areas. A more real possibility is that some RSPs may not provide services in areas that are costly from a backhaul perspective, therefore limiting the choice for consumers in those locations," he said.
"[However], in the longer term, as backhaul is provided to the majority of these 121 POIs from multiple providers, the price will drop and the incremental cost in these areas will slowly diminish."
Paul Budde, telco analyst at BuddeComm, also suggested it was unlikely NBN prices would increase.
“I find [it] very hard to [believe] that retail RSP prices are going up, with now more than 40 RSPs competing in this market ... Competition in this market is ferocious already, why would that change?” he said.
“The high level of retail competition will keep this market in check. The wholesale prices set by NBN Co are under the control of the ACCC and I can’t them see agreeing to any unwarranted price increases.”
Another potential scenario Sugo suggested was larger telcos will need to lower their margins as they make the shift from running services on their own DSLAM infrastructure and the larger profits that brings.
“Larger telcos at the moment are making a lot more money out of DSL because they have DSLAM infrastructure and they get quite a low cost model, whereas when we go to [the] NBN, everyone has the same cost model because NBN [Co] is providing last mile access,” Sugo said.
“They’re now going to be forced to adjust either to lower margins or they’re going to have to put their prices up to maintain that same level of margin.”
While smaller companies have an advantage because they are used to operating on lower margins, Sugo said, the NBN will also potentially be more challenging for smaller companies.
“…[the] NBN’s gone for a large number of points of interconnect, which does make it a bit challenging for the smaller guys to reach full footprint coverage of the NBN,” he said.
“Certainly the capital cities will be reasonably competitive, but the regional sites are more difficult to get to and that’s where some of the smaller guys will suffer in getting access to all the points of interconnect.”
In order to compete with larger companies, Sugo said smaller companies will use the NBN to sell additional applications on top of access to the network. Non-telco companies could also enter the NBN market ‘over the top’, Sugo said.
“At the moment it’s not viable for [companies such as Google and Apple] to resell DSL or VoIP because it’s too complicated [and] it’s too messy ... But if NBN [Co] lives up to the expectation of providing high quality ubiquitous broadband with very smart business-to-business systems, then it would definitely open the door for one of these non-telco [companies] to come in,” Sugo said.
Google has already signalled its intentions to enter the broadband market in the US, last night announcing it has "embarked on a journey" to bring ultra-high speed broadband to Kansas City under Google Fiber, which it states is 100 times faster than America's current average broadband.
"Gigabit speeds will get rid of these pesky, archaic problems and open up new opportunities for the web," the company said in a blog post.
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