CommsDay Melbourne Congress 2016: New Street Research

Ian MartinSenior Telecommunications AnalystNew Street Research Australia and New [email protected]

Game of PhonesAligning risks and value in the NBN

October 2016

Game of Phones

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NBN state of play

NBN can’t meet all expectations

NBN is industry policy…

…when it should be about LTIE

LTIE requires capital efficiency as well as competition

How NBN can meet the LTIE- i) separate the USO, means no need to undermine Competitive Neutrality - ii) open aggregation market to competition, access anywhere in NBN - iii) harness capital risk management abilities of RSPs

NBN state of play


NBN can’t meet all objectives


Fundamentally, NBN can’t achieve all of its operating objectives and ROIC targets in its current form- ARPU trend is 5-6% pa to 2020

- likely needs to continue at that rate for some years- Take up of high speed services is too low; partly demand related partly - Disincentives in provisioning traffic aggregation- High cost structure is partly to blame:

- Forced transition for A$10bn copper network to A$46-56bn MTM (mostly FTTN) network- Plus extensive non-commercial areas- Compounded by structural separation

- Incentives of RSPs is price, service and margin, not NBN RoIC

Government can’t write down the NBN at this point- Its spent <50% of the budget- Its built <50% of the network- It hasn’t tested the wider market for demand for HSBB services

NBN is industry policy

www.newstreetresearch.com 5Source: ABC website

Spending A$50bn+ on a SFBB network without an evaluation- Who benefits? Industry players with Internet-based business models- (Potentially) RSPs, but not like the value tfr with pricing copper below cost

May benefit if demand emerges, don’t bear the cost if it doesn’t.- Who pays? You know the answer to that

Increasing interest in bypass


• Vocus founder James Spenceley: “The evolution of fixed wireless, to enable the delivery of 40mbps and 100mbps speeds to households, is one that surprises many people… By owning the network end to end Uniti can deliver the performance people want, coupled with the ability to roll it out quickly.” (Uniti Blog, 8 Aug 2016)

• Spark NZ CEO Simon Moutter: “We've been quite a heavy over-builder and investor in backhaul over the last two or three years. So we understand the issue, as you want capacity, you want fixed cost economics and service control. …and we'll be looking to overtime make sure we're in complete control of that fibre backhaul capability, which doesn't necessarily mean we're going to own it all, but if we need to we will.” (FY16 result briefing)

Long term interests of end users


CompetitionEfficient use of, and investment in, infrastructureAny to any connectivity

Federal Court (2006) must give equal weight to all three• ACCC doesn’t understand capital efficiency; doesn’t assess risk• Fundamentally, if you don’t get capital efficiency right, wont have effective competition

Aligns the interests of those that invest

How NBN can meet the LTIEi) Separate the USO => this would mean no need to undermine Competitive Neutrality ii) Open the traffic aggregation market to competition => no need to reserve to NBN co, no need for CVC iii) Most importantly, harness capital risk management abilities of RSPs by allowing end-to-end ownership

Direct subsidy for non-commercial areas

Average cost per line v average revenue


Open traffic aggregation to competition


- No reason for this to be reserved to nbn co other than cross-subsidising small RSPs- If the Government wants to do that, it should do that directly, not by distorting CVC prices- Risks marginalising a third full service (5G) player (VHA +/- TPG)- Principle: access should be provided anywhere in the network that is technically feasible

RSPs best placed to manage capital risk


No incentive to manage capital risk unless you face capital risk

RSPs are best placed:

• To assess risk: demand and supply

• Manage risk: put together packages and prices that best drive value

• Respond to changes in demand and supply

• Learn from their errors

So lease access lines (FAN to premise) to RSPs in 15 year lease

• Works for radio frequency spectrum

• Combines the positive attributes of efficient capital management with best attributes of rivalry in supply

To best manage capital risk,RSPs must face capital risk


So lease access lines (FAN to premise) to RSPs in 15 year lease

• 15 year transferable lease

• Transferable if or as customers switch RSPs

• Lease value is FN of expected CF = Net ARPU plus price cap over 15 years

• Customer switches RSP, lease is transferred at remaining value

• NBN as a holding company: settlement of switched leases every quarter, so only net transfers

• Government realises capital value (such as it is) of NBN post build by sale of leases to RSPs

• RSPs hold leases, have capital at risk, so greatest incentive to drive the value of the lease- improve the set of services on offer, increase usage and utilisation- better structure prices and package- win customers by doing these better than rivals

• Maximises difference between lease charge and Operating CF value

Issues in lease of NBN lines


Value of lease set by formula Net ARPU +/- price cap

• What happens if RSP can’t see value greater than lease?

• Same thing happened with spectrum: VHA declined to bid

• Same thing with Telstra carrier of last resort obligations

• Comparable to CVC issue: RSPs may not see value in NBN at current price structure

• Will also require a fall back COLR obligation

Maintenance

• May remain with nbn co, or taken up by RSP at RSPs discretion

• NBN has a long term incentive to ensure value is maintained

What other issues?


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CommsDay Melbourne Congress 2016: New Street Research

Technology

Transcript of CommsDay Melbourne Congress 2016: New Street Research