Monday, 10 September 2012

NBN: Why Mr Turnbull's plan leaves me uneasy

I finished a previous piece in this series uneasy about Mr Turnbull's plan and I'm now starting to understand why.

I've a dear friend who's idea of splitting the bill for a coffee or lunch is to work out her share to the cent. I'm happy to evenly split the total, even amongst large groups.
When I was at O.T.C., the 30 or so exchange programmers would "do lunch" once a fortnight, giving me 100 or more occasions to experience the reactions of many personality types in sharing bills.

For me, those lunches were all about socialising, the cost a minor issue. A few dollars either way wasn't important if I was enjoying myself. Once I got home at 1AM.
I was happy to divide the bill equally, give the secretaries (less well paid) a discount and leave a generous tip. Which meant rounding up to an easy number of whole dollars.

We had "Neville", who every time he came along would quibble about exactly what he'd ordered. So, like my dear friend, we had to respect his attitude to money and accomodate him. For both "Neville" and my friend, being forced to pay more than their share would've been anathema and they'd object in righteous indignation. Paying $1 too much would destroy the whole experience for them and it would continue to rankle for a very long time. They complain long and loud about injustice.

I learnt that for some people, price is the sole criteria of merit for a product or service.

And that's the whole trouble with offering anything for sale to the general public, there are many incompatible attitudes to money and criteria used to judge "merit":

  • price is the only thing for some people.
  • highest quality or latest functionality are what make people queue for hours waiting for Microsoft or Apple products.
  • peer group conformance drives many: having the same gadgets and services as your friends.
  • some people have specific affiliation, location, use, support or access and timing needs.
  • but most people appreciate "value for money". This is why many products come in 3 price points: the very cheap "poverty pack", the expensive "Luxury Edition" with all bells and whistles and the mid-price, good value model that's 90% of the function for 70% of the cost.
My unease is with Mr Turnbull's value proposition.
This is a political policy that must be sold to the electorate, and all he's got to differentiate on is price.

The public is going to behave like purchasers: with no one common criteria and conflicting definitions of "best".

It's a tightrope, with a central question: Which purchaser attitude will predominate?

Labor has already taken the "high ground" with Fibre everywhere: the latest functionality and "best" quality. Leaving Mr Turnbull and the Coalition to look at price as their "product differentiator".

And there's the rub... The FTTN is an unknown amount cheaper, but significantly lower performance.

We already know a small percentage of the population are sold by 'cheaper' - probably cancelled out by the "Luxury Model" folk. Unless you live in the bush and have to use dial-up and satellite.

So it's likely that the central group, the "value for money" deciders, will swing this.

The question becomes: What value proposition will the middle group see?
And I'd like to deal with that via an analogy.

Imagine you bought a brand-new Holden Gemini in 1980. Went well, state-of-the-art, cheap to run, generally you're happy with "value for money" it gives.

Then Unleaded petrol came along in 1986 and after a few years you had to have the values and guides changed. A reasonable investment, much less than buying a new car.

By the late-90's, the car is near 20 years old and needs a major overhaul. The engine gets replaced, so you might upgrade the suspension, reupholster the back seats, add new front seats, redo the interior, add new 'sportier' rims and give it a nice paint job. It's expensive, but still less than a new car - and the car is a 'statement'.

Another 10-15 years on and the old car is tired.
You speak to the mechanic:
 A more powerful engine is going to need a new drivetrain, wider tyres with body and suspension work to support it. For another 20-25% you could buy a new car, with modern passive and active safety features, even all-wheel drive and importantly, at the beginning of its lifecycle.

For two of the three groups, the decision is obvious: either choose the cheapest or go for the best.

But how do the intermediate, "value for money" group decide?
For me, 80% of the price for 50% of the functionality is a bad deal.

I'd like to assert that the 1980's Gemini analogy is very accurate.

The phone system has been around for a century and tweaked, modified and pushed to new levels of performance. My home landline delivers 175 times the speed of the first modem I used 15+ years ago.

BUT, the FTTN is the last evolution possible with the copper network.
And Fibre Optic, commercially introduced here to Telco long-distance in 1988, is a solid technology at the beginning of its lifecycle.

For the mid-market consumers, the value-for-money equation decides.
Fibre starts with a guaranteed speed 2-5 times that possible with FTTN's VDSL for the majority of homes at more than 65% of the maximum distance.
At then in a couple of years, they'll upgrade it another 10-fold. guaranteed.

There is no way that the (guess) 70,000 new "nodes" needed to be rolled out for the FTTN will be 2-5 times cheaper than the Fibre-only network. The price of the network termination in the home will be roughly the same. The existing ~8500 RIM/CMUX units serve many times more than the ~100 lines that each VDSL node would serve, and the maximum cable distance is 2-3 times too far. Transact installed pretty much this technology (small VDSL nodes) but much better cable, "cat-5" around a decade ago.

But the best Mr Turnbull can say about the price of the FTTN is "we'll see":
I have been careful not to nominate a particular sum of money as the difference between what we would do and Labor’s current plan.
This was in relation to Alan Kohler's speculation that the FTTN might be $20 Billion cheaper than Full Fibre. A bit more than half the price for well less than half the performance and no upgrade path.

But Mr Turnbull, and the Coalition, seem to have made a very solid promise:
We will complete the NBN, there need be no anxiety or uncertainty about that, and we will do so sooner, cheaper and more affordably for users.
Which, after Labor and NBN Co managed to get Telstra to enter into the Structural Separation Undertaking after 3 years, is no longer a difficult or "courageous" decision.

As I've said before, I have a lot of respect for Mr Turnbull and his business acumen. He seems to do careful and through research on topics and has the "intellectual firepower" to grasp tricky technical, legal and financial questions.

So he must know that his only hope of selling the FTTN to the value-for-money group is to have detailed costings, which means detailed deployment plans. But he had no answer when I asked him about detailed deployment plans.
FTTN deployments, because they follow the pattern of the existing lay out...
So this is the Value Proposition I think Mr Turnbull is putting for his Hybrid-NBN of mainly FTTN with HFC, wireless and some Fibre:
  • For 60% or more of the capital cost,
  • we'll give you 20-50% of the performance,
  • with no upgrade path,
  • except complete replacement with Full Fibre
  • with almost nothing being able to be reused,
  • and it will be technically obsolete, and so valueless, long before its operational life is over.
The clincher for me is that while a VDSL-FTTN will be, as I've said previously, better than what I have now, it won't be value-for-money, especially because it's obsolete when built and will need full replacement in 2020-2030.

Building a VDSL-FTTN means all its costs have to be fully recovered in just 10-12 years. That makes depreciation the most expensive operational cost of this solution.
Who gets to pay to dig up all the copper and remove the nodes and their conduits etc?

That designed-in removal, disposal and conversion cost from VDSL-FTTN to Full Fibre has to be paid for, by the subscribers. Even if the cost of Fibre and necessary electronics falls 5-fold, the majority of the replacement network costs are planning, earthworks and labour related.

We can reasonably expect the cost of Fibre related equipment to fall by deferring a Full Fibre network, but those savings don't financially justify deferring building a Full Fibre network.

What's he not saying is that he's building the FTTN as a throw-away, it's purely a stop-gap measure and an expensive one at that.

I absolutely agree with Mr Turnbull that he'll be able to deliver a sort-of NBN "sooner and cheaper", but without detailed costings of this deployment and estimates of a full Fibre replacement, he cannot assert "more affordably".

He might hope this is true, but can't guarantee it, and his VDSL-FTTN won't be considered value-for-money by the majority of consumers.

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