NBN: Why FTTN rental must rise in a dual FTTP/FTTN world

The NBN deal the Coalition is offering to the general public is:

We're going to build a network past 12.2 million premises, saving $250 out of $3,000. In exchange, it's going to cost all of the unlucky 9 million homes, $5,000 each to ever get full Fibre. 

And they make an implied guarantee about Affordability: we'll keep the price of DSL cheaper than Fibre, forever, which is really 15-20 years.

Only that's not nearly true.


If on your street of 50 houses, 14 of them have Fibre and 36, including you, are on DSL, then all the costs of maintaining the whole of each network must be shared between those using a network. This is much more than the last 350m that runs down your street.

Whether you have 1 or 50 people connected to a network in a street, the costs of running the whole network, to connect, manage, bill and maintain for those houses, stays the same. The variable costs of providing any network connection to a house is almost, but not quite, nil, its the small amount of electricity used. The fixed costs, those that don't change with the number of services connected, are more than 99% of the network costs, operational and capital.

This is the economics of all Telecommunications networks, including wireless, and what made two Cable TV networks serving the same addresses pure madness: the additional cost of another user is too small to measure or bill. Telcos must spread their costs across a large number of users, or go under, as Cable TV did here within 5 years of being built.

Those 14 people on Fibre get to share the whole costs of their network while the 36 on DSL get to share the whole costs of their network. Funnily enough, those costs are not all that different, 10-25% different at most.

In the beginning, the share of costs of the "lucky few" on Fibre is two and a half times more than their  DSL-connected neighbours. The company that owns the DSL network can charge less and make more profit! That's "a beautiful set of numbers".

But what happens in 10 years when the situation has reversed because 11 of the 50 houses have converted to Fibre?

The situation is reversed: the "lucky majority" now get to share the whole network costs and their costs are much, much less, making the operator now able to charge much less for Fibre.

What's happens for the DSL houses is their share of maintaining the network increases by 250%.
The operator has two choices: absorb the costs of pass them on...
Any rational business must pass on the costs, raising DSL prices considerably, for a less capable service.

Of the 14 of 50 houses now left using DSL, many will start to wonder if its a good deal anymore: slower and more expensive! The service will also be much less reliable for technical & commercial reasons. Operators will direct their maintenance dollar towards the more profitable service, Fibre by then. DSL performance and reliability will decline because of falling revenues and margins.

If just one more house "defects" to Fibre, that increases the costs to those left by 7%. Not that much, but 275% of the original share of costs and 285% of the share of the other group.

The next house to go, "and now there were 12",  adds 8% to the latest cost, or up 300% on the original cost and 315%  the share the other group pays.

For 10 houses, they're paying 360% more than when they started and 400% more than the other group.
For the last 5 houses,  they're paying 720% more than originally and 900% more than the others.

Rational customers will flee the old network as charges start sky-rocketing, compounding the problem.

The only questions for the network operator are:

• When do we give those stuck on their old service a "special deal" to step-up to the new service?
• When do we declare the old service "no longer economic" and shut it down?

This is a cascade change or "tipping point" problem. As the more desirable service becomes cheaper, the barrier to entry reduces so it becomes more desirable and cheaper etc etc.

At some point, the more desirable service is also the cheapest, then everyone jumps on-board, or is forced to jump when the operator kills it. A good operator will maximise their profits and abandon a failing service well before it starts making a loss. The decision point is when the Gross Margin (%) on the new service is more than the Gross Margin on the old service.

Normally a tipping point is 40-50% of a population. Fibre starts at 28%::72%, if only 12% of premises switch to Fibre, the ratio is now 40%::60%, well within the tipping-point range.

The Maths is simple and relentless, the business decision is unavoidable.

The only question for Telstra and NBN Co is:

How long before the DSL/Fibre tipping-point is reached?

The time to market collapse is very important to both businesses: it sets the maximum time they'll agree to rent the copper, which determines the yearly rental price.
Telstra has to get $3 billion in rent (NPV, PostTax) to make the new Coalition deal as good as its present deal, NBN Co needs to pay the least rent it can to make a profit.

Even at $5,000/premise to "Got Fibre?", one in eight houses can reasonably be expected to switch in the next 10 years for both its utility and for the effect on house value.

The accounting depreciation life of DSL nodes and lines may be 20 years, but it's extremely doubtful the service will get to run 10 years, especially if it turns out there really are services that only work over Fibre.

If I was a Telstra shareholder, would I accept any deal to rent the copper & not stick with the current deal?
Absolutely not, it is way, way too uncertain for me.

What if a Coalition tried to force their hand with regulation or legislation? It'd be challenged in the Hight Court. The additional time would scuttle their plans: they can't afford either losing or winning such a case.

The Coalition has to strike a deal with Telstra, and it has to be to be "rent not buy".
Telstra doesn't have to change, it already has a great deal.

I don't play poker, these types of plays are too much for me. How this will play out is outside my experience and knowledge.