Sunday, 7 April 2013

NBN: Rivers of Gold II

Previously, I wrote that nobody has analysed the "Rivers of Gold" scenario for NBN Co.
Recently, Rob Burgess wrote on the NBN:
Connection speeds provide good and bad news for the government. The good news is that at December 2012 there were 31 retail service providers actually offering packages to subscribers, with 43 per cent of customers signing up for the 100/40 Mbps service. The bad news is that, although there were a few subscribers opting for mid-range plans, the bulk of the remainder were on slow speeds – 28.6 per cent were on 25/5Mbps speeds and 20.7 per cent were on 12/1 Mbps.
These are well ahead of the NBN Co projections. Customer access speeds are half the variable costs NBN Co charges its resellers. The other, RSP connection speeds (CVC's), are reflected in the "GB/month" download volumes of ISP plans. Higher access rates typically drive increased download volumes, which together account for the steadily rising ARPU's in the NBN Co plan.

NBN Co's market growth projections are laid out in Chapter 7 of their 2012 Plan, and
these take-up rates are well ahead of the revenue projections of NBN Co from its 2012 Corporate Plan [~1MB PDF], with the key chart showing NBN Co expect 30% of subscribers to stay at the entry point (12Mbps) access rate. The current take-up is closer to FY2028 than FY2012 projections:

In their 2007 response to the ACCC on the FANOC FTTN (ADSL2) proposal, Telstra estimated "triple play" bandwidths (Video, Telephony, Internet): 25 Mbps now, 70Mbps in 15 years. The key table:

I suspect "you ain't seen nothing yet!" with Customer Demand exceeding the NBN Co plans.

That the Coalition stubbornly refuses to recognise or discuss the implications of NBN Co massively exceeding its projections suggests they are solely ideologically driven and not concerned about the National Interest nor the about the business interests of major Australian companies.

The universal and outstanding lesson of the public use of the Internet over the last 15 years can consistently been:
The best conventional guesses about growth wildly underestimate demand. The Internet is a game-changer, completely different to conventional Telecommunications.
This is driven by a number of fundamental economic drivers:

  • Telecommunications has always had very high (50-90%) Gross Margins due to the high capital costs, with producer costs dominated by (fixed) Interest and Depreciation, not operational or variable costs.
    • Because of the small impact of variable costs on product cost, service providers need to do two things to maximise profits:
      • If supply of the service is constrained and increasing supply is expensive and slow, use high price to reduce demand and make consumers compete for the product.
      • If the supply is not constrained, profits can only be maximised by maximising sales above the marginal cost of production: lowering prices increases profits in a market with high elasticity.
  • Price is the mediator between Supply and Demand.
    • When a commodity is scarce, like DSL line access speeds, then:
      • savvy vendors will only slowly release higher value products, charging a premium for he "better" services,
      • prices will be artificially high due to the constraint, well outside "cost plus margin" pricing, and
      • when the constraint is removed, then
        • pent-up demand will push through with unexpectedly high demand, and
        • prices will either drop or remain static from the high demand and competition for new sales.
  • Nobody has probed the most critical factor in this industry:
    • Market Demand Elasticity: if the price is dropped 5-10%, does total demand increase significantly more?
      • Because costs are predominantly fixed and the supply of bandwidth and network capacity is infinite compared to current DSL technologies, vendors of Fibre services can substantially increase their revenues by matching supply and demand at every price-point:
        • consumers can have fine-grained enough offerings to spend at their highest price-point, leaving "nothing on the table" by the vendor, and
        • maximising revenues is achieved by setting the minimum price to the marginal cost of production. With exceedingly low variable costs and no need for large marketing or advertising costs, NBN Co can maximise profits by selling as far down the price-curve as it can.
        • If NBN Co was allowed to offer properly priced 1-4Mbps services and could supply everywhere now, they would achieve near 100% market penetration within a single consumer contract cycle.
        • Savvy DSL resellers would likely "upgrade" customers for nothing, encouraging and quickening the conversion.
          • The advantage for current ISP's is the ability to "upsell" and charge each and every customer, the maximum price they're prepared to pay.
  • Internet Access Price Points in Australia have not been well explored.
    • No Telco's know what service/pricing combination will take the market by storm.
    • Ancillary service providers, like Digital Content and Streaming Providers have been unable to establish functionality/pricing points because of the high barriers to entry to customers to fast broadband.
      • Although every household now has masses of digital photos & videos on non-permanet media, backup and storage services have failed to take-off because of DSL speed and volume charges. The access speed prerequisites place the services above the pain point of the majority of candidate households.
    • There have been multiple breakthrough products globally that turned long-standing markets on their head, simply because they explored price-points and functionality:
      • The Palm Pilot in 1997 established the $300 price-point for high-end PDA's and defined a new mass-market product.
        • Long-term vendors such as PSION were sidelined, becoming "Symbian" for mobile phones then being dumped by Nokia and manufacturers.
        • Wann-be's, like the Apple Newton, failed in the market because they performed poorly compared to the Palm Pilot. 
      • The iPod/iTunes store in 2001 redefined the Music Business by:
        • identifying the player-store connection as critical and putting in place contracts with Content providers,
        • focussing on device Usability, including "effectively infinite capacity", and
        • establishing a high-end price-point and creating a marketing cycle than maintained older models, but at reduced prices. This maximised returns from production investment, while allowing premiums to be extracted from customers with high price-points.
      • The iPhone in 2007 redefined the decade-old Smartphone market owned by Microsoft & Blackberry until then.
        • Apple again focussed on Usability, integration and multiple price-points to achieve outstanding customer-value, extreme loyalty and enviable Gross Margins.
    • Are the Coalition really asserting that there are no more surprise left in the development of the Internet?
      • If not, they have to allow the prospect that a number of "game-changing" applications or devices will arrive in the next 10 years, and like the iPhone/iPad, redefine how people use the Internet and the services provided.
      • This is the nature of Innovation: you can't predict it, only recognise it once it has become something.
        • For the Coalition leadership, especially Turnbull/Fletcher to knock-down suggestions that new high-value services will arise on the back of ubiquitous, fast broadband is at best ignorant and disingenuous (based on their own use of new devices/services) at worst much, much darker and unpleasant.
        • Creating new businesses within Australia where we are globally competitive and leading implementors should, you'd think, be at the top of the Coalitions' party platform. If they don't represent the interests of business owners and aspirational voters, then who does? This is perverse, backwards political thinking at its worst.
  • We know a lot about general consumer behaviour in buying Internet access from long-running overseas experiments:
    • Consumers are price-sensitive, but will spend higher ARPU for much higher-spec services than current Australian DSL services.
    • Internet Access Consumers like mobile phone and smartphone/4G data users will acclimatise to their service/costs and ARPU's increase per user over time, not remain static.
      • Part of the reason is users riding up the Learning Curve and increasing the Utility of the product to them, and
      • These communication devices increase their value through Metcalfe's Lawvalue of a network is proportional to the square of the number of connected users of the system (N2). The driver behind the explosive growth of Social Media.
  • Look at the Google, e-Bay, Paypal, Amazon, Twitter, Facebook and Apple experience over the last 15 years: it's the classic innovators cycle of market testing, network promotion and successive refinement, improvement and tuning.
    • Their success took time, but were predicated releasing new zero-cost services to Internet users.
    • The more people there are on the Internet, and the more with good access, the faster products evolve, spread and take-off.
      • Facebook could not have happened in 1996: users need "Always On" connectivity.
      • Twitter's success could only happen after 2008/9 with the release of both Android and iPhone smartphones and "Always On, Everywhere and Anywhere" connectivity.
    • It takes time and many trials, (read "failed attempts"), to arrive at services that are both:
      • taken up and used extensively, and
      • have strong business models.
    • It's easy to give services away on the Internet, but much harder to monetise them in the face of a perfect marketplace:
      • All vendors and all consumers have perfect knowledge of the whole market.
      • The Internet is almost "frictionless", a vendor can be in Timbuktu, Seattle, London or Bullamakanka and their customers don't know, or care, where they are.
      • Look at the current fate of print media trying to sell "News":
        • They haven't done well in the face of a single, frictionless, perfect market.
        • They didn't understand, protect or leverage their business model.
        • This was a failure of management understanding, foresight and planning, not the individual reporters: they are amongst the most accomplished users on the Internet.
    • The Baba Brinkman rap song on Evolution, "Performance, Feedback, Revision", perfectly illustrates the Internet Innovation cycle.
    • The Big Secret of profitability of Google et al is hiding in Plain Sight:
      • upselling, just the same as MacDonald's.
      • They give away services in return for consumers either viewing advertisements or leading a small group onto their premium services.
    • The whole of this model is based on cheap and easy Internet Access by consumers.
      • The Internet is about Business, nothing more.
      • What people pay for is what is provided, even if the vendor gives it away for free, like the words on this blog.
    • Users drive use over time as they learn new products and integrate them into their lives and usage spreads by association.
      • Businesses need to be able to offer loss-leaders for extended periods to arrive at profitable, sustainable services.
      • There is no better example than Amazon.
      • The necessary conditions for this are cheap and easy fast broadband access by consumers:
        • "Build and they will come" only works if the customers can come.
  • The only way for Australian Business to compete in this new world of Business on the Internet is to lower or remove the barriers to entry to Internet Access, not of the Businesses (though that helps), but of consumers.
    • It's not about the sticker price of a connection today, prices are only incidentally affected by underlying costs (low variable costs, mainly fixed/capital costs),
    • but of world-class line access rates and affordable volume charges,
    • for everyone,
    • where-ever they are.
    • We only get that with a Full Fibre rollout.
    • Farnarkling with interim solutions or attempting to shave a few cents off here-and-there are  massively counter-productive to Australian Businesses, their competitiveness, productivity and growth/development prospects.
      • Some cheap-arsed lash-up of Nodes, HFC and who knows what other old and dilapidated equipment might fly well with cost-conscious consumers who aren't aware of the real economics, but will cripple Australian industry for the next 50 years.
  • Without knowing exactly what Mr Turnbull is going to announce as "Policy", I can make this assertion categorically:
    • it'll buy a few votes now, but cost a lot of Australians jobs over the next 25 years until someone does it right.
    • We are ahead of the game right now compared to the rest of the world, why would be squander that lead for the sake of some short-sighted, cynical and dysfunctional political advantage for under 100 Coalition members? It doesn't make sense to me.

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