NBN: disputing the four Turnbull "Stress Tests". Pure fantasy.

Turnbull created 5 spreadsheets, published on 09-Apr-2013, that he asserted contained "reasonable" assumptions and allowed him to claim a fantastical figure of "$94 billion" as the Coalition estimate of the NBN Co Corporate Plan:

• sustained 3.5% pa real growth
• 40% increase in Fibre build costs, to $3600.
• 25% of households opt for Wireless (4G) only, a 50% increase.
• Fibre construction takes 50% longer to finish in 2025, not 2021.

So "reasonable" that a large staff of highly competent professional staff at NBN Co, over a couple of years, and covering all relevant disciplines, completely missed them. Nothing like any of Turnbull's assumptions have appeared in any of the Risk Analyses published by NBN Co.

That's as likely as Turnbull being able to pick holes in QANTAS or Commonwealth Bank business plans: Not likely in the least, yet he continues the charade and attacking the professional competence and integrity of the whole of the NBN Co staff. That's magnificent arrogance from Turnbull: "everyone is wrong but me"!

Turnbull is now widely spruiking "My figures must be right because nobody has challenged them!".

Which is utterly wrong: this is why I was given short shrift by his staffer. Because I'd hassled them and questioned their figures and assumptions since April. And they are fully aware of it. But enough of his lies.

The five "stress tests" (my phrase) are four independent "worst-case scenarios" that are then rolled into one colossal OMG! scenario, the probability of which isn't given, but is likely to be a million to one.


The problem for Turnbull is that he both insists that his figures are completely up to date, and he didn't revise his published spreadsheets when NBN Co released their latest update on 19-April.

The NBN Co results of April refute all Turnbull's inane and fantastical propositions.


Sustained 3.5% pa real growth: WRONG. Growth is 9% or higher.

The actual financial results of NBN Co are 2-5 years ahead of forecasts, depending on what variable is examined. ARPU was $38 for March, with AVC (line access charges) at $30, around 20 months ahead and CVC (Volume) 50% higher than the ABS national average.

The NBN Co Corporate Plan is being shown to be conservative.
At over 50,000 premises connected, the results are statistically significant, the mean and variance within a small fraction (<0.5%) of the whole 12M premises figures.

The real AVC revenue of ~$30, especially 31% selecting 100/40Mbps vs 18% planned, should deeply trouble Turnbull: it's double the pathetic $16 "one price fits all, take what you get and like it" of his Copper/Node Plan.

This is the real reason Turnbull can't get his rate of growth up for the Copper/Node Plan: he can't charge enough and can't match consumer preference to products.

40% increase in Fibre build costs, to $3600: WRONG: 40% is $450 not $1200

The Professional experts within NBN Co released the current mass rollout costs of constructing Fibre connections. They are in two parts:

• Fibre to the street, past the premises: $1100-$1400 Estimate at Completion (EAC), and
• Fibre from the street into the premise: $1100, final.

The only cost that can vary is the Fibre past the premises, the costs of running Fibre into premises are very well known and dominated by the fixed Telstra 'PSAA' contracts for lead-ins and access.

A 40% blowout in Fibre construction costs, should it occur, could only affect the fibre past the premises component. It's completely incredible to think that the prime contractors signed these large contracts so far out. 10-15% might be possible, as reflected in the ranged EAC estimate.

25% of households opt for Wireless (4G) only, a 50% increase: WRONG not 12.5% but 6.25% decrease.

This is a based in profound ignorance of the market. As I've outlined before, we know from the Sandvine data the distribution of broadband demand is exponential: 1% of users consume 10% of downloads, while the low 50% consume just 6.4% (six point four).

The lowest 25% will be on both the entry-level plan and consume 2% of download data.

The high uptake of  high-end services is perfectly in-line with this.

The April NBN Co figures showed that much higher propensity to pay higher prices than forecast, 31% vs 18% paid $38 wholesale for 100/40Mbps and 39% not 51% paid $24 wholesale for 12/1Mbps entry-level.

The AVC ARPU is around $30/mth, reducing the entry-level by 8.3%, increases the ARPU to $30.50, while reducing AVC revenue by 6.2%.

CVC revenue accounts for around 15% of total Revenue. This will be reduced by 0.16% (8.3% of users who in total contribute 2% of download). That's enough to be a rounding error.

Turnbull calculated a 12.5% reduction in Revenue in 2021, it can at most be half that.
We are yet to see the effect of 1Gbps services, at $150/mth, being offered and

Fibre construction takes 50% longer to finish in 2025, not 2021: WRONG, no effect on CapEx



Mike Quigley when interviewed by Parliament demolished this point, so I don't have to.

Quigley said, as I recall: "The NBN Co Plan will be cash-flow positive by then, delaying the project by 50% will NOT affect CapEx or Funding required".


Aggregate Position: NIL variance outside budgeted Contingency.

With two of the four "stress tests" of no affect and the other two out by a factor of 2- and 3-times respectively we can safely say the "$94 billion"is completely bogus and fantastical.

Instead of a 1 in a million chance, there might be a 1 in 10,000 chance of a 10% budget over-run.

This is in-line with what you'd expect of a highly professional and independent group of experts who do this every day for their living.

Just to rub salt into the wounds, the April NBN Co document discloses they have a 10% contingency and that it is, as yet, untouched.

Worse to come for Turnbull: what if Fibre is a "River of Gold?"

When we have the first full-year results from NBN Co, we will know just how conservative the forecasting was. Already we know that consumers have an almost double propensity to pay higher AVC charges than anticipated.

The other figure is the 30%/year growth in Download demand. At 45Gb/mth, NBN Co users are already 50% ahead of the Dec 2012 ABS national average figures (series 8153).

If this is showing pent-up demand, then volume growth will exceed the 70% long-term average in the ABS data series.

This time next year we will know how things are shaping up.

If data demand does continue to run at the long-term ABS average, or higher, then revenues will be significantly ahead of forecasts, easily by 25%, or $1.5-$2 billion in 2021, enabling NBN Co to self-fund much earlier, to both reduce CapEx & Funding and increase the capital intensity, to speed up the mass rollout.

This more likely scenario, is borne out by the data currently available.

NBN: Understanding the NBN: it's simple business.

Summary:
The Coalition's Copper/Node Plan is complete dud, able only to send NBN Co bankrupt and will never pay-back the Government Equity, let alone make a Return on Investment. This would've been apparent to any informed investor had the Coalition made public their complete Business Plan.

NBN Co, the owners and builders of the NBN, are a wholly-owned Government Business slated to be sold one day. It is NOT a Government Programme and is NOT included in the Federal Budget, apart from low interest payments because it is funded off balance-sheet solely because it's an investment.

Investments make money, that's their only definition. There are exactly three things you need to know upfront about any potential investment:

• ROI, Return on Investment, as an equivalent yearly rate over the life of the investment.
• Most people also like to know the schedule of repayments.

• Pay-back period: exactly when will your original capital be returned to you in full.

• Downside Risk: If everything "turns to mush" (goes as wrong as it can), what is the full extent of your liability. This was the 'gotcha' in the partly-paid shares of BrisConnections so ably exploited by a young investor taking on $96 million in commitments and then selling his $47,000 of shares for $4.5 million to the developer. He won, the other small investors lost their shirts.

You'll note that all of these are very clearly laid out in the public NBN Co documents, and Turnbull has released nothing about them for his Copper/Node Plan. We know from multiple statements within all three of the Coalition NBN Policy documents that Turnbull has prepared a full set of financial forecasts as part of a Business Plan, yet has deliberately failed to release it, or the key figures (ROI, pay-back, Downside).


Understanding the NBN is simple:

Nobody has to understand the blizzard of technical details, claims and counterclaims, they're only of interest to the people running the business, not investors, not customers.It's a just business and everyone can grasp "Does it make a profit or will we, the taxpayer, have to bail it out, like the GFC?"

Turnbull is a Master Illusionist, his stock in trade is hiding the obvious and making people believe the opposite of what they see. This is why the majority of the 36 pages of confusing content in his "Policy Background" are doing in what should be a simple, clear, transparent and complete set of financial forecasts with all material information revealed and all assumptions clearly laid out.

Instead, Turnbull gave us 34 pages of carping and criticism of the current NBN Co Corporate Plan, and two very sparse pages on the Business side of his plan. All Turnbull gives us about the Financials is just the first 5 years of a 30 year Business Plan. Truly bizarre, especially from a seasoned investor and a party that styles itself as "great Economic Managers". This disconnect between what they say and do is extreme.

Turnbull's attack, with bogus assumptions, on the current NBN Co numbers rolls out out to 2025, yet his own figures halt very early at 2019. What is he NOT telling us? Why are the three key investment indicators deliberately withheld?

All you need to know about the NBN

As an investor: Will it pay for itself and make a profit? Can I get blind-sided with a big loss?

As a business manager: Where does the profit come from? What are our revenue growth drivers?

As a customer: Will I have my choice of 'models' to suit my needs and budget as they change? Will they be able to affordably meet my possible future needs?

The Investor question: Not Cost, but Profit.

As every investor and share owner will tell you, "cheap is seldom good, good is never cheap". This is why of the three critical investment indicators (ROI, pay-back, Downside), Profit (Revenue - Expenses) and the four major Accounting categories: Assets/Capital, Liabilities/Debt, Revenue and Expenses, Turnbull has only focussed on a small part of Assets: Capital Expenditure (CapEx) and Total Funding.

CapEx is an irrelevant distraction and Turnbull knows that. It's his sole point of apparent advantage, on every other measure his Copper/Node Plan can only be an unprecedented Financial Disaster.

As a Master Illusionist Turnbull must be very pleased that not only has he hoodwinked the entire Mainstream Media, but all the business journalists, including our finest like Alan Kohler and now the PBO too.

The Customer question: What do I get for my money? Can I choose, based on need and means?

As investors and consumers, you don't need to know about "speed". This is why Turnbull focuses the argument there. Any technical discussion of "speed" is multi-layered and quickly gets very detailed, complex and intricate. The details haven't mattered to customers since 1996, so why do they matter now?

"Speed" is solely measured in your time spent waiting for something to happen. It's not complex, it's not about Megabits or throughput or latency or congestion or contention ratios. It's your subjective experience of time passing when waiting for something on the Internet. For businesses, including the self-employed, there are very simple and direct means to value their Time. "Time is Money" and good business owners do put a dollar value on their time. They'll choose expensive plans if they pay for themselves.

As consumers, you want to know a few things about product offerings so you can spend your dollar wisely:

• What are the range of plans offered? How much? What's included and what upgrade options do I have at what prices? and
• What future products will you be offering me? What will they cost?

If you have the need and means, you might buy the most expensive service, otherwise, you can express your preference by deciding for yourself what feature/price tradeoff you'll take.

If a service provider cannot, or will not, offer you a guaranteed service, then you need to be asking "what are they hiding" or "what bad things aren't they telling me about?"

This, "guaranteed access rates with tiered pricing options", versus "one price fits all, take what you get" is the essential difference between Fibre and Copper/Node Plans:

• For the 30% of people who want to pay 50% more (later, 500% more) for a fast service, why shouldn't they be allowed to pay a premium and subside the rest of us?
• The Fibre wholesale prices will fall between 19%-26% by 2021 and 51%-82% by 2040.
• Copper/Node wholesale prices, not yet disclosed, will fall by 10% by 2024 and 30% by 2040. A very pale comparison.

There's a simple question you can ask as a consumer:

If a car manufacturer wanted to offer you the same deal, would you take it or look elsewhere?"We have 7 models from 2-seat runabout to 7-seat people-mover, SUV and V8 utes. All are the same price, we just randomly give them to people." The only guaranteed outcomes are: most people pay a lot more than they need and almost nobody gets what they want or need.

The Copper/Node Plan is the Jackboot Business Model: "You can have any speed you like, as long as it's the one we choose for you in the Bandwidth Lottery." I think that's a really, really bad deal and believe most people will as well.

Confusion about "Average Customers"

The most outrageous of Turnbull's illusions is deliberately confusing terms:

• There is NO "average user" and Turnbull should know it.
• The top 1% of users consume 10% of downloads and the low 50% consume just 6.4% (six point four) of download data.
• The top 25% "high demand" users generate all the NBN Co profit, the rest of us get the services at cost or less. The top-end subsidise the rest of us handsomely.
• In the "one price fits all, take what you get" Jackboot Business Model of Copper/Node, the 25% of people who will pay more, cannot.
• Entry level subscribers get to pay a lot more.
• The super-profitable top 25% can't be supplied with services to match their needs.
• Nobody is happy with their service: it's expensive or too slow.

• NBN Co's ARPU is the wholesale price charged to Retailers for the product they sell, NOT the bill charged to the 'average' user.
• Turnbull often confuses the wholesale prices charged by NBN Co with what Retailers charge.
• A tripling of ARPU by 2040 means two things:
• The 75% getting a free-ride aren't paying more!
• The Retailers won't just triple profits, but increase them 5-10 times because of economies of scale, premium pricing and service 'upgrades'.
• It's a Business Bonanza, not high-costs to users.
• The "secret sauce" of NBN Co's business plan is the heavy discounting they will deliver, passing on technology and economy of scale savings to customers:
• Entry level prices go from $24/mth wholesale to $11.75 and entry-level speed goes up to 100Mbos.
• Current premium prices for 100Mbps reduce from $38/mth wholesale to $11.75 (69%)
• while Top end service, 1Gbps, reduce from $150/mth to $27, (82%).
• On top of this, the cost for everyone, of download data is set to reduce by between 2 and 4 times.

What you don't know will hurt you!

Perhaps the most insidious Illusionist work by Turnbull is NOT telling, as investors and customers, about many hidden costs and not comparing Like with Like (or Apples and Apples).

The list is far too long for here, the most important points are below. Apologies for the length, this is the work of the Master Illusionist weaving his magic:

• I'm not going to do more than mention the many technical "slam-dunk" advantages of Fibre over a Copper/Node network. When, not if, you need these features, there is no substitute:
• Very low errors rates.
• Immunity to lightning and electrical noise/disturbance. You won't blow up VDSL2 modem and connected TV & PC in a storm.
• Guaranteed access rates.
• Guaranteed high upload rates, for backups and sharing videos and pictures.
• Already in production are 100Gbps fibre transceivers, guaranteeing cheap, commodity upgrades of 100-fold, for the very few that want or need that and will pay. This will allow NBN Co to keep charging a premium to the few high-demand users and using that to subsidise the rest of us.
• Multiple service Quality and Reliability options, like dual-paths, for home businesses and content producers.
• Fibre costs 5-10 times less to maintain than Copper.
• This significantly increases Profit by lowering Expenses.
• The Coalition's own figures suggest that in just 5 years, the $90/yr they estimate Copper will cost to maintain, makes Fibre cost less.

• The Copper/Node Plan is temporary, it is designed to be thrown away and that cost, under normal project accounting guidelines, must be counted in.
• The Coalition claims their Copper/Nodes will cost $8 billion to build (9M lines at $900 ea)
• BUT, half of that will be wasted:
• The Coalition, by their own figures, is deliberately wasting $4 billion, but does not include that in its plan.

• The Coalition claims a $17 billion saving by building 9M Copper/Node services:
• The whole Fibre sub-project is $28.5 billion, of which 25% will be kept,
•  or $28.5-$7.5 = $20 billion in Fibre construction abandoned.
• How can they save $17 billion out of a $20 billion project, when they need to spend $8 billion? At the very best, they can only save $12 billion up-front, but also have to add back the $4 billion in planned wastage.
• The maximum savings from Copper/Node are $8 billion, not $17 billion.
• Either they are deliberately concocting figures or can't add up.

• Of the $28.5 billion Fibre sub-project, around $11 billion is in payments to Telstra, not for any copper, but for the holes in the ground, the "lead-ins" and other access.
• The Copper/Node plan has to cater for an additional $8.25 billion in Telstra payments.
• These contracted amounts don't appear anywhere in the Coalition documents.
• These payments to Telstra won't change and cannot be avoided, they are cast-iron contracts.
• As well, they expect to get 215,000 kilometres of Copper (compared to 208,000 km of Fibre in the total NBN) from Telstra for free, without a shareholder vote.
• The Coalition has not included any payments to Telstra, and expects a massive free gift of all the Copper they want.

• The real maximum savings of the Copper/Node construction are at most $450/line, or $4 billion.
• NBN Co have two firm costs for the mass rollout of Fibre:
• $1100-$1400 for Fibre past the premises, "to the street", and
• $1100 for Fibre into the premise, included the Telstra payments, the internal equipment (NTD etc) and the install and testing of it.
• This amount will be around the same for either Fibre or Copper/Node sub-projects.
• The $900/line cost only reduces the $1100-$1400 cost.
• For ease of calculation, I assume $1350/line for Fibre, and $900/line for Copper
• = $1350 - $900
• = $450/line savings, for 9M lines.
• = $4 billion maximum construction savings
• The total possible savings, $4 billion, from build a Copper/Node network are identical to the deliberate wastage in building a temporary network.
• The Copper/Node Plan costs exactly the same to build as Fibre, but is far inferior.

• For the Fibre, Wireless and Satellite networks, NBN Co provides, installs, maintains and replaces the network interface ('box of tricks'), the NTD, Network Termination Device.
• The Coalition does not supply Copper/Node NTD's, they are not even a pay-for option.
• The cost of a VDSL2 modem ($150+) and installation of a central splitter ($300+ per retail service call) is the same as the maximum $450 savings possible with a Copper/Node Plan.
• But there's more: Over the 20 year life of the Copper/Node Plan, the average consumer will have to replace their VDSL2 modem 3 times, or another $450 in forced costs.
• Because the VDSL2 modems aren't remotely managed, tested and monitored by NBN Co, customers will have to pay for any service calls to diagnose a faulty modem, wiring or central splitter.
• The Coalition have silently and deliberately forced over $1,000 of unavoidable additional costs onto Copper/Node customers. These are over and above what a Fibre user will pay.

• Multicast Video and network features like "TC1" necessary for high-quality, reliable telephone over Internet will not be included in the Copper/Node network VDSL2 modems.
• The 75% of fixed-line customers, probably all in the Metro areas, won't be able to access the most revolutionary service offered by NBN Co: universal, cheap Cable TV.
• Multicast hasn't been planned yet for 4% of Satellite premises.
• The Coalition is deliberately denying 75% of NBN Co customers access to multicast Video.

Conclusion

The Copper/Node Plan is missing all key financial indicators and 25 years of their 30-year Business Plan. Payments to Telstra and renting or buying an additional 215,000km of copper are ignored.

If you add in the planned wastage in replacing it, a Copper/Node network costs the same to build as Fibre, but Operational costs of Copper are, by the Coalition estimates, at least 5 times more. A Copper/Node network is more expensive to build and operate than Fibre after just five years.

Tiered access pricing, costing up to six-times more for 80-times the speed, is critical to the Fibre Business Model. It allows real consumer choice, each paying according to their need and means, reduces entry-level pricing below cost and is already generating more than twice the income ($35 ARPU vs $16) that Copper/Node Plan can deliver.

The top 25% of high-demand users generate all the profit for NBN Co, the rest of us get a free ride, getting NBN services at cost or subsidised.

On top of this, the Coalition is attempting to further hoodwink us either not denying Copper/Node consumers essential NBN features or saddling them with high, hidden costs.

Business Economics of Fibre vs Copper: a slam-dunk win for Fibre

A good post in an Advertising, Marketing and PR industry publication: NBN: ‘Do it to the home, do it once, and do it right’

My comment:


Fibre offers a revolution in the business economics of Broadband.
Finally ISP's can offer multiple consumer "models" with different features, such as speed, but also more, for different prices.


Just like cars and most other consumer goods, people can choose to trade features and price. In Economics, its reducing the "Consumer Surplus", increasing producer profits.

The beauty of Fibre is the SAME physical service can be resold at many prices: $24 entry level to $150 for 'premium' service.

THIS is the primary difference between Fibre and Copper. Fibre makes a lot more profit, while offering consumers features they value. "Speed" allows consumes to put a value on their time. Those with the need and means can elect to pay a premium, other can choose the entry-level service.

Copper's "one price fits all" and "any speed you like, so long as it's slow" kills the economics. If FTTN stars at $16/mth wholesale for everybody, that's under half what NBN Co is already getting: $38/mth ARPU.

This single innovation is why the FTTP NBN can expect sustained 9% real-growth while the FTTN NBN will be lucky to hit 3.5% and be cashflow positive, let alone make a profit.

The distribution of demand is also highly skewed: it's exponential.
The top 1% consume 10% of download data, the low 50% just 6.4% (six point 4).
NBN Co profits are generated by the top 25% high-demand users, the rest get the service at cost, or less. Everyone is happy.

This WHOLE business model is thrown out by the Coalition.

For a 10% saving in CapEx and around four-times more in OpEx, they sacrifice most of their revenue stream and destroy one of the prime NBN value propositions:

20%-25% discounts on access rates in 2021 and 51%-89% rates by 2040.

Nobody seems to have noticed we've only been shown by the Coalition the first 5 years of a 30-year business plan, that includes throwing away the FTTN and upgrading to full FTTP. The Coalition itself estimates that the "throw away" will waste $4 billion. Wasn't that what they saved in CapEx.

If the FTTN business doesn't turn a profit, then how will it ever pay for the $4 billion wasted, let alone provide a positive Net Present Value over going directly to FTTP?

Would any serious investor stump up $30 billion on the basis of a 36-page document that doesn't mention Marketing, Segments, growth or even pricing?

So why are the Coalition pitching the taxpayer for $30 billion without a complete Business Plan?

If the Coalition were concerned about the high price of Fibre, they could've levied a charge of $250 per service, either up-front over spread over 2 years.

That would give the same CapEx, but allow all the financial benefits and OpEx savings to be realised.

Myths: Low-end Broadband users subsidise high-speed, high-end users

This is an update to a piece from May about this Myth, how its the reverse of reality, usually expressed as:

I don't want to pay for something I won't use and subside the leeches who want high-speed. I'm happy with what I've got and don't want to pay for them to freeload on me!

This is exactly wrong: the Fibre NBN makes its profits from the high-end, high-speed consumers and the premium they pay generates all the profits and subsidies the rest of us.

This cannot happen under the Turnbull Node Plan with a "one size fits all" fee and line-speed lottery, making it rack up $10-$20 billion losses in the next 20 years.

NBN Co create a fair and equitable pricing structure where the few high-end users subsidise the entry-level by at least 75% by:

• Tiered Pricing: offering real choice based on your needs and means, not a one-size-fits-all line lottery.
• People are taking-up high-end plans much faster than the conservative NBN Co plan predicted.
• Access charges will drop 20%-25% by 2021 and between 50% and 85% by 2040.
• Download volume charges are set to halve by 2021 and continue to drop after that.
• The top 10-25% of consumers pay the majority of charges, they generate the profits needed run the business, pay-off the loans and make a 7% Return on Investment. The rest of us get a free ride, which is pretty cool to me.

The Power of Tiered Pricing:
  Money for Nothing or a Fairer, more equitable scheme?

One of the big deadweights on ISP profits over the last 10 years has being forced to charge the same price for an ADSL line, regardless of the speed.

This is the same as going to a car dealer and being told "we have 6 models and all cars here cost $15,000. You'll go in a lottery for the model you get". That'd never fly. Some people would get the top-of-the-line model and be very happy, others will get a very small and cramped entry-level model.

Why manufacturers offer a range of models is so that consumers can choose, that the dealer can match supply and demand. "You want a big car with lots of features, here's our most expensive one" versus "You want the cheapest, smallest, most economical car? This is ours".

NBN Co has introduced a radical innovation into the Australian Telecommunications Industry: they allow Retailers to match supply and demand with a range of options, just like every other manufacturer.

The beauty of the NBN Co scheme is that they can charge between $24 and $150 for exactly the same physical thing.

But doesn't that rip-off customers? No, in exactly the same way as a car maker selling 6 models with near identical parts built in the same factory by identical machines and people is not a rip-off. Customers can see increased value, to them, for the extra money they pay for a higher-cost model.

If NBN Co had to charge a single price and give everyone the same speed, then what price would the charge and what speed would they deliver? They couldn't charge $24, the current entry-level, and give 1Gbps. They'd go broke, just like the Turnbull Node Plan must with its one low charge and line-speed lottery.

Just as not everyone wants a high-performance sports car or a big people-mover, every household wants a different level of broadband service and as times change, will want to change their speed to match their needs or means.

The tiered pricing not only offers entry-level customers a cheaper price, subsidised by those selecting the high-speed plan, it offers value-for-money for the people that want those higher-speeds.

A 100Mbps plan doesn't cost 8-times the $24/mth of a 12Mbps plan, it only costs $38 - a $150/mth saving to the customer, or at least their ISP.
Similarly, a 1000Mbps plan doesn't cost 10-times that $38, but $150/mth, a $230 saving to the customer.

NBN Co has adopted a very sensible and well known pricing regime that both allows them to charge entry-level customers six-times less than the high-end, but also returns exceptional value-for-money to those high-end customers by reducing their charges thirteen times on a speed basis.

That's not just fair, but makes all customers feel they've got a very good deal. They've been able to make a real choice, but just be thrown into a lottery where some are favoured and most are disappointed.


What people actually decide:
  customers love both ends of the scale.

Does this scheme work? Yes, and it is already well beyond the conservative estimates in the NBN Co plan.

NBN Co forecast, (last chart below) just 18% of customers would buy 100Mbps services and 49% would buy entry-level. The Average Revenue would be around $27 from access charges. Instead it is already at $30, 10% higher than forecast, just by allowing customers their choice of speed.

When 1Gbps is released, I expect a 10% take-up, further boosting Average Revenue to $42, or 75% more than the entry-level price. (And 250% more than I estimate the Turnbull Node Plan "one size fits all" price.)

We can also guarantee not one of those customers will be grumbling about not getting the speed they want. This is just good business. This aspect of the NBN is a "no-brainer".


Wholesale Pricing:
  What NBN Co earns and charges to ISP's.

In the charts below, I've included how NBN Co will drop real prices over time.

• The entry level, 12/1Mbps, drops from $24 now to $19.50 in 2021, and to $11.75 in 2040: 50% less in real, inflation adjusted terms.
• The current high-speed, soon to become mid-speed, 100/40Mbps, drops from $38 now to $28.10 in 2021 and the same $11.75 in 2040.
• The imminent high-speed, 1000/400Mbps, drops from $150 now to $111 in 2021 and $27 in 2040.

Note that in 2040, there's no price difference for an entry level 12Mbps service or 100Mbps and the high-speed service, 1Gbps will be just one-eight more than current entry level-pricing. That's not going to happen with the Turnbull Node Plan and it "one size fits all" pricing. They have to keep raising their prices by 3.5% every year, even to contain losses to $10 billion.

As well, NBN Co will reduce it's CVC (Volume) pricing as Average usage grows. After Average-GB/mth hits 120GB, prices will halve when usage increases four times. Sounds a lot, but NBN Co traffic is currently at 45GB/mth. If expert forecasts are correct, it'll take 1.3 years to double download volume, by 2015/6 we'll hit the  trigger volume to reduce prices. Every 2½ years after that, the price of download data will halve. This progress, if it happens, will be much slower under a "one size fits all" Node model, because people can't buy the speed they want, just take what they get in the line-speed lottery.

This forecasting says that by 2021 volume pricing by NBN Co will be one-quarter what it is today.


Retail Pricing:
 what will you, not your ISP, pay?

Those are NBN Co wholesale prices. ISP's have to add margin and pay for additional costs like "backhaul", "peering", "Tier-1 connection to the Internet", their own routers/switching and internal systems like customer records and billing. Like any business, increased volumes should bring economies of scale. The margin they need to charge to make good investor returns should decrease as they become more efficient and take costs out of the business.

As well, with a nearly "level playing field" on input pricing, you can expect competition to drive out inefficient organisations or those that don't provide reasonable customer service and good plan options.

Optus and Telstra as the large, long-standing Telcos have a privileged position: they own backhaul to almost everywhere. Their input costs will be lower, but they traditionally generate higher margins. If they are slightly more expensive than other ISP's, they'll still make very healthy profits for shareholders.

If ISP's contain their mark-ups, consumers can expect the drop in wholesale pricing to be reflected directly in their bills. If they don't, the ACCC has shown in the past a willingness to intervene.


How the subsidies work:
  Why the "Rich" subsidise the "Poor", not the other way around.

Right from the start, consumers get to choose the line speed they want according to their needs and means, not get it foisted on them through a lottery. Nobody is forced to pay more than they want, everybody can get the speed they want: that sounds like a "no-brainer" to me.

Instead of a single access line charge of $42, the average when 1Gbps is released, entry-level customers will pay just $24. Those people shelling out top-dollar are paying for that 75% discount and are doing so happily. They are getting their sports-car and loving what it gives them. If they tire of it or decide they want to pay less, then they can. This is real choice.


But wait, there's more:
  Internet charges are Access Rate plus Download Volume

There's yet another wrinkle to this story: we pay our ISP's two charges, one for the line and another for the data we download, "Volume". Usually ISP's include a carefully chosen standard amount in plans, so that customers get the same bill each month and can enjoy some predictability with charges.

On an entry-level plan, 12Mbps, you can still download 4 TerraBytes of data in a month if you want, and upload around 300GB. These plans typically include 30GB of data while a 100Mbps plan includes 500GB (0.5TB).

To download more data and it'll likely cost you $0.60/GB or $2,400 for those 4TB. Someone doing that scale of downloads is going to pay the extra $13 to go eight times faster. They'll buy 100Mbps because the extra cost is tiny.

The Sandvine data tells us something very, very interesting: "Average" users don't exist.

Just 1% of users download 10% of data, while the "low" 50% download 6.4%, that's a 75:1 difference in how much the two groups download and potentially in their Volume charges.

There is probably a correlation between high-volume downloads and high-speed access. If you're download 500GB/mth, at $0.60/GB, it's cheaper to upgrade to 100Mbps and use the quota already bundled in. That's part of the business modelling of ISP's, to choose price points and plan bundling options that are attractive and yield good returns.

I've included the chart that shows how NBN Co will reduce Volume prices as average use goes up.
Half of us contribute around 5% to downloads: all the heavy lifting, paying for Volume is done by the top 25% of users.

All users share in the reduction of Volume charges, entry-level and high-end. The high-volume, high-end users end up paying the lions share of NBN Co charges, and are happy with the deal they get.

Would you want to give the high-volume consumers a discount, at the expense of the low-volume users? I wouldn't. If you think of the volume charge as the discount already given to high-volume users, it just means you're offering the same deal to the 50% of users who consume just 5% of download. It's also much, much easier for everyone concerned to figure out what they should pay. The ISP's have a single pipe back from each Point of Interconnect, not one per customer. A common rate for all consumers makes sense.

Everybody else piggybacks on what the top-end pay: the few high-end consumers generate the bulk of the revenue and profits, the rest of us get a free ride.

Not only do those who want, pay more, they also generate the profits that turns the business from making a loss, into paying back its loans and making a 7% return on all the money put in.

Entry-level users can either ride the cost curve down and pay half what they pay now, or they can maintain a constant level of expenditure and upgrade their plan, considerably increasing speed and services. This is real choice.

I think the NBN Co tiered pricing and reductions in both Access and Volumes charges over time is a very fair and equitable scheme for everyone. It's a "no-brainer" to me.

Update [28-May-2012]: Dr Neil Gunther has analysed the Akamai data as a Time Series, albeit a small one, and initial results are that it is approximately exponential growth, but the simple scatterplot trendline underestimates the forecast. The 2014 (2 year) projections, expressed as logarithm (kbps) are around 3.9 ± 0.3 [95% CI] and ± 0.2 [80% CI].

---

Sources:

NBN Co Plan, Aug-2012:

http://www.nbnco.com.au/assets/documents/nbn-co-corporate-plan-6-aug-2012.pdf

NBN Report to Parliamentary Committee, 19 April, 2013.
http://nbnco.com.au/assets/media-releases/2013/report-to-parliamentary-joint-committee.pdf

Sandvine 2013, 1st half, USA Internet usage
http://www.sandvine.com/downloads/documents/Phenomena_1H_2013/Sandvine_Global_Internet_Phenomena_Report_1H_2013.pdf

Charts:

2013 Sandvine US Traffic Distribution

2012 NBN Plan, reduction in CVC (Volume) charges

NBN 2013 report: 12Mbps AVC real price reduction

NBN 2013 report: 100Mbps AVC real price reduction

NBN 2013 report: 1Gbps AVC real price reduction

NBN 2013 report: Proportion of services by AVC speed

Dr Neil Gunther 'Rplot' of Sandvine Data Model

NBN: Fibre to the Farm - splitting the cost 3 ways. $2500 per household

The people who have the most to gain from the benefits of Fast Broadband, those subject to "the tyranny of distance", or geographical isolation, are currently, under both NBN Policies,  not going to get those benefits. Both parties will deliver the slowest, most expensive broadband services to those that  could benefit most...

Where is the outcry from the National Farmers Federation or the "National Party" in any state??

Previously I've written on "Fibre to the Farm", running along the Rural Electricity Distribution network. Presumably the network owners would become the ultimate owners of the asset, gaining a second, even third, income from their assets.

There are Engineering questions I'm not able to answer with limited resources. I've assumed a single-tube 144-fibre (12*12-ribbon) cable could be run for $10,000/km. Only $2,000/km is the cost of the cable.

Today I updated that piece, suggesting that the Federal and State Governments could between them share the build costs with the householders who originally paid for the construction of their power supply (poles, wires and transformer) and understand the notion "you need to pay for services".

$2,500 per household should be affordable and enticing to rural subscribers, with Grid Electricity.

Who would end up owning, controlling and maintaining the Fibre asset? Presumably the owner of the Distribution network, perhaps jointly with NBN Co.

There is an immediate and substantial subscriber benefit in swapping to pure-digital connections from a Copper phone service, or POTS (Plain Old Telephone Service): increased clarity and zero noise and cross-talk. But as well, they can access many of the ISP-run VoIP services, eliminating long-distance call charges (Internode: 18cents/call, untimed, to any National landline). Update 8-Jul-13:

Current timed-call charges for rural phone subscribers. 49 cents flagfall and 25 cents per minute. Most VoIP plans are cheaper than Internode.

https://www.mynetfone.com.au/Residential/Home-Phone/Plans/MegaSaver

At $2,500/household, most rural household would get a 12-24 month payback, just from direct savings of avoided car travel (2-3,000km). I've not attempt to estimate the unquantifiable benefits of time wasted travelling, resulting opportunity costs and avoided car crashes with attendant deaths and permanent disability.

For those on fixed-incomes, even pensions, perhaps the Federal Government could allow NBN Co to recover the $2,500 over 5 or so years through their bills.

From a Victorian DPI document, two maps of their Rural Distribution Network. First is a Google map with whole network overlaid, second is a partial map of the state:


https://docs.google.com/file/d/0B1GLdfqdwpNQS2d4VEpEcVcwVm8/view Colour Key: SWER: Pink; 22kV: Yellow; Alpine HV underground: Red

https://docs.google.com/file/d/0B1GLdfqdwpNQN2ZOemNXajhiZTg/view. Map showing the extensive reach of the system.

NBN: Telstra wins, no matter what.

This question arrived in my inbox. I thought it might be worth sharing:

The impact of the NBN/election on the TLS (Telstra) share price..
Alan Kohler is fairly positive in this article in May, are you aware of discussion on this angle?

Thanks for the link. Yes, I saw that article, even if I don't agree.
Kohler got convinced of the "better than the nothing we were offering in 2005, 2007, 2010" point of view.

This is the Coalition pitch, don't be fooled it's otherwise:

For 10% less in build savings and more than that  in-out-of-pocket expenses to subscibers for only a temporary network (yes they'll throw away 75% of the fixed-lines in 10-15 years and we will have to pay for all the work avoided now, but with more degraded and poorer Telstra pits, pipes and ducts, in need of full replacement):

• the Coalition Plan is to break the "universal access, guaranteed speeds" part of "broadband"
• AND destroy NBN Co profitability
• by preventing planned growth in ARPU (Average Revenue Per User) from access rate creep and revenue dominated by high-end download volumes
• WHILE giving us 40 to 80-fold access rates with massive congestion and unusable latency...
• we know this from the Gunghalin Experiment and the non-performance of  RIMs.

Telstra share-price didn't change when Turnbull released the Coalition plan, neither has it fallen back or slowed its rise. This is information on the collective view of 'The Market'.

Telstra has somewhat locked in contracts, but is racing ahead with NBN Co work to crystallise  as much of the contract, as quickly as possible, because the contract pays them when they declare a pit 'OK to go'.

Telstra are very good at optimising their cash-flow and returns.

Telstra win in every scenario, which is why I think the market is supporting them:

• All Fibre NBN:
• Telstra have largest backhaul, lowest cost structure & dump deadweight of copper CAN maint, leverage high free cash-flow from NBN Co payments. Concentrates on 4G mobile & dominating that space.

• DSL NBN:
• Telstra might yet own all the nodes (with NBN Co leasing access), still dump deadweight of copper CAN, make more money leasing copper. Concentrates on 4G mobile & taking customers off DSL. Paid for by NBN Co contracts.

• NBN Co fails because of DSL/FTTN:
• TLS Concentrates on 4G mobile & sends NBN Co broke.
• As largest creditor, can purchase them for what its owed. Then has monopoly on CAN (Customer Access Network) again.
• Can charge what it likes and is able to defeat ACCC demands: doesn't have to build an inch of new network, can only rollout "cost-effective" fibre. I.e. most profitable and force everyone else onto their 4G network, then decommission DSL + copper phone as "unprofitable" or force ACCC to allow massive price hikes, making their 4G cheapest, most viable solution.

NBN: "two Fibre active services" - possible?

Telstra's rate card includes 10Mbps for $7,931 per month for business [as mentioned previously].

Will NBN Co ever sell pairs of Fibres over the Customer Access Network connected to active Ethernet devices? If so, it would allow a whole new class of applications and businesses - much as "dark fibre" has in certain places.

These links would, I think, terminate in the FSAM. Current GBIC/SFP's sold are 1/10/40/100 Gbps. You wouldn't bother with 100Mbps, because GPON offers 1000/400 on a single fibre.

Would you even need a pair of fibres, or are there adapters already available?
Update: 3-Jun-13. 3-port Optical Circulators split light flowing in opposite directions on a single fibre. ie. still only need a single fibre to the premises.

NBN Co could offer three levels of interconnection (because every link needs two ends), with different pricing:

• off same FSAM
• off same PoI
• connect at PoI to RSP or backhaul

Standard NNI charging might be used: Table 10 (pg 22) of the NBN Product and Pricing Overview.
These are wholesale, not retail, prices, exclusive of GST.
For a whole link, two ends are needed, doubling these costs.

1Gbps $200/mth, $1,000 install
10Gbps, $400/mth, $5,000 install
$20 per 1 Mbps/mth ($20,000/mth per 1Gbps) A flat rate for non-switched service would be needed.

NBN: Creating opportunity out of disaster

There's an opportunity for electricity/utility suppliers and distributors in the current bushfires sweeping South Eastern Australia and Tasmania:

There will be hundreds, if not thousands, of kilometers of electricity network (poles and wires) to be replaced. This is the perfect opportunity to either add fibre optical cable to the poles or make them "fibre ready" by installing non-metallic strain cables.

The incremental cost of adding conduit and fibre to new or replaced underground or overhead utility distribution networks, like electricity, gas, water, storm-water or sewerage, is minor, whilst the on-going returns are substantial.


The network owner can do everything from own and supply full network services to rent their network to NBN Co or other comms networks.

It was only after gas suppliers had installed a few thousand kilometers of new trunk and reticulation network up the East Coast of Australia that an ISP in one town, Cooma, asked if they could lay conduit in their trenches. You could hear the collective, "Do'Oh!" by the Board from Melbourne to Sydney, when they'd realised they'd passed up a massive recurrent income opportunity, simply by always doing what they'd done.

---

[10-Jan-2013] Paul Budde commented in an email [with permission to quote]:

I discussed this situation with Conroy after the bushfires in Victoria in 2009.
I suggested to use this opportunity to look at a combined NBN/smart grid deployment. Within days it was however clear that this would never happen.

All of those organisations operate in silos and there are no plans in place to change that. In the rush to get people connected old technologies rather than new ones are used so every single time the opportunity is missed.

Now, 4 years later nothing has changed.

Unless there is a holistic plan in place can such a united initiative be implemented. Trying to get such a plan in place after a disaster is totally impossible because of that silo thinking.

Despite many inquiries no comprehensive plans have been developed to overcome this.
The only one who can change this is the government they need to direct the utilities to work together towards a trans-sector approach.

Paul

NBN: Funding with Infrastructure Bonds

Either the Government or Coalition could embrace a funding model for the NBN suggested by Alan Kohler in Business Spectator: Infrastructure Bonds.

Either side of Politics could allow the "Free Market" to vote with their dollars on what they think of the current NBN plans, design and execution. It depoliticises the debate, frees up Government debt and would ease some of the worst Policy concerns the Coalition has over funding

As Kohlers' Bonds are specifically targeted at soaking up foreign investments, the interest rates don't have to be Australian Reference Rate + Risk Margin, but US Rate + Margin: say 4% (0.5% + 3.5%).

Alan Kohler wrote:

For Australia the problem is compounded by the very large flow of safe haven capital inflow now arriving, which is largely blind to interest rates. Money is pouring into Australian dollars, including from other central banks, seeking the security of our AAA rating. That’s making the exchange rate immune from domestic monetary policy.

What to do?

The answer, surely, is to give up and put the money to good use replenishing the national infrastructure.

Rather than wringing our hands about the capital inflow, why not give global investors something to invest in other than Aussie government bonds and export LNG projects?

Specifically – infrastructure bonds to finance a huge national building programme of roads, ports, bridges, airports using money borrowed at super low rates to take advantage of this once-in-a-lifetime opportunity.

It would assist the non-mining economy of the eastern states, cushion the transition from the peaking of the mining investment boom and set Australia up for the future.

What other large infrastructure projects could we invest in that would benefit our common-wealth? Many and more than I could guess. But say:

• The Very Fast Train up the East Coast
• Additionally, the direct Melbourne - Brisbane inland rail link.
• Pacific Highway and Hume Highway: full duplication.
• Upgrades to existing Ports and new Ports.
• A second and third Sydney Airport: a passenger and separate freight hub.
• This slots in with the State Government Transport review underway.
• Waste water recycling in Sydney, Melbourne and Brisbane, as happens in the old Olympic Village: all these cities have long-term water security issues. The last 10-year drought isn't far behind us and with Climate Change, we should prepare for 'challenges'.
• Improving mass-transit systems in all major cities, including Canberra. Perhaps "light rail" would be good for the National Capital.
• Local manufacturing capacity for Wind Turbines and Solar Cells to lower per-unit costs and increase deployment.
• Agriculture and transport improvement in the Top End.
• Roads are impassable during the Wet Season. Why aren't Hovercraft, as used in the English Channel for years, an option?
• Create new high-value manufacturing precincts. Why couldn't Australia become one of the major players in Industrial Robotics? We have the talent and capability, while demand is exploding.

The Infrastructure Bond model could be applied to many useful projects: just as the USA built its Freeway system after WWII to fuel economic growth for 4 decades, Australia could use this cash-inflow opportunity to seed the next half-century of development.

I'm not sure how the interest on the Bonds gets paid... The NBN, Very Fast Train, Ports and Light Rail are all commercial enterprises with good cash-flow: they're easy. But highways aren't and there would be stiff consumer resistance to tollways on the major highways where the only gain is 'safety', an intangible.

The data showing the structural change in the Australian Dollar exchange rate was published by Alan Kohler on his website. Look for [no permalink]:

"Dollar Has Divorced Resources Stocks" [heading]

The index of resources companies in Australia has fallen steeply since mid-2011, yet the dollar has stayed high against the greenback.

Source: Iress

The chart is at: http://1.static.australianindependentbusinessmedia.com.au/sites/default/files/styles/ak_graph/public/kohlersgraphs/2012/Nov/121126-dollar-resources.png on archive.og: https://web.archive.org/web/20170310014841if_/http://1.static.australianindependentbusinessmedia.com.au/sites/default/files/styles/ak_graph/public/kohlersgraphs/2012/Nov/121126-dollar-resources.png

Kohler Chart Nov 2012

Telco Customer Service Madness and the NBN

Will Telstra, as it is now, survive to see the NBN contracts end in 35 years?
My view: It won't, not in its current form.

In 2006 I started to write about my concerns for Microsoft's future, giving them 5-6 years before major cracks appeared. They haven't collapsed yet, but Horace Dediu (asymco) has produced a graph that unequivocally shows their rapid decline in whole-sector market share: the quantitative support for my hypothesis.


I didn't understand that when "the pie is rapidly growing", as in technology, companies can survive, even increase sales, whilst their market-share falls off a cliff. The model is IBM post-1980, not Unisys post the 1986 merger of Burroughs and Sperry, with their revenues shrinking by around 10 times.

Telecomms Industry Structural Changes

There are three structural economic changes that Telstra has to master to survive another 15, let alone 35 years:

• Sector Economic Reform through "Digital Convergence".
• Open Access wholesale networks competing for all services except mobile 3G/4G.
• Good Customer Service and Cost-Effective Operations.
• Quality, Performance Improvement and Profitability are inter-dependent, all are based on Reviews and deliberate Corporate Learning and Adaption.

Telstra have regarded the vertically integrated network as their "birthright", operated under the "Traditional" Telco Business Model ("what the market will bear" not "cost plus margin") and relied on captive markets. Once they could claim "Engineering Excellence" as a counter to outrageous Customer Service, but not so for the last 2 decades. Their management mindset must change to accept current conditions, or with the NBN, they will "lose the farm".

All these "pillars" of their business are being shattered, first by Internet Everywhere, by the NBN removing their customer lock-in and an increasing number of Technology Businesses that "get" Apple's insight and innovation: The User/Customer is all important for your Business.

What Telstra should be doing to undo the resulting Brand Damage

Below is a case study that Telstra should deeply investigate as it encapsulates most of their challenges/deficiencies and could be used as an on-going Reference for Change, but why would they?

In an ideal world, the centre of the study would have these outcomes:

• A personal meeting with the Head of Telstra for the State.
• An apology from him, a guarantee it would never happen again and his personal phone number if further problems arose.
• An audit of all records for their services and accounts to correct all errors.
• A written account of:
• Exactly what went wrong,
• Why it couldn't be fixed, and
• Why it won't recur.
• An offer of compensation for the non-supply of service, for the hours of customer time wasted on the phone and waiting and an ex-gratia payment for the "pain and suffering" caused.

Does any of that sound "over the top" to you?

Consider for a moment, "What would Richard Branson do?". If he was in the country, he'd personally see them, otherwise it would be someone very senior and it would be done very quickly. Stories about his interventions are legion, this is not wild speculation.

If you think Branson and his Virgin Empire are "off with the pixies" and not in the real-world of Big Bureaucracies, mass workforces and challenging business environment, consider the page, "Turn Complaining Customers into Advocates" by The Royal Mail, one of the oldest communications companies on the planet, working under one of the most demanding Industrial Relations systems, riven by Unions and staffed by British Workers, renowned for their lack of customer empathy and poor work-ethic.

If The Royal Mail management understands Customer Complaints are opportunities to both fix your business processes and to convert a hostile customer who'll damage your brand into a strong Brand Ambassador for you, then why don't Telstra?
Don't they understand the rules of Customer Service or read the same well known management books?

What Telstra says it does

In the 2005 Telstra presentation, released to the ASX, supporting their 20,000 node 12Mbps ADSL2 network, I was very impressed with their guiding principles (p3), but those are nowhere to be seen in this case:

• Principle #1: Do it once
• Right first time, every time
• Simplify, standardise, focus
• Less of everything – fewer products, platforms, applications, processes, vendors
• Capture the benefits of scale through focus
• Principle #2: Do it right for the customer
• Invest against the things customers value
• Principle #3: Do it in an integrated way
• One Factory
• End to end approach
• Whole greater than the parts
• Principle #4: Do it at the lowest unit cost
• Scalable
• Costs grow slower than revenues and volumes
• Limited manual intervention

Case Study

The facts of the case study and an analysis of causative Systemic Failures are in a previous post.

Psychological Dimension: Stirring strong customer abreactions

Feelings of Frustration, Powerlessness and Agitation in response to poor Customer Service aren't a "minor annoyance" or idiosyncratic: there is some very deep human psychology involved.

The positive effects of Goal Attainment means the inverse, preventing people from achieving goals, is devastating, more so for high-performing individuals as here. If intermixed with multiple events setting up false hopes and then dashing them, the customer response is even more profound.

Treating customers badly, especially when you know about it, is really bad for business. The cumulative Brand Damage may not be curable. It will cause massive customer revolt and backlash when they have reasonable service substitutes available, such as from the NBN.

Business Consequences

This whole episode was preventable: it was clearly an internal fault within Telstra systems.
It wasn't a user-error (the Client did nothing), it wasn't a hardware, connection, patching or line fault nor a an accounting or software error.

My speculation is that Telstra has significant service database errors since the $10B 2005 (1st phase live in 2007) "IT Transformation Project" led by Greg Winn, one of Sol's "Three Amigos" whom returned to the USA with full saddle-bags. It seems complex, high-value customers like the Client were never catered for, from the 2009 article on the project over-running by $200MM (2%):

Thodey said 9.2 million customers have moved onto Telstra's new billing and CRM systems, which represented over 70 percent of the carrier's customer base.

The final thirty percent were "multi-product holding customers" he said - referring to those Telstra customers that use more than one of the carrier's services.

The fault had something to do with a modem attachment being incorrectly setup in the database, possibly by an automatic provisioning system attached to the order/fulfilment system.

The ARPU for the single service is $60-$80/month. Total revenue on this account, would be $1-2,000/month. Gross Margin must be 30-60%, Net Margin more like 10-15%??

This whole episode put at risk $10-15,000/year on-going revenue for a $10/month Net Margin. I'm sure Telstra won't bother to detail and account for the cost of the event. Why would they? The fault is fixed.

Over the six week period, there must have been:

• 30-50 phone calls
• 20 staff directly involved and 10-20 indirectly or in 'backroom'.
• 50-100 hours of phone calls [$50/hour?]
• 4-6 site visits, each 1 hour or more [$150+/hour]
• 10-40 hours of marketing and engineering effort [$100+/hour]

This preventable error has cost Telstra close to $10,000 for under a $100/year return. They can never make their money back. They are also quite likely to lose all of the Clients business, forever, if they don't directly attempt to follow The Royal Mail's approach and win them back.

As a shareholder, the Client was frustrated that the business was wasting money so prolifically, yet the organisation resisted all efforts to hear this news.

The worst aspect is that Telstra seems oblivious to any need to learn from this affair and follow their own Principles espoused in 2005, "Do it once, Do it right for the customer and Do it in an integrated way".

Lessons

1. If faults aren't covered by the (telephony) Customer Service Guarantee, then Telstra behave very poorly towards Customers.
2. The Telstra Customer Service and Complaints fails dismally with complex issues.
• There appears to be no recognition of "process faults" or identification of "not previously seen" faults.
• There appears to be no fault escalation process.
3. Shareholders are not treated better than anyone else. A marketing opportunity to improve shareholder relations going begging.
4. Busy people's time is worth a lot to them, yet Telstra fail to acknowledge this nor provide ways to bring more certainty to site visits. Telstra could help itself and customers by:
• Having registered 'home sitters' that customers could use to allow them to carry on with their lives, or
• Telstra could charge extra for shorter attendance windows (2 hours, 1 hours, 30 mins). If this is allowed by the ACCC and Telco Regulations, it would earn them considerable money and by only reordering technician visits within a single day, not affect service calls.
5. Telstra seems not to have a culture of Review Incidents, Learn from Mistakes to intentionally Improve Service, Profits and Productivity.
• Telstra has a major improvement opportunity here and seems to be deliberately discarding it, being intent on destroying customer goodwill and shareholder value.

Prognosis

Within 10 years, NBN-Co has planned to displace most of Telstra's wholesale copper network with fibre.

By then, all Retail Providers that can provide good Customer Service will beat Telstra in the marketplace. We are likely to see many small retailers who can offer good, local service, like ISP's, as well as a few large existing companies that compete solely on price,

The NBN seems to be the "magic bullet" that will allow customers to change and release decades of pent-up frustration with Telstra and their oligarchy and monopolistic mindset. The Internet and smartphones/mobile devices have changed the rules of the Telecommunications forever.

If Telstra doesn't learn the lessons of Great Customer Service practiced by the likes of Richard Branson, their only competitive asset will be their 4G mobile network. Which, because they haven't allowed competitors open access via third-party roaming, and forced them to overbuild networks (like HFC Cable TV) is of very little value.

Unlike Microsoft, Telstra is in a Mature Market with moderate, but non-zero, barriers to entry. In a low-growth market like Australia, its revenues will be "eaten" by others, it will follow the Unisys path downhill, but like Unisys, is likely to remain as a brand or engineering operation, though nothing like they are now.

In the same way that I viewed Microsoft as entering a challenging period, I think Telstra is as well, though I don't have a way to estimate or forecast the timeline.

My father spent his entire working life within PMG/ABC/Telecomm/Telstra and it was one of Australia's finest achievements for many decades. I doubt he would be proud of what they've become and I am saddened at their fall from grace.

Telco Customer Service Madness: Case Study

Will Telstra, as it is now, survive to see the NBN contracts end in 35 years?
My view: It won't, not in its current form because of multiple failures within the Organisation.

Below is a case study that Telstra should deeply investigate as it encapsulates most of their challenges/deficiencies and could be used as an on-going Reference for Change, but why would they?


In an ideal world, the centre of the study would have these outcomes:

• A personal meeting with the Head of Telstra for the State.
• An apology from him, a guarantee it would never happen again and his personal phone number if further problems arose.
• A desk audit of all records for their services and accounts to correct all errors.
• A written account of:
• Exactly what went wrong,
• Why it couldn't be fixed, and
• Why it won't recur.
• An offer of compensation for the non-supply of service, for the hours of customer time wasted on the phone and waiting and an ex-gratia payment for the "pain and suffering" caused.

Case Study

The facts of the case study are:

• Customer, 'A', has on their account multiple individuals, multiple service addresses, and multiple services for each individual and service address (mobiles, landlines, ADSL, Cable TV, Cable Internet, ...).
• Whilst these are all domestic services, Telstra regularly deals with this complexity for SME's.
• They are a "high-value" Telstra customer. This seemed irrelevant in the process.
• Unsure if all individuals and services are billed together or by separate, linked accounts.
• 'A' is also a Telstra shareholder, which seems to have been irrelevant in the process.
• 'A' is highly educated, has run businesses and is well conversant with modern PC's and networking, relying on it for work and private life.
• There are multiple family members who are quite I.T. literate and provide in-home I.T. support and troubleshooting.
• A new Cable Internet service was ordered by 'C' in June. (date?)
• The modem was never delivered.
• When queried at the Telstra shop, customers were advised "the order had been cancelled".
• The customers had not cancelled the order, nor been advised of that action.
• 'A' had a working Cable Internet service that then became intermittent. It met their needs and wasn't reported as a fault due to very poor past customer experiences.
• "Not wholly broken, don't tempt fate" was the reasoning.
• 'B', another of the service holders, took it on themselves to report the fault to Telstra.
• The first technician attended on 23rd-August, intending to change the cable modem.
• They were unable to rectify the fault, did not replace the cable modem as it was serviceable and left saying "there is an error", which at some point changed to "an activation error".
• The replacement cable modem was left on-site, unconnected.
• 'A' was told the install failed because of "Error Code CCP0012",  and Tech suggested that the system “thought” there was already a modem on order.
• Technician advised 'A' to call the general BigPond Enquires number (137 663), quote the Error Code, and the fault would be fixed.
• Multiple technician attendances were booked:
• Technician did not attend, did not phone customer. More than once? (date?)
• Technician sent to wrong address, an old service address on the account. (17-Sep-2012).
• Technician 'M' attended (19-Sep-2012), gave customer personal contact number and spent considerable time on-site and continued to work at resolving the fault.
• Possibly instrumental and worthy of commendation.
• 'M' followed-up a week later (25-Sep-2012) saying:
• TRG (Technical Response Group?) were aware of the problem,
• other customers (in the area, state, nationally?) were affected and
• TRG didn't know when or if the Error Code could/would be cleared.
• There were a large number of unsatisfactory and long (1-4 hour) calls to the "Help Desk". e.g. 18-Sep-2012 following Technician no-show.
• 'A' was repeatedly shunted between departments (Accounting, Technical, ...), with no-one taking responsibility. The call finally dropped whilst 'on-hold'.
• No evidence on subsequent calls of any knowledge of previous calls. Every call was a return to the "pass the parcel" with no person/department taking responsibility.
• A Telstra complaint was lodged (04-Sep-2012), 'A' was given a "trouble ticket" number and told to contact Technical Support (number supplied). [[Two people assigned to the case (?), with promises to call-back within 24 hours.]]
• Tech Support called (11-Sep-2012), on-site visit booked for following week (17-Sep).
• Being able to speak to someone with "English as a First Language" had been an immense relief to 'A'. Finally their concerns were noted and seemed to be taken seriously.
• Neither person called 'A' back within 24 hours.
• When contacted, the complaints folk said they'd tried to contact 'A' using an incorrect phone number, one 'A' had never held. No apology was made for this. The complaints people could not correct the database error.
• Having the number corrected took a good deal of time and effort in itself. Multiple departments claimed "can't do it" or "not my area".
• 'A's mobile phone number has been registered with Telstra as their primary contact point for more than a decade. Why were any of the databases incorrect?
• After this (mid-late Sep-2012?) a very confident Telstra employee rang and identified themselves as "Level 3 support" and embarked on a very long and trying support call. They reassured 'A' that they could and would fix the fault.
• Under instruction, the replacement modem was connected by 'A' and failed to work.
• When the original modem was reconnected, it failed to work as well.
• The service was now non-operational and the support person left it that way.
• No apology or explanation was offered.
• The "support" person did not book a recall or ever call back.
• 'A' was nonplussed: Telstra had oversold their competency and destroyed a usable service without progressing resolution of the fault.
• 'A' visited a local Telstra Shop (26-Sep-2012). Wished:
• a credit for the time the service was not provided, and
• to cancel the cable internet service.
• 'A' was told that because of the technician visit arranged for the next day, the service could not be cancelled. The Telstra Shop staff were not interested that the fault had not been fixed in a month.
• 'A' had wished to speak, as a shareholder, to someone senior about costs to the business for the fault. The manager was not present, no meeting was organised.
• 'A'  had wished to request checking and correct all related account and service records. This was not organised either.
• 'A' purchased a Telstra prepaid wireless modem from Australia Post (26 or 27-Sep-2012), unable to get working after spending time with Call Centre. Device returned. (date?)
• 'A' bought a Vodafone prepaid wireless modem from Australia Post (26 or 27-Sep-2012) and after a few false starts, got it working and regained their Internet service.
• Telstra Complaints officer called next day (27-Sep-2012) to say "we're working on it".
• Telstra sent a standard e-mail survey following up on the prepaid wireless modem (bought 27-Sep-2012).
• 'A' detailed their disappointment in Telstra service and invited them to call.
• (02-Oct-2012) A Melbourne based Customer Service rep.. 'R', called 'A' about the wireless modem and the on-going fault. 'R' said they would ring the next day.
• (02-Oct-2012) The Teltra Complaints Officier assigned to 'A' called saying another person in their section would contact 'A' later that morning.
• No call was received.
• 'A' left messages that afternoon and the next morning. These were not returned.
• (03-Oct-2012) 'R' rang 'A' in a conference call including a technician , 'J'  in Melbourne. 'R' had to leave the call early, with 'J' spending an hour on the phone with 'A', attempting "a manual override" of the Error Code. This required long waits and providing the hardware address of the original modem. This had to be read by 'A', 'J' did not seem to have this on record.
• This over-ride appeared successul at the time.
• The connection failed overnight.
• It seems to be working today.
• How will 'A' know the fault has been cleared?
• They currently believe the fault is rectified.
• Why wasn't this done on, or just after, the first site visit, six weeks earlier?
• Why the long wait and run-around?
• After the apparent resolution, 'A' had multiple calls from people within Telstra, all very excited the fault had been fixed.
• None offered an apology or any compensation, some seemed to claim direct credit.
• None offered an explanation of either the Technical fault within their systems, nor what had gone wrong with internal Telstra processes and automatic systems to cause the multiple faults suffered.
• None offered a "magic phrase" to be repeated to Technicians and Help Desk about the fault should it recur.
• No on-going "trouble ticket" number was given to 'A', should the fault recur.
• No-one offered a shortcut for service if the fault recurred shortly.
• After the overnight service disruption, it wasn't clear if one of the other Telstra personnel had undone the "manual override" with an individual attempt to rectify the fault they'd claimed.
• There was no evidence of good co-ordination amongst the various Telstra "Silos".
• 'A' had concluded on 3 October, that  Error Code CCP0012, is not a technical problem, nor is it an accounting problem, but an Activation error problem and simply a code that needs to be removed from the Telstra system to allow the modem to connect and activate.
• 'A' raised a complaint with the TIO (Telecommunications Industry Ombudsman) (03-Oct-2012) sending their records of the incident.
• 'A' had been originally told "there is construction work in your area, a cable may have been cut". This seems to have been a deliberate, misleading statement.
• Telstra did not give any hint that after a month:
• That the fault had been escalated
• That for failing to provide the service, they would rebate 'A' the service charge.
• No offer was made to supply a temporary service, such as a 3G USB modem.
• 'A' had had to cancel a number of important business and personal meetings to wait aimlessly for a Telstra technician to attend on multiple occasions.
• No option for an increased priority owing to the long-standing nature and difficultly of the fault was offered.
• Telstra would never offer better than a 4-hour window for any attendance. They never scheduled 'A' at the beginning of the window, always near the end, or didn't attend.

Psychological Dimension: Induced Pain and Suffering

It's also worth noting that completely out of character, 'A' suffered extreme agitation, frustation and desperation at both the impenetrable wall of "service" and the inability to be heard, treated respectfully and to get a resolution to a service that had become necessary for conducting their business and life.

This isn't a "minor annoyance" or idiosyncratic: there is some very deep human psychology involved.

There's a branch of psychological therapy that relies on our limbic systems' (the cingulate nucleus) response to attaining goals: pre- and post-goal attainment happiness, two very distinct and important phases.

For all humans, striving and overcoming challenges is innate and core to our psychological well-being.

Consistently setting goals and achieving them isn't just "nice", but necessary, for our continued happiness and psychological well-being. Goal Attainment forms the basis of various powerful approaches addressing Depression and other conditions.

Knowingly and uncaringly forcing people into powerlessness and frustration would, in an OH&S workplace setting, be illegal: employers are required in Australia to provide a Safe Workplace. Deliberately causing employees harm, physical, emotional or psychological, is illegal and attracts civil penalties, as well as curative support for those affected.

I'm not sure if current OH&S law can be extended to customers. If so, companies like Telstra which seemingly have a policy and strategy of blocking communications and frustrating customers, would face considerable penalties...

The positive effects of Goal Attainment means the inverse, preventing people from achieving goals, is devastating, more so for high-performing individuals like 'A'. It can be categorised as "cruel and unusual" treatment, especially if intermixed with multiple events setting up false hopes and then dashing them. The human response in this case is even more profound and damaging.

Systemic Failures within Telstra

This whole adventure was unnecessary and presumably preventable: some automatic system failed when a new Cable Modem was ordered and incorrect configuration data uploaded to an operational system, without detection, audit or correction. Who has been charged with finding the root cause?

The final fix, a "manual override", should at worst, have been done the next day by the technician 'R' in Melbourne, prompted by the call from 'A'.

If Telstra's fault resolution system had worked properly, the fault would have been automatically passed to 'R's section as soon as the first technician recorded the Error Code.

• Telstra has no fault escalation procedures, conclusively demonstrated here.
• After any fault has been open/unresolved for two weeks, it should have been escalated to the Head of Operations for the State.
• Any fault that is due to an internal process failure, like this, should be immediately escalated to senior officers with full cross-organisational authority and access to diagnose the root cause and initiate permanent prevention measures.
• Own-goal process faults like these need to be reviewed, tracked and addressed by the CEO and their Senior Management Team.
• They threaten the viability of the whole business and sufficient Responsibility and Authority only comes together at the top of all Silos, the CEO and their team.

• High-value multi-service clients are treated worse than low-value customers: there are demonstrated errors in Service and CRM databases.
• There is a major deficiency within Telstra: nobody is checking and correcting these service records.
• After the "IT Transformation" project, it was known that high-value customers could not be automatically transferred.
• To have stale data in multiple locations (service address, customer contact) says the database is seriously compromised, leading to many costly preventable errors.
• Who is responsible and accountable for Data Quality, and do they have the Authority, will and budget to force records to be corrected?
• This appears to be a major organisational failing and oversight.

• Correcting faults in Telstra records is onerous and time consuming for Customers, it should be simple and easy.
• It cannot be done in real-time whilst speaking to Service Reps, or
• Service Reps are poorly trained or refuse to execute their tasks.

• Telstra shareholders are treated no better than anyone else.
• This is a marketing opportunity going begging to create engaged and supportive shareholders. Telstra has one of the largest 'Mom and Pop' share registers.
• Service discounts, special offers and loyalty bonuses are possible.
• Special service and access arrangements for shareholders would encourage them to give all their business and that of their immediate families to Telstra.

• Telstra BigPond seems to offer nothing like the Telephony Customer Service Guarantee (CSG).
• The Internet is a vital lifeline personally, professionally and in business for almost all Telstra customers now.
• Decent Service Guarantees would match Consumer expectations and usage, as well as provide Product Differentiation.

• Telstra's Offshore "Help Desk" with ESL speakers are counter-productive, especially for complex, long-running faults.
• Whilst possibly tolerable for simple tasks and "script driven" data acquisition, they are a Nett Negative Value in this situation and many others. Saving money on Help Desks may be illusory and detrimental to the whole business.
• Allow Customers to choose more expensive support options:
• Like Airlines, offer multiple levels of pay-for-service, allowing the business to maximise profits by offering multiple price-points. (No "money left on the table").
• Higher cost support could be automatically included as 'upgrades' for high-value customers, as Banks do.
• After two calls on the same fault, automatically direct the Customer to a specialist Held Desk with a single person assigned and responsible for achieving Customer Satisfaction.
• Instead of measuring "time to finish or transfer call", complex calls need to measure "Time until Customer is fully satisfied". Only the Customer can close   complex faults.

• The Help Desk practice of "pass the parcel" is frustrating to Customers and Counter-productive as it causes significant Brand Damage.
• Somebody within Telstra needs to be responsible for detecting, monitoring/reporting and preventing this situation.
• Ideally, the phone system should track customers who are passed around and offer them a "circuit breaker".

• Making Customers wait on Help Desk queues for hours serves no purpose other than weeding out those with better things to do, prompting them to look for alternate service providers.
• Long Help Desk delays are an invitation for Customers to Choose Another Carrier, a tactic which would not impress shareholders one iota.
• Under provisioning Help Desk service staff only serves to reinforce the stereotypical image provided by Lily Tomlin in her "We're the Phone Company" sketches. This is against the best interests of the Business.
• This reinforces Telstra as a Toxic Brand to Customers. Whilst Customers have no better place to go, they will tolerate it. Given the choice, they will flee, never to return.
• This is known, preventable Brand Damage at its worst.

• Complex faults are slow and difficult to solve. This isn't simply a Customer Service and Brand Damage issue, but very expensive to the organisation.
• This fault cost $5-10,000 more than it should have.
• We know that this wasn't a one-off and that other Cable Internet subscribers were affected, but their faults weren't resolved.

• The initial problem, the non-supply of an ordered service, was never addressed.
• How much business can an organisation deliberately throw away and survive?
• It seems nobody is directly responsible or accountable for this lost revenue.

• Telstra, if it wants to engage and retain customers, must never internally cancel a service order without contacting the customer, explaining the situation and offering alternatives, It's an opportunity to "upsell" the client.

• There is a major fault with the Technician ticket system: The first on-site Technician should not have been able to pass a known, unresolvable fault back to general enquiries.
• Telstra confirmed that "TRG":
• knew of the "Error Code CCP0012" fault,
• that it affected multiple customers,
• presumably they had no idea of the immediate or root cause, and
• they had no idea of when they would be able to fix it.
• In ITIL-speak, this was a Severity One Major Problem, but wasn't classified as such.
• An appropriate organisational response would've been to establish a war-room comprising the State Heads of Branches and Senior Line-of-Business Managers.
• Following the successful work-around, all other faults associated with the Problem should've been corrected.
• Investigations initiated as to the root causes (automatic systems and processes) responsible for the error and means of detecting recurrences and costs of prevention measures.

• Telstra's Problem Management is either deficient or non-existent.
• Problems are not Faults, but the cause of one or more Faults.
• To have a Known Problem not detected by the Fault Ticket Handling system is a major Professional failure that should be explicitly investigated and reviewed.
• All the Help Desk and Technical Systems should've found an outstanding Problem with "Error Code CCP0012", with a known workaround ("manual over-ride").
• The systems and processes need Review and correction.
• A major internal inquiry is needed to uncover the root causes of this meta-failure.

• Multiple Telstra employees were contacting the Client unbeknownst to one another.
• This is the compelling reason for a CRM, a "single Client Communication Flow".
• This definitively failed, either because the CRM was faulty, or it was bypassed or procedures ignored.
• All of these are cause for deep concern and deserve an inquiry.

• The inability of the Complaints Officer to progress the issue, or identify it was a Known Unresolved Problem, means their systems and/or processes are deficient or faulty.
• This is a major problem deserving immediate attention.
• The fault was only resolved accidentally when a Customer Survey person became involved and somehow was able to refer the fault to a diligent, competent and active Technician.

• The unidentified "level 3" support person that caused the service to fail entirely should be found and castigated, as should the many service personnel who failed to follow-through on the fault.
• These actions are consistent with a widespread attitude of "Care Factor: Zero", inimical to resolving faults or preventing faults through good Problem Management.
• The one Technician who persevered should be found and commended.

• The consistent lack of apology to the Client, the lack of any offers to provide an alternate service until the service was restored or anyone offering the statutory minimum (under the TPA/CCA) of rebating service charges show a systemic failure in even adequate, not good, Customer Service training and knowledge of legal requirements.
• At a minimum, this is a systemic Training failure.
• It indicates that nobody is monitoring, measuring and reporting on general levels of Customer Service and evaluating adequacy of Training.

• The most critical and over-arching and pervasive Failure is the identification and investigation/analysis of massive cost over-runs on service faults etc:
• This fault cost the organisation an unnecessary $5-10,000, more than the $100/year service margin could ever return.
• This will not be an isolated occurrence, many of these will be eating away at Profits and turning away Customers, particularly high-value long-term Clients.
• This only got resolved through an accidental interaction, the Customer Survey person who bothered to follow-up on the feedback. This bodes very poorly for the future performance on the organisation.
• By rights, Telstra should have standing reports with automatic escalation:
• Identify full internal cost to resolve faults and other service issues.
• Report and escalate excessive fault resolution costs to Senior Management.
• Mandate Root Cause Analysis  (RCA) of the "Top Ten" faults found in the RCA's.
• Require the CEO and their Senior Management Team to track all "Top Ten" issues and regularly report to the Board on progress and problems identified.

The irony is that I shouldn't be writing this analysis at all. None of this should've happened in a well-run organisation that cared sufficiently for its Customers.

The tragedy is that Telstra will probably continue "Fat, Dumb and Happy" for the next 10-15 years in blissful ignorance of this piece and then wonder why they are "suddenly" losing Customers, disproportionately their most valuable, at an accelerating rate.