I recently suggested Thodey's statement "copper doesn't decompose" isn't just disingenuous in the extreme, but is deliberately misleading the market and investors, a serious ASX and ASIC infringement. While I was talking about probity and criminal offences and the evidence is deep and easy to find, they declined to muddy their brains with anything "technical".
While I'd like some points on the public record by someone authoritative like Mike Quigley, based in fact, not just my calculations supported by public information, I haven't been able to make that happen.
George Maltby, the outspoken CEO of O.T.C. fired by Bob Hawke, would also have been an appropriate source.
1. There is no "average" NBN user: most traffic & revenue is generated by a small cohort of subscribers.
Demand on the Customer Access Network traffic has an exponential distribution, with the top 10% consuming over 50% of downloads and the top 30% using the highest available speeds. A cost-of-wages calculation vs Internet rental costs for small business is brutal: any small business that spends 10-20 person hours/month on the net can justify 'top tier' speeds.
The bottom 50% of consumers are a footnote in the accounts: they use the slowest speeds available and account for around 6% of downloads, vs the top 1% who consume 10% of the total download.
2. Fibre speed-tiers are a gold mine: input costs are unrelated to "speed" while revenue increases with "speed".
This is the "economic magic" at the heart of the NBN Co full-fibre business model: monetising higher access rates and reducing the consumer surplus.
Something, I'd assert, that has never been done effectively on a large scale by an Australian Telco before.
Line rental profit margin for higher access rates are phenomenal because the input costs for all services are nearly identical. The internal marginal costs for higher speed services is very close to zero.
The utility to customers is high, begining with wages that are wasted from waiting for downloads and more so for uploads. The value proposition for consumers for higher speeds is compelling: the cost per extra Mbps declines very rapidly.
The higher access rates have a very high perceived value to the customer, because the "price per Mbps", their unit of value-measure, radically decreases as access rates increase, while the supplier has almost nil variable costs. The consumer demand/supply curve, and Price for a volume point, bears no relation to the supplier production costs.
Gross Margin increases near exponentially with increasing speed tiers. Selling higher rate services is a GOLD MINE. There is now enough solid revenue & take-up data over long-enough time periods to allow very accurate demand modelling (>0.1%).
The only unknown, I assert, is the rate of growth of demand. The ABS figures for NBN traffic show it's 50% higher than the rest and still growing at trend, not as asserted by the Coalition, collapsing.
3. All the profits of NBN Co flow from the top 25% of consumers: 100% of profits, not 'nearly all'. The high-end pays for the low-end, not vice versa.
The rest of us get a free ride or better, being heavily subsidised by those users.
I did some sensitivity analyses of losing 25-40% of low-value consumers, a much harder "stress test" than the Coalition's. The results aren't that surprising if you understand the economics at play.
Losing most of the bottom-end has a very, very small impact on revenues, potentially an increase in profits because retailers have lower overheads and can better match upstream capacity with customer volume demand.
4. NBN Co profits can only be maximised with universal supply of the full range of speed-tiers at guaranteed rates.
Because of 1, 2 & 3, universal deployment of guaranteed access rates and the full spread of speed-tiers across all subscribers is necessary to maximise revenues and profits.
This is because suppliers cannot tell beforehand who will be a 'top 20%' consumer: they don't gather in convenient places, but are spread randomly through the whole network.
To gather all available profits, not leave gobs of money on the table, the Customer Access Network has to be able to offer the premium services to every subscriber. It's basic economics and unbreakable laws of commerce.
5. To Mar 2013, NBN Co financials are running well ahead of forecasts, even with delayed rollouts.
The NBN Co operating financials, revenue & profit and consumer demand (take-up rates, speeds & volumes) are months, even years ahead of Plan forecasts.
The Quigley plan is demonstrably conservative, the actual revenues are blowing away the plan - which means the break-even, peak-debt (probably) and IRR will be much, much better than the plan.
But only if guaranteed access rates and the full set of speed tiers is offered equally to everyone. The economics of differential pricing on 'speed-tiering' are powerful and untried here in the mass market.
I'd say "by any Telco", but I haven't done that research.
6. The election campaign noise about the "Cost" of the NBN Co construction work is a distraction, just as consumers of petrol, gas and electricity don't question infrastructure build costs. The real cost to taxpayers is more like $1 billion/year, before profits are returned.
The only number taxpayers, and hence voters, should, and need, care about, is what it will cost them and nobody, not either side of politics or the mass media, has put that out in public.
This is a known and computable figure:
- the on-budget interest payments of the $30.4 billion yet to be borrowed.
My calculations of $30.4B from 2018-2033 @ 2.5%, are ~$12B in on-budget interest payments.
Barely $1billion a year. Not even close to a 'large' budget line-item cost, and many times lower than the increased economic turnover with associated tax revenue increases. A correct analysis would properly separate public and private money and clearly identify recoverable investments from expenditure.
- the project's profit or Internal Rate of Return (IRR) figure, generated from 2033-2040, is around $40-$50 billion, aside from significant income beforehand of company tax, GST, payroll tax and income tax/FBT.
- the Coalition's failure to publish any of these 3 figures suggests a real risk of commercial failure of their 'plan'.
- the downside of which is a potential $50 billion loss - out of the budget, not as much again profit. The downside risk is ~$100 billion if the project is destroyed.
- the project break-even and IRR are the critical numbers, not CapEx or peak Public Funding.
- if revenue is ahead of projections, then, just like a house mortgage, a small increase early on massively shortens the loan and reduces total interest paid.
- Unlike a residential house mortgage, this is an income producing asset and total profits returned will massively increase.
- On current financial performance figures, I wouldn't be surprised if total public expenditure would be more like $8-$10 billion, with also quite a kick in IRR, over 10%.
7. The NBN Co debate can only be about good business, good marketing and good economic management - and profits to the taxpayer.
Maximising returns of public investments is required under law of governments and the public service. That's the only base for a debate: which approach will be more profitable for the taxpayer.
The debate isn't about technical issues or "maximising returns on existing assets", a furphy as the Coalition sold Telstra in 1995, leaving NBN Co with no existing assets. Why would the Coalition care so deeply about the assets of a business it sold?
8. What does Telstra want?
Telstra have some of the sharpest economic and financial brains in the country working there.
They're not just good at modelling, they are superb.
Telstra will have done all these calculations and should know that:
- they can still leverage their network assets and beat every other Telco on costs & hence dominate both fixed-line and mobile markets, and
- they will double or treble their corporate profits only with the current NBN plan of universal, guaranteed services and speed-tiers.
My view is that Telstra has a everything to lose and nothing to gain from keeping the Copper Customer Access Network (CAN).
I think Mr Thodey should be looking to unload ownership and maintenance responsibility of the Copper CAN, and push forward a full-fibre CAN, as an absolute priority and as quickly as possible.
9. Cost-Benefit Analyses (CBA's) only apply to direct expenditure with no associated, direct, measurable benefit. CBA's are not how profit generating enterprises are valued or compared.
That's Accounting 101.
There are very small on-budget costs (~$1B in interest) and no indirect, hard to quantify benefits to find and sum. The NBN Co accounts and their forecasts, in the Business Plan, are a full and complete answer to calls for a CBA.
The only valid business question for NBN Co is evaluating the Business Risks. Are they fully declared and properly mitigated or dealt with?
The formal accounting definition of expenses and revenues applies to analysing the returns of NBN Co:
- do the transactions go through your books?
- Because NBN Co is a trading business, it already accurately measures and reports real expenses and income.
- Maintaining NBN Co is a government expenditure program in need of a Cost/Benefit Analysis is both absurd and a wilful lie.
We know to the dollar, what the direct expenses and monetary benefits (revenue) to the community, represented by the government budget are. Nothing has to be estimated.
NBN Co is a business, the money put into it is off-budget, as its an investment that will pay for itself, pay interest and then make a tidy profit.
Ask the "hard headed" infrastructure economists what the CBA value is on a zero cost.
- It's infinity: ANY benefit from a nil cost, which defines a profitable investment, is infinite.
You can't do better.
We know before starting what a CBA of NBN Co's business should be, the real question is what the Coalition's bogus inquiry will find.
Perhaps this is why the Coalition is so keen to kill NBN Co financially: they just can't bear that Labor can created a public investment that will be a guaranteed River of Gold, compared to their rather weak and dreary penny-pinching and slinging handouts to the rich and super-rich.
The Real Deal on the Coalition NBN: same price, worse outcomes.
Copper cheaper than Fibre? Only if you "cook the books" radically!
Correcting wrong-headed Journalistic Myths & Memes
The NBN Co business model - who really subsidises others.
The Blackhole at the centre of the Turnbull Node Plan
The commercial innovation of NTD multiple porting
Part 2: The commercial innovation of NTD multiple porting
Disputing the four Turnbull "Stress Tests". Pure fantasy.
Myths: Low-end Broadband users subsidise high-speed, high-end users
Business Economics of Fibre vs Copper: a slam-dunk win for Fibre
The Need for Speed I - the path to 1 gigabit services
Need for speed II - nobody 'needs more than 1Mpbs'