Thursday, September 18, 2014

Exposing the 'mysteries' at the heart of the Ergas "Cost Benefit Analysis".

The mystery at the heart of the Vertigan/Ergas "Cost Benefit Analysis", how you assess the highest-growth, highest gross margin Industry in the country and decide it's not profitable, won't be dealt with in this piece.

This piece is on the mysteries at the heart of the UK's Communications Chambers report, referred to in the Ergas CBA as a "Demand Forecast": Domestic bandwidth requirements in AustraliaA forecast for the period 2013-2023.

The CBA is for the 25-year period, 2015 to 2040, yet the bandwidth requirement is only calculated for a single decade. Are we to believe that somehow the final seventeen years of exponential demand growth "fell behind the couch"? No, this was a very considered and deliberate decision.

Over the whole of the "Cost Benefit Analysis", or CBA, the NBN Co service is modelled as only providing 100Mbps download while upload rate isn't modelled or discussed in detail.

This ignores the fundamentals of the technology and the business plan:

  • The 'G' in GPON is "gigabit", which on the CBA's own terms makes FTTP a more profitable and desirable business, but these calculations are simply omitted. Again, not an oversight. The real comparison is for gigabit FTTP vs 100Mbps FTTN, for which there is no technical, financial or economic contest.
  • The 2012 Business Plan very clearly lays out the transition from differential charging on access-rate (AVC) to charging for traffic volume (CVC).
    • By 2040, the AVC charge for 12/1Mbps and 100/40Mbps will be the same, $11.75, under half the initial price, while 1000/400Mbps will drop four-fold to around $30/mth.
    • While the ARPU, Average Revenue Per User, will have increased to $110/mth on the back of exponential growth in data volumes.
    • NBN Co always planned to offer an exceedingly cheap entry-level services and to adopt a very equitable "user pays" model based on download data.

By far the most bizarre assumption by Henry Ergas is that Customer access rate, "speed", isn't just the primary determinant of Quality of Service, but the sole metric. This utterly fantastic statement, at odds with 100 years of Telecommunications Engineering, is entirely unsupported and never discussed.

In this context the "Bandwidth forecast" was obviously needed to justify "Nobody needs more than 25Mbps".

The report authors themselves state that it's exceedingly hard to find any reports forecasting, or even reporting historical, customer access rates. There's a simple reason for this: for Telecommunications Professionals, both Engineering and Business, 'speed' is an irrelevance.

In Economic & Marketing terms, 'speed' is only a "hygiene factor". Customers only notice it when it's not there. It's is not, and has never been, for the Industry, a Quality Metric.

From page 37 of the CBA
This study does not consider changes in the amount of data downloaded, latency or jitter. 
There are other customer experience changes that are less important than speeds and that are not quantified in this CBA. [emphasis added]
These include:
variability of speeds, latency, packet loss, jitter 
* Increases in the amount of data downloaded will have costs for retail service providers directly (which are then passed through to customers) and benefits to customers. To evaluate this change would require estimating the costs of allowing greater downloads, not just across the access network, and the benefits that customers obtain from greater downloads.