NBN Co is set to ignore calls from across the internet industry to dump the connectivity virtual circuit (CVC) charge, meaning it will remain a variable cost for retail providers for the foreseeable future.
The formal position on CVC confirms comments made on a recent results call that the CVC construct would likely be retained.
The network operator is also favouring more conservative increases to the amount of CVC included with each broadband service than what the industry had asked for.
The combined effect, if waved through, would entrench the current structure of NBN pricing through to at least May 2021.
Retail internet providers including Telstra, Vocus and Vodafone had wanted NBN Co’s two-part pricing model replaced by a single wholesale charge. Other RSPs had asked NBN Co to “reconsider” the CVC construct.
The reason RSPs dislike CVC is the reason NBN Co likes it.
As user demand for data grows, more CVC is required to meet that demand and ensure services don’t become too congested.
RSPs say the amount of CVC that comes bundled with each broadband plan is not increasing at the same pace as demand for data.
They are therefore having to buy extra CVC capacity to meet the shortfall, incurring significant “overage” fees.
Those fees are a variable - and growing - source of revenue for NBN Co, and the company has indicated that it is unwilling to give up that revenue in its response to wholesale pricing review submissions from RSPs .
“The need for certainty was expressed by several respondents that articulated a preference for single-part or AVC-only pricing,” NBN Co said.
“While single-part pricing would provide valuable certainty to RSPs, it fails to take into account the cost in provisioning and dimensioning the network to accommodate rising data consumption.
“NBN Co believes that our bundled discounts are the best way to implement a user-pays approach to wholesale pricing at this time, and this paper will therefore focus on ways that NBN Co may provide cost certainty within the structure of discount bundles.”
Both Aussie Broadband and Optus had adopted a more pragmatic position that calling for CVC to be dumped outright, instead asking NBN Co to bundle enough with plans to keep better pace with data growth.
NBN Co’s proposals fall well short of what either RSP had sought; however, NBN Co says its proposed changes “will significantly reduce costs associated with CVC and overage.”
Aussie Broadband, in particular, produced detailed modelling of the amount of CVC it forecast would be needed at each broadband tier through 2023, just to keep the performance of internet services at current levels.
It predicted the amount of CVC that came bundled with services would need to double.
NBN Co, however, is only proposing moderate increases.
On a 50Mbps plan, for example, NBN Co presently includes 2Mbps of CVC. It is offering to increase that to 2.25Mbps in May next year, and then to 2.5Mbps in May 2021. Aussie Broadband predicted 3.5Mbps of CVC would be needed in the same timeframe.
For 100Mbps plans, NBN Co currently includes 3Mbps of bundled CVC (courtesy of a 500Kbps boost applied recently). It is proposing to boost that to 3.75Mbps in May 2020 and 4Mbps in May 2021. Aussie predicted 5Mbps would be required.
In both instances, RSPs would be up for around an extra 1Mbps of CVC per user.
That’s more or less consistent with what Telstra has predicted: that RSPs should expect $5-10 in CVC overage charges a month through 2022.
As Telstra flagged, one would expect retail prices to rise over that period, since RSPs are unlikely to have the margin space to absorb that additional cost.
One reason NBN Co is likely to want to keep CVC is that it still expects to find an extra $5 per user per month in revenue from its residential customers between now and 2023.
It will likely reach that goal by encouraging more users to sign up to higher tier plans that drive demand for data, requiring RSPs to pay for any CVC shortfall.
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