NBN Co CEO rejects calls for price cuts

NBN Co’s chief executive Stephen Rue has rejected calls by telcos to cut the company’s wholesale prices.

“In our pricing we’ve worked hard to balance the interests of retail providers, the experience of end users using the network and our own economics” as the company seeks to deliver a “modest return” on the federal government’s investment, the CEO said today.

“Some have called for NBN to significantly reduce wholesale prices charged, resulting in a large reduction in revenues generated into the future,” Rue said.

“As you know from our corporate plan announcement in August we revised our revenue forecasts after making changes to our pricing last year,” the CEO said. “We have naturally no intention of diverging from our overall revenue projections outlined in our latest corporate plan.”

In August, NBN Co released an updated version of its corporate plan. The document revealed that NBN Co had revised its revenue projections, with the company expecting revenue of $3.9 billion in FY20 — down $1 billion from NBN Co’s previous forecast.

The corporate plan projected lower than expected revenue for FY19 and FY20, though NBN Co expects that by FY21 the gap between the previous and current forecasts will have narrowed ($5.2 billion in the updated corporate plan, down from $5.4 billion in the previous plan).

NBN Co has said the short-term impacts on revenue are a result of its moves to improve customer experience, including discounts on capacity (CVC) purchased by telcos.

It’s “always been understood from the start for NBN to deliver on its mission, NBN must be underpinned by a strong business model,” Rue told a briefing on the company’s first quarter results. “This will ensure that not only taxpayers’ investment is recouped but that the company remains economically viable into the future.”

As a result NBN has a “user-pays model”. “This enables high speed broadband to be delivered to all without needing a taxpayers’ subsidy and enables NBN to generate future cash flow providing modest returns to government while funding ongoing capex investment,” Rue said.

Earlier this year Telstra CEO Andy Penn described NBN Co’s wholesale pricing as “unsustainable”.

“In the migration to the NBN, wholesale broadband prices have more than doubled and are set to increase even further,” the CEO said. He added that Australian telcos have so far absorbed the increase but to the point where “providing an NBN service is uneconomic for the industry”.

“This is unsustainable and ultimately the model has to change otherwise it will lead to higher long-term prices for customers,” Penn said. “This is bad for NBN, bad for the industry but most of all it is bad for customers because it will impact affordability and Australia’s competitiveness.”

The completion of the NBN will reduce Telstra’s net profit after tax by close to 50 per cent, Telstra chairperson John Mullen told the telco's AGM.

NBN Co is projecting that average revenue per user (ARPU) on the network will grow from the current level of $44 today to $51 by 2022. However, Rue said today that that boost to ARPU will not be driven by wholesale price increases for residential services.

Instead, much of it will be a product of revenue from the business market, the CEO said. On the residential side, the ARPU increase will come from increased take-up of fast speed tiers and growing data consumption.

“In reality we have reduced our prices and have factored that in to our long range planning and we will continue to consult with the industry as we balance not just NBN’s need for a strong business model but also end user needs and our RSP [retail service provider] partner economics,” he said.

NBN Co reported revenue of $620 million for the three months to September 30, up from $405 million a year earlier.

It reported a loss of close $1.09 billion for the quarter, compared to a loss of $1.38 billion a year prior. Once costs associated with payments to Telstra and Optus for migrating customers to the new network are removed, the company delivered EBITDA of $74 million during the quarter (including subscriber costs the figure is negative $270 million).

As of the end of September there were more than 4.3 million households and businesses with NBN active connections, out of 7.3 million declared ready to connect to the new network.