Thursday 29 November 2012

NBN Co's bold assumptions on Australians' willingness to pay

Broadband has been a great deal for consumers. In most markets they have received ever more bandwidth for roughly the same amount of money, or even less. Many countries show a pattern of declining 'ARPU' (average revenue per user), and increasing average Mbps. Consumers may actively choose a plan that offers more bandwidth for a similar price, or they may be automatically upgraded to higher bandwidth by their ISP. (This latter is a surprisingly common phenomenon - the UK's Broadband Stakeholder Group has just published an excellent report looking at the numbers.)

Here's the pattern of price and bandwidth in the UK:

Source: Ofcom CMR 2012, p340

As you can see, the average spend for broadband has dropped by a third, even as average speeds have increased significantly. (Note that the speeds in this chart are 'headline' speeds - those actually achieved will be different, but the trendline will undoubtedly be upwards).

The historic picture in Australia is not quite as good as the UK, but nonetheless very positive for consumers, who have seen increasing speed for broadly flat spend:

Source: Telstra financial results, Akamai

[Some caveats: I haven't been able to find national average figures for ARPU, so I've used Telstra's number as a proxy. Given its significant share in the market and its role as a price setter, it is likely an accurate representation of the trendline, even if the overall average is somewhat lower. Figures for speed are in this chart actual speeds, rather than headline, so are not directly comparable to the UK figures above.]

What about the future? In Australia the broadband market is undergoing dramatic change. The government is rolling out the NBN, a (near) nationwide fibre-to-the-home network, which will wholesale services to retail ISPs. The business plan shows NBN Co making a slim return for its citizen shareholders, but of course a business plan is only as good as the assumptions that go into it.

What does NBN Co have to say about ARPU? They are forecasting a sustained and substantial increase over the life of the plan - the yellow line on this chart:

Source: Wholesale ARPU from NBN Co Corporate Plan 2012-15 p69,
Telstra retail ARPU as above, estimated retail ARPU author's estimate

Also on the chart is the Telstra retail ARPU, as before (in red), and my own rough estimate of what retail ARPU is implied by NBN Co's wholesale ARPU (in yellow - based on an estimate of $25 for the ISP to cover its costs and margin).

Note that NBN Co aren't saying that they will be charging more over time for any given product, or that those products will be more expensive than today's equivalent. What they are saying is that they expect consumers to be willing to pay substantially more to get higher speeds, with a result that the typical user increases their spend by about 70% over the next decade. While it is intuitive that consumers might pay more for higher speeds, as we have seen historically they haven't had to.

This is a very different point from saying that at any given point in time, higher bandwidth products are more expensive than lower speeds - of course that is true, but over time the price of all speed tiers have moved down. Consequently consumers can upgrade their speed without spending more money, and broadband's "share of wallet" has been roughly flat. The NBN Co plan critically depends on this long standing pattern changing dramatically, with a substantial rise in broadband share of wallet.

9 comments:

  1. Dear Mr Kenny,

    You make the assumtion that ARPU is a direct correlation of Retail price. When it is not.

    ARPU stands for (as I'm sure you are aware) 'Average' Revenue Per User.

    It doesn't stand for Average Revenue Per Product/Service.

    1) Part of the reason behind growing ARPU is the ability to service business customers... You can add on 1 user, but have a massive increase in revenue.

    2) Part of the reason behind growing ARPU is 'un-adressable locations'. There are 3 fibres allocated per current household. 1 which is actually connected. The other 2 are 'un-adressable'. NBNco could add one customer, say VicRoads/RTA for traffic light service, and bring in an exponential amount of revenue, yet they have added just one new customer. Hence, Revenue has risen, yet 'users' have stayed relatively 'static'.

    3) Part of the reason behind a growing ARPU, is new products being purchased. Once upon a time we had a phone line. Say $30pcm. Then we add a mobile account. Say $30pcm. Then we add in internet. Say $30 pcm. So we still have the same amount of users, yet we have 3 fold the revenue. Granted, in given example, this is likely over different carriers. But not necessarily. In NBNcos case, we are looking at the increase in 'services' not an increase in price... If people want good skype, they have to take up a higher speed tier. If people want multiple users (family/share house), they need to take up a higher speed tier. If people want IPTV, they need to take up a higher speed tier. This higher speed tier (new services) drives the increase in ARPU. They are no longer buying one product. The customer is buying multiple products. Hence the increase in 'Average Revenue Per User'.

    These are just a few examples that I could think of. I'm sure there is more. E-Health, Home Monitoring, etc etc. Static amount of users, increasing services, therefore revenue increase.

    Thank you for allowing me to clear this up.

    Sincerely

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    1. Cabidas -

      Thanks very much for taking the time to respond. Taking your points in turn:

      (1) 'Business users will drive up ARPU'. But this can only explain rising ARPU over time if business users are an ever larger part of the mix or if business ARPU growth is much faster than residential.

      Won't business users be signing up to NBN Co from day one? Won't they be forced to when the copper cut-over happens? Thus a mix-change to business can't explain rising ARPU over the very long run, as NBN Co forecasts.

      On the second, business ARPU growing much faster than residential, do we have any reason to believe that's the case?

      Most businesses anyway aren't that heavy users of bandwidth. Typical per user bandwidths are measured in Kbps (here's ArsTechnica saying 41 Kbps). Thus even a premise of 100 people only needs ~4 Mbps. Of course there may be particular businesses that need more, but as a whole they are unlikely to drag NBN Co's ARPU up - if anything they may pull it down.

      (2) Your proposed definition of ARPU (ie that one user could have many connections) is not how the term is generally used, and I don't think NBN Co is using it that way either. Apart from anything else, they're wholesale only. If I understand correctly, they couldn't serve VicRoads directly. Optus or Telstra might, but all NBN Co would see is a block order for lines, mixed in with all the other Optus or Telstra end-users. How would NBN Co even have the data to calculate ARPU in the way you suggest? [Genuine question - I'm happy to be corrected on this if you know better].

      (3) I think you rather prove my point here. You say that with NBN Co if people want good Skype, and multiple users they will have to pay more. I appreciate these are only examples, but my point is that historically people have got all these benefits (via increasing bandwidth) without having to pay more over time. Speeds have increase, spend hasn't.

      Thanks again for taking the time to comment.

      Rob


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    2. Of course. Your points makes sence.
      However, there is always more to the picture. And that was my point.
      To summarise my position:

      There is more to the picture than just: Rising ARPU = Rising retail pricing.

      ----

      "Typical per user bandwidths are measured in Kbps (here's ArsTechnica saying 41 Kbps). " One then has to consider whether this is a factor of 'need', or whether this is a factor of 'this is all that is currently able to be accessed'.

      "If I understand correctly, they couldn't serve VicRoads directly. Optus or Telstra might, but all NBN Co would see is a block order for lines, mixed in with all the other Optus or Telstra end-users." I don't necessarily belive that NBNco have factored this into their current corporate plans either. My point was to illustrate, that static customers, can skew the ARPU.

      Jakob Nieson's law of bandwidth has an effect in this. Especially when higher speed tiers, have a greater percentage of return, than the smaller ones.

      As people take up higher tiers, the ARPU is designed to go higher at a compounding factor. This is clear in the Corporate plan. As it's designed to subsidise the areas of low profitablity.

      "You say that with NBN Co if people want good Skype, and multiple users they will have to pay more." Yes. The difference is not that the retail price is going up, as you allude to, but rather that people are 'buying more product' because their needs have evolved.

      We can't compare it to a static internet browsing price, when we are factoring in 'browsing/skype/cloud/IPTV/(and future needs ie. Health)'. It isn't apples and apples. It's Apples vs Apples/Oranges/Pears/Bananas. A whole fruit basket vs a single piece of fruit.

      If we want to compare general browsing and email pricing, we have to compare it with the lowest available package. And in NBNco's case, this is the 12/1 package. If the price on this rose, in comparrision to todays browsing price. We can't compare 100/40 packages (+) with a 12/1 internet connection. They have very different uses. Therefore are very different products.

      In my Phone and internet example, it could have been over 3 different mediums/carriers (though it could just as well as been Telstra). In NBNco's case, it's over the one medium. We could even add in an extra $10 pcm to your mobile bill for added data capacity. Which wasn't needed 2 years ago...
      $30 Phone rental + $20 calls
      $30 Mobile cap (Telstra's minimum is $60, it's gone up $10 over 2 years) so let's go with $50
      $30 internet bill

      =$130. Then bundled with Tbox, say $100.
      + $10 for extra mobile data.

      So we are still at $110...
      Alot higher than the original $30 + calls that was common before the release of the Nokia 5110...

      All you have to do is ask your parents if 10 years ago they thought it was acceptable to spend $50 pcm on a mobile phone.



      Sincerely and in good faith.
      Anthony Wasiukiewicz

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  2. I just came across this post and Have to agree 100%. Despite being personally very excited for the NBN I am very concerned about these future ARPU increases.

    One of the scariest things is the NBNCO will be a monopoly so the normal market forces that would traditionally bring these prices down as technology/bandwidth became cheaper to supply will not apply.

    I think most people expect that technological progress will give them better and faster access without significant price increases as it has done in the past. It will be a big shock and could actually backfire when people are asked to pay this much.

    Especially as other countries who haven't created this kind of monopoly benefit from future speed increases and improvements without being locked into early 201x's pricing models.

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  3. Further to the above points that ARPU is not equal to retail pricing:

    ."Senator SINGH: Mr Quigley, I have some questions that I think would be very relevant and very interesting for the Australian public, who, after all, are the people that we represent here. The questions that we ask should be of interest to them, not just to ourselves.
    My question is in relation to retail prices on the NBN. Before I get to that, I wanted to ask about the average revenue per user, ARPU. NBN Co.'s special access undertaking, or SAU, sets out that NBN Co.'s prices will decline in real and nominal terms. However, the press has given some attention lately to NBN Co.'s ARPU—average revenue per user—mainly in response to some claims made, I understand, by the member for Wentworth. Are you happy to clear this up for the committee in the sense of whether NBN Co.'s prices will go down in real and nominal terms?
    Mr Quigley: In our corporate plan we project that our prices will decline over time. What I mean by that is as for the prices, for example, for a 25-5 service or a 50-20 service we are projecting that they will decline over time both in real and nominal dollars. Likewise on the other component, which is the connectivity virtual circuits, which is a kind of usage charge, we are expecting also per megabit per second that will decline. Simultaneously, of course, we expect people to be upgrading their speeds and upgrading their usage. They will be using more and more downloads.
    Senator Conroy: But that will be their choice.
    Mr Quigley: That will be their choice. They do not have to, of course. They will get a greater utility, which means that our average revenue per user we are projecting to increase while prices per unit go down.
    Senator SINGH: So they will actually go down?
    Mr Quigley: Yes."

    http://parlinfo.aph.gov.au/parlInfo/download/committees/estimate/e0b04b6e-d4aa-48d7-8452-7c02a0d207cb/toc_pdf/Environment%20and%20Communications%20Legislation%20Committee_2013_02_12_1702.pdf;fileType=application%2Fpdf#search=%22committees/estimate/e0b04b6e-d4aa-48d7-8452-7c02a0d207cb/0000%22

    Page 114 (110)

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  4. Cabidas -

    Take another look at what I said in my original post:

    "NBN Co aren't saying that they will be charging more over time for any given product, or that those products will be more expensive than today's equivalent. What they are saying is that they expect consumers to be willing to pay substantially more to get higher speeds"

    I completely accept Mr Quigley's point that the plan assumes retail prices for any given service will fall, and that consumers will choose to spend more to get higher speeds. But the key point is that elsewhere in the world and in Australia to date, consumers haven't had to pay more (over time) to get higher speeds. Prices have fallen so fast that you can get much more bandwidth each year and still take only the same amount of money out of your wallet.

    NBN are assuming that consumers will take more money out of their wallet each year - that's the bold assumption.

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