Since the announcement of the new NBN, there have been various news reports claiming that the charges to users will be unrealistic. For instance, this report from the Daily Telegraph claimed consumer experts had calculated that broadband monthly usage fees would have to be $200 to justify a commercial return on the NBN. Of course, the consumer expert turned out to be AAPT’s chief — hardly a prima facie model for independence in expert advice.
[DDET So let’s try and tease a few things out.]
First, there are about 8 million households in Australia and by 2016 another million will likely be added. Anyhow, for various reasons let’s suppose only 90 percent of them will spend money on telecommunications so we can use 7.2 million as a base. Second, it is not clear what the rate of return (commercial or otherwise) should be on the NBN. 10 percent is a number thrown around but that is a number after the whole network is complete. In any case, it is useful to think of yearly flows so let’s take $4.3 billion per annum as a desired target for revenues from this. Taking these two numbers together we have about $600 per annum from households on average or $50 per month. (By the way, if you desired rate of return was 15 percent, that number would rise to $75 per month. Alternatively if only half of potential users use the NBN services, that becomes around $1,200 per annum or $100 per month per subscriber).
Can we justify this on the basis of broadband alone? Current expenditure per household on broadband is $500 per annum, according to the ACMA. That said, that involves less internet penetration than I have assumed above (5.1 million subscribers) and so if currently internet penetration were to rise to 90 percent that would require a lower revenue take per household. On the other hand, the higher speed availability will increase the willingness to pay of households for the service. More interesting, is the ACMA’s calculation that improvements in competition or other outcomes in the industry are netting us over $300m per annum in additional consumer surplus or about $60 per annum per subscriber household. Those gains accumulate and so if the NBN generated additional gains of the same order, the social returns might be there.
Once we add wired communications in general, there is another $7.65 billion being spent or $765 per subscriber (of which around $350 is in access charges alone and $177 is in fixed to mobile charges). My belief is that this is where the NBN will have its biggest impact. Access charges may rise but more importantly, usage charges (other than to mobiles) will plummet — maybe to zero. If that occurs, the gain to consumer surplus is at least $238 per subscriber but possible more like $400 in total.
The issue here is that, the NBN may itself only capture revenue from say half of all potential customers. So the amount going to the NBN would be at most $500 per annum per subscriber from broadband and, conservatively, $527 from wired telecommunications. Spread over 3.6 million households that is annually $1027, which is less than the $1,200 required (a shortfall of $320m). However, add the potential consumer surplus benefits which are spread over all households and there is another $2.88 billion there from wired telecommunications alone (ignoring the broadband benefits). Thus, socially, the NBN even if taking just half the market, seems comfortably able to earn well beyond a 10 percent return.
Now I stress that these calculations are a ‘Sunday morning’ affair but I thought the exercise would be useful just to frame a bit of the debate. I am happy for others to try out their own calculations in the comments.