Friday, August 22, 2014

The Numbers are in. Now we know why Rupert is anti-NBN, pro mobile.

Murdoch famously tweeted that "NBN is ridiculous". His mouthpiece, The Australian, explained that away as:
"In fact, NBN would be great for Foxtel because it would take all those programs into every home."
But he is worried mobile technology has overtaken the need for the NBN.

Saturday, August 16, 2014

NBN Co already running at 500% Cost Benefit Ratio. Why the Vertigan/Ergas Review hold-up?

The Michael Vertigan and Henry Ergas "Cost Benefit Analysis" of NBN Co was announced on 12-Dec-2013 and is still yet to deliver their review.
Meanwhile, NBN Co has achieved more than 500% Cost-Benfit Ratio.

There are two problems I have with the assumptions and methodology announced:
  • Even under the dubiously recalculated figures, the IRR (Internal Rate of Return) of all versions of the NBN Co business plan is positive, albeit FTTP was 2%, down from the Quigley Business Plan of 7.1%.
    • NBN Co is not, and never has been, an expenditure-only investment.
    • The "Cost" of the CBA is zero by definition, and the resulting Cost-Benefit Ratio is infinite.
    • From the announced revised estimates, there was never a reason to run a CBA, once positive IRR's were established.
  • On the available Government Funding figures, somewhere between $5.3B and $7B has been injected as equity by the Federal Government into NBN Co.
    • There is already a directly attributable and precisely measurable economic Benefit of the NBN project: the additional increase in Market Value of listed Telecoms companies.
    • This is at least $36.5 billion,
    • for a Cost-Benefit ratio, already, in excess of 500%.
    • This is the direct benefit only to shareholders of the companies.

Thursday, August 14, 2014

Telstra and the new NBN Deal: Not inked yet and the details won't favour Turnbull.

I find Malcolm Maiden's piece, Telstra's new NBN deal is as good as the first one, Aug 14, 2014, to be misleading and factually inaccurate: Telstra is only a viable business and growth company because of the Labor Government's NBN Co initiative.
Howard and Switkowski's legacy was a deeply damaged and uncompetitive business palmed off onto naive investors. The Telstra share price was performing a "dead-cat" bounce and didn't recover until the NBN Co agreements were signed.
Since the 2013 election, it has continued to increase in value, but not noticeably faster.

Brandis's stumbling and bumbling has given away more State secrets than Snowden.

Expanding on my previous comment that only ordinary citizens, no serious criminals or terrorists, will be caught by the mismanaged & mangled "thought bubble" of Brandis on metadata retention .

Brandis is a fool or knave, probably both. he's given away two important intelligence secrets, he's trying to secretly "backdoor" his draconian "Copyright Piracy" laws and he's covertly, possibly unconstitutionally, trying to push costs of Government Intelligence operations onto the private sector.

Sunday, August 10, 2014

Letter to Alan Kohler. Time has proven you right and Turnbull wrong, where's the reprise?

Alan Kohler was not just right to ask Malcolm Turnbull why Telstra would play ball with him at all, but why they wouldn't screw him mercilessly. Turnbull's promises are now well past their "use by" date and Kohler could be writing a "please explain" follow-up.

This is the note I sent him asking him to reprise his earlier comments.

New 'metadata' laws will only catch ordinary folk, NOT terrorists or serious criminals

Life Matters on RN ran a session today on the proposed Metadata legislation. I tweeted a comment, but it didn't make the cut.

First, what's metadata?
It's "Data about Data", an inexact, mutable and undefinable concept, best described as "it varies on what we have, who wants to know and what the law says it is".

Sunday, December 8, 2013

Mainstream media: Failure to report NBN Issues

The one or two journalists I write to, usually 'business' focussed, dismiss my emails as soon as I mention physics or chemistry with "that's technical".  Nor do they pass those emails onto their "technical" writers.

I recently suggested Thodey's statement "copper doesn't decompose" isn't just disingenuous in the extreme, but is deliberately misleading the market and investors, a serious ASX and ASIC infringement. While I was talking about probity and criminal offences and the evidence is deep and easy to find, they declined to muddy their brains with anything "technical".

While I'd like some points on the public record by someone authoritative like Mike Quigley, based in fact, not just my calculations supported by public information, I haven't been able to make that happen.

George Maltby, the outspoken CEO of O.T.C. fired by Bob Hawke, would also have been an appropriate source.

1. There is no "average" NBN user: most traffic & revenue is generated by a small cohort of subscribers.

Demand on the Customer Access Network traffic has an exponential distribution, with the top 10% consuming over 50% of downloads and the top 30% using the highest available speeds. A cost-of-wages calculation vs Internet rental costs for small business is brutal: any small business that spends 10-20 person hours/month on the net can justify 'top tier' speeds.

The bottom 50% of consumers are a footnote in the accounts: they use the slowest speeds available and account for around 6% of downloads, vs the top 1% who consume 10% of the total download.

2. Fibre speed-tiers are a gold mine: input costs are unrelated to "speed" while revenue increases with "speed".

This is the "economic magic" at the heart of the NBN Co full-fibre business model: monetising higher access rates and reducing the consumer surplus.
Something, I'd assert, that has never been done effectively on a large scale by an Australian Telco before.

Line rental profit margin for higher access rates are phenomenal because the input costs for all services are nearly identical. The internal marginal costs for higher speed services is very close to zero.

The utility to customers is high, begining with wages that are wasted from waiting for downloads and more so for uploads. The value proposition for consumers for higher speeds is compelling: the cost per extra Mbps declines very rapidly.

The higher access rates have a very high perceived value to the customer, because the "price per Mbps", their unit of value-measure, radically decreases as access rates increase, while the supplier has almost nil variable costs. The consumer demand/supply curve, and Price for a volume point, bears no relation to the supplier production costs.

Gross Margin increases near exponentially with increasing speed tiers. Selling higher rate services is a GOLD MINE. There is now enough solid revenue & take-up data over long-enough time periods to allow very accurate demand modelling (>0.1%).

The only unknown, I assert, is the rate of growth of demand. The ABS figures for NBN traffic show it's 50% higher than the rest and still growing at trend, not as asserted by the Coalition, collapsing.

3. All the profits of NBN Co flow from the top 25% of consumers: 100% of profits, not 'nearly all'. The high-end pays for the low-end, not vice versa.

The rest of us get a free ride or better, being heavily subsidised by those users.

I did some sensitivity analyses of losing 25-40% of low-value consumers, a much harder "stress test" than the Coalition's. The results aren't that surprising if you understand the economics at play.

Losing most of the bottom-end has a very, very small impact on revenues, potentially an increase in profits because retailers have lower overheads and can better match upstream capacity with customer volume demand.

4. NBN Co profits can only be maximised with universal supply of the full range of speed-tiers at guaranteed rates.

Because of 1, 2 & 3, universal deployment of guaranteed access rates and the full spread of speed-tiers across all subscribers is necessary to maximise revenues and profits.

This is because suppliers cannot tell beforehand who will be a 'top 20%' consumer: they don't gather in convenient places, but are spread randomly through the whole network.

To gather all available profits, not leave gobs of money on the table, the Customer Access Network has to be able to offer the premium services to every subscriber. It's basic economics and unbreakable laws of commerce.

5. To Mar 2013, NBN Co financials are running well ahead of forecasts, even with delayed rollouts.

The NBN Co operating financials, revenue & profit and consumer demand (take-up rates, speeds & volumes) are months, even years ahead of Plan forecasts.

The Quigley plan is demonstrably conservative, the actual revenues are blowing away the plan - which means the break-even, peak-debt (probably) and IRR will  be much, much better than the plan.

But only if guaranteed access rates and the full set of speed tiers is offered equally to everyone. The economics of differential pricing on 'speed-tiering' are powerful and untried here in the mass market.
I'd say "by any Telco", but I haven't done that research.

6. The election campaign noise about the "Cost" of the NBN Co construction work is a distraction, just as consumers of petrol, gas and electricity don't question infrastructure build costs. The real cost to taxpayers is more like $1 billion/year, before profits are returned.

The only number taxpayers, and hence voters, should, and need, care about, is what it will cost them and nobody, not either side of politics or the mass media, has put that out in public.

This is a known and computable figure:

  • the on-budget interest payments of the $30.4 billion yet to be borrowed.

My calculations of $30.4B from 2018-2033 @ 2.5%, are ~$12B in on-budget interest payments.

Barely $1billion a year. Not even close to a 'large' budget line-item cost, and many times lower than the increased economic turnover with associated tax revenue increases. A correct analysis would properly separate public and private money and clearly identify recoverable investments from expenditure.

  • the project's profit or Internal Rate of Return (IRR) figure, generated from 2033-2040, is around $40-$50 billion, aside from significant income beforehand of company tax, GST, payroll tax and income tax/FBT.
  • the Coalition's failure to publish any of these 3 figures suggests a real risk of commercial failure of their 'plan'.
    • the downside of which is a potential $50 billion loss - out of the budget, not as much again profit.  The downside risk is ~$100 billion if the project is destroyed.
    • the project break-even and IRR are the critical numbers, not CapEx or peak Public Funding.
  • if revenue is ahead of projections, then, just like a house mortgage, a small increase early on massively shortens the loan and reduces total interest paid.
    • Unlike a residential house mortgage, this is an income producing asset and total profits returned will massively increase.
    • On current financial performance figures, I wouldn't be surprised if total public expenditure would be more like $8-$10 billion, with also quite a kick in IRR, over 10%.

7. The NBN Co debate can only be about good business, good marketing and good economic management - and profits to the taxpayer.

Maximising returns of public investments is required under law of governments and the public service. That's the only base for a debate: which approach will be more profitable for the taxpayer.

The debate isn't about technical issues or "maximising returns on existing assets", a furphy as the Coalition sold Telstra in 1995, leaving NBN Co with no existing assets. Why would the Coalition care so deeply about the assets of a business it sold?

8. What does Telstra want?

Telstra have some of the sharpest economic and financial brains in the country working there.
They're not just good at modelling, they are superb.

Telstra will have done all these calculations and should know that:

  • they can still leverage their network assets and beat every other Telco on costs & hence dominate both fixed-line and mobile markets, and
  • they will double or treble their corporate profits only with the current NBN plan of universal, guaranteed services and speed-tiers.

My view is that Telstra has a everything to lose and nothing to gain from keeping the Copper Customer Access Network (CAN).

I think Mr Thodey should be looking to unload ownership and maintenance responsibility of the Copper CAN, and push forward a full-fibre CAN, as an absolute priority and as quickly as possible.

9. Cost-Benefit Analyses (CBA's) only apply to direct expenditure with no associated, direct, measurable benefit. CBA's are not how profit generating enterprises are valued or compared.

That's Accounting 101.

There are very small on-budget costs (~$1B in interest) and no indirect, hard to quantify benefits to find and sum. The NBN Co accounts and their forecasts, in the Business Plan, are a full and complete answer to calls for a CBA.

The only valid business question for NBN Co is evaluating the Business Risks. Are they fully declared and properly mitigated or dealt with?

The formal accounting definition of expenses and revenues applies to analysing the returns of NBN Co:

  • do the transactions go through your books?
    • Because NBN Co is a trading business, it already accurately measures and reports real expenses and income.
    • Maintaining NBN Co is a government expenditure program in need of a Cost/Benefit Analysis is both absurd and a wilful lie.

We know to the dollar, what the direct expenses and monetary benefits (revenue) to the community, represented by the government budget are. Nothing has to be estimated.

NBN Co is a business, the money put into it is off-budget, as its an investment that will pay for itself, pay interest and then make a tidy profit.

Ask the "hard headed" infrastructure economists what the CBA value is on a zero cost.

  • It's infinity: ANY benefit from a nil cost, which defines a profitable investment, is infinite.

You can't do better.
We know before starting what a CBA of NBN Co's business should be, the real question is what the Coalition's bogus inquiry will find.

Perhaps this is why the Coalition is so keen to kill NBN Co financially: they just can't bear that Labor  can created a public investment that will be a guaranteed River of Gold, compared to their rather weak and dreary penny-pinching and slinging handouts to the rich and super-rich.



The Real Deal on the Coalition NBN: same price, worse outcomes.

Copper cheaper than Fibre? Only if you "cook the books" radically!

Correcting wrong-headed Journalistic Myths & Memes


The NBN Co business model - who really subsidises others.

The Blackhole at the centre of the Turnbull Node Plan

The commercial innovation of NTD multiple porting

Part 2: The commercial innovation of NTD multiple porting

Disputing the four Turnbull "Stress Tests". Pure fantasy.

Myths: Low-end Broadband users subsidise high-speed, high-end users

Business Economics of Fibre vs Copper: a slam-dunk win for Fibre

The Need for Speed I - the path to 1 gigabit services

Need for speed II - nobody 'needs more than 1Mpbs'

Sunday, December 1, 2013

Turnbull's New NBN: A prediction

The Coalition's NBN report is due in tomorrow, I believe, 2nd Dec, 2013.
This is an incomplete prediction for what will be released.

Update Sun 8-Dec: Unsurprisingly, the report wasn't released to the public last week and we're told large slabs will be kept secret. Most. Secret. Government. Ever. Bizarrely, Abbott claimed "we're on a Unity Ticket" supporting Gonski was not an "actual" promise, but a misinterpretation by the public & press. Does the Liberal Party have a list of their actual promises? Not publicly. Their election materials are consistently like their "fully costed budget": "summaries", vague statements, platitudes and slogans.
The Liberal costings were not given to the Parliamentary Budget Office until the last minute [and then only fully divulged to their own hand-picked 'Independent' review group].

Update: I missed the obvious change: as little as possible buried cable, maximum use of aerial cable.
So get used to a mess of cables in the sky in your suburb. This neatly devalues the Telstra "pits, pipes and lead-ins" to zero... They wouldn't be used, so wouldn't have to be paid for. A good bargaining chip? Telstra has never lost in commercial negotiations - I'd say they won't this time either. NBN Co Mark 1 didn't come lightly to settle on the most expensive "buried cable" as its preferred network model. It's a longer-life, more reliable, lower maintenance model: lower Total Cost of Ownership. You can pay more now and a lot less later, or save a few pennies up front and regret it for a very long time.

Back to the Future:
  • Telstra will be offered government funding for the FTTN Sol Trujillo pitched to the Howard ministry in 2005.
    • Probably only $4.7 Billion, without CPI as "the hardware is now so much cheaper".
    • Telstra will be given the competition protections/exceptions it lobbied for in 2005.
    • Telstra will not have any universal supply connectivity requirements.
      • NBN Co will still be required to supply broadband, probably FTTP, connections where no other supplier wishes to supply an area.
      • Telstra and other Telcos will be able to build only where they deem it to be economic.
      • Telstra will have the footprint their HFC (Cable) network supplies declared as "25Mbps".
    • Telstra will not be obliged to offer wholesale connection to its "private" Customer Access Network.
  • Telstra and other Telcos will be able to exclusively supply niche markets, especially MDU's (flats and apartment blocks), at unregulated prices.
    • FTTN by Telstra will most likely be rolled out in country towns.
    • NBN Co will be directed to in-fill unserved areas with (expensive) Fixed Wireless.
    • NBN Co will be directed to supply Fibre connections at subsidised prices to MDU Network Operators.
  • Telstra may undertake a 'best efforts' upgrade of its HFC assets to the current (fast) DOCSIS 3.0 standard.
    • Consumers will have no recourse in requiring Telstra to connect 100Mbps services.
    • Higher speed services will only be connected "at full commercial rates".
  • NBN Co will be forced to remain the sole Satellite Service supplier.
    • They will be directed to continue charging the current fully subsidised wholesale rates
  • Single wholesale fee structure will be abandoned:
    • Network owners will be able to charge unregulated "competitive rates" for areas they exclusively control.
    • Tiered charging will be reintroduced for non-Metro areas:
      • Country dwellers will be given direct government subsidies, unrelated to need or usage.
      • It is unlikely these subsidies will be pegged to prices, leaving country subscribers further and further behinds
  • NBN Co will be directed to lay, but not connect, Fibre past all premises.
    • NBN Co will incur the majority of network construction expenses, with none of the revenues.
    • NBN Co will be forced to retain the existing 121 Points of Interconnect, while their premises served will be drastically reduced.
    • NBN Co may be directed to reduce their minimum wholesale rate to $16/month for lower-speed services or resold FTTN services.
Cheaper, Sooner, More Affordable:
  • The hybrid, optional private-sector supply will be trumpeted as being "much cheaper", at least in immediate CapEx by NBN Co.
  • Because nominated services, such as Telstra HFC and exclusive MDU FTTN's, will be 'declared' as 25Mbps compliant for the entire footprint covered, regardless of premises connected or able to be served.
  • Non NBN Co services will be removed from calculations of "Affordability" with NBN Co also directed to reduce their wholesale charges, enabling "more affordable" to be claimed.
Financial Outcomes:
  • The new NBN Co financial plan:
    • will cap government funding at $29.5 billion, forcing NBN Co to raise additional funds "on market".
    • The new Internal Rate of Return will exclude large slabs of CapEx related to the existing investment, writing off many billions and effectively moving losses onto the Federal Balance Sheet.
    • The new target IRR will be "cash-flow neutral" or just positive for all new CapEx.
      • This will be insufficient to achieve break-even,
      • the government funding can never be repaid,
      • the NBN Co investment under the Coalition will result in massive losses, that will be transferred back onto the Federal Budget.
  • Under these conditions, NBN Co will be unable to raise commercial loans as it won't have the cash surplus to meet payments as they fall due.
    • This is the technical requirement for insolvency.
    • NBN Co will put itself into voluntary liquidation at this point.
    • The major creditor, Telstra, will swap its outstanding amounts for majority ownership of the NBN Co assets.
  • Under the already agreed variations to ACCC regulation, Telstra will be able to charge whatever it deems "competitive rates" for the new network under its control.

Monday, September 30, 2013

Post election changes to Blogs

The Coalition won the election and now Turnbull has the helm. He will, as promised, execute his three "reviews" of NBN Co, which we can assume will "prove" all the claims the Coalition has previously made to justify giving it away to Telstra, radically redefining its scope and priorities or just shutting it down.

There's not much to say about his actual plans, because we know nothing of them.

The previous blog is now at: