NBN CVC will compromise pricing or customer experience: Vocus

Vocus Communications CEO Geoff Horth has said that the impact of the National Broadband Network (NBN) company’s wholesale pricing construct will be to adversely affect either customer experience or the cost of accessing the high-speed broadband service.

“We have a difference in interpretation of what the [network traffic] growth profile is going to be like versus what NBN thinks,” Horth said during his Vocus’ Strategy Day 2017 presentation on Wednesday morning.

“Either customer experience or the cost is going to be compromised as a result … when you’re building a high-speed broadband network, this is counter-intuitive.”

NBN’s wholesale pricing incorporates a two-part model, with a Connectivity Virtual Circuit (CVC) charge paid in addition to the access virtual circuit (AVC) charge levied across all speed tiers.

The CVC charge reserves a consumer’s bandwidth from the point of interconnect (POI), and sees an individually averaged dimension-based discounted (DBD) pricing structure to encourage more dimensioning of CVC capacity — or greater usage of data.

“The vast majority of building this network is a fixed cost, so I don’t understand why such a high proportion of the cost base is variable,” Horth said.

“I think something’s got to give.”

His statements follow widespread industry criticism of the CVC, with Vodafone and Macquarie Telecom arguing in their submissions to the NBN Joint Standing Committee that there needs to be a “serious examination” of the way the CVC pricing is inhibiting user experience, claims that were denied by NBN CEO Bill Morrow.

Other retail service providers (RSPs) have argued that NBN’s CVC pricing prevents them from being able to offer 1Gbps services to their customers due to the high cost involved. NBN has also denied that customers need 1Gbps services, but said it will continue reviewing its pricing structure in line with data usage increases.

During his Strategy Day presentation, Horth said Vocus’ own extensive core fibre broadband network will not need a lot of investment, other than using GPON technology upgrades to improve capacity.

Vocus now has a 30,000km fibre network spanning Australia and New Zealand, including the Australia Singapore Cable (ASC) and North West Cable System (NWCS) purchased for AU$27 million and AU$134 million, respectively, during its AU$700 million acquisition of Nextgen Networks last year; more than 5,500 buildings and 70 datacentres on net; and a portfolio of 23 owned datacentres.

Horth said the company is uninterested in rolling out a fixed-wireless network, saying it doesn’t play into Vocus’ target market and as such is “unimportant” to the company’s focus.

In regards to becoming a bigger player in the mobile market, however, Horth acknowledged that TPG’s entrance as Australia’s fourth mobile provider has provided “more of an opportunity for us to have new conversations on whether to enter the market”.

“We arguably have some assets to bring to the table,” Horth said, adding that Vocus could potentially move away from only being a consumer of mobile services.

“The mobile opportunity is a pretty big one, and we’ll push pretty hard throughout FY18,” Scott Carter, Vocus head of Mass Markets, added.

Vocus currently provides mobile broadband services by wholesaling Optus’ mobile network to customers under its Dodo and iPrimus brands.

Carter announced that iPrimus is being rebranded and relaunched to provide mobile, entertainment, and broadband services, with a view to playing “very, very hard” in the NBN space.

As to Vocus’ financial future, CFO Mark Wratten expressed confidence that it would be able to hit its revised guidance for the 2017 financial year, with results to improve in years thereafter due to some one-off expenses incurred during FY17.

Vocus last week received a AU$3.50 per share takeover proposal from Kohlberg Kravis Roberts & Co (KKR) and formed an independent board committee (IBC) — chaired by Vocus chair David Spence and comprised of Vocus’ non-executive board directors Rhoda Phillippo, Craig Farrow, Robert Mansfield, and Jon Brett — to look into the proposal.

According to Horth, the formation of the IBC was “very appropriate in the circumstances” to assess the proposal.

Vocus’ revised guidance saw revenue AU$100 million less than previously forecast, down to AU$1.8 billion; underlying EBITDA down by between AU$65 million and AU$75 million to be between AU$365 million and AU$375 million; and net profit down by between AU$45 million and AU$50 million to be between AU$160 million and AU$165 million. Net debt is expected to be between AU$1 billion and AU$1.1 billion.

Lastly, Mark Callander, head of Vocus’ operations in New Zealand, said he’s “not losing sleep” over a possible Vodafone NZ-Sky TV merger, because “it doesn’t seem to be going anywhere”.

Vocus merged with M2 last February to form the third-largest telecommunications provider in New Zealand and the fourth-largest in Australia worth more than AU$3 billion.