Angry ISPs?

There have been some concerns expressed recently that the NBN will drastically reduce the number of Internet Service Providers (ISPs) in Australia, because the system will make it too expensive for smaller operators to compete with the larger ones.

Simon Hackett, the managing director of Internode (An NBN proponent), suggested that it would not be financially viable for any ISP with fewer than around 250,000 customers to offer NBN services nationally without the assistance of a larger provider acting as a wholesaler.

Seemingly on-cue, Optus announced that they would offer wholesale services on the NBN to smaller providers.

Before explaining the issues involved, let me change some terminology. Under the NBN, ISPs will instead be known as RSPs (Retail Service Providers), because they will offer telephone and other services as well as internet services. So from here on, I’ll use the term RSPs to describe these companies.

Background

The issue for the smaller RSPs relates to the number of Points Of Interconnect (POI) for the NBN. A POI is a place where the NBN leaves off, and the RSP takes over. The NBN will have a number of POI across the country, and for an RSP to offer services Australia-wide, they would need to connect their own “backhaul network” to every POI. There are two points of view with regard to the number of POI that should be implemented across Australia:

Small number of POI:

The NBN Co had originally proposed just 14 POI across the country. This position had the support of most of the smaller RSPs, but drew strong criticism from larger RSPs.

Pros:

• Lowers the cost of offering a nationwide service, leading to a greater number of RSPs.

• Simplifies the network design for NBN Co.

Cons:

• Leads to the overbuilding of existing infrastructure, rendering it essentially worthless.

• Potentially reduces competition, because there is no prospect of cost savings associated with RSPs having their own, efficient backhaul network.

Large number of POI:

Larger RSPs, most notably Telstra and Optus, strongly lobbied for a large number of POI to maximise the return on their existing infrastructure. Calls from these larger companies varied from 200 up to 500 POI to be placed around the country.

Pros:

• Allows the use of the substantial existing networks of larger RSPs such as Telstra, Optus and iiNet. Potentially reducing the costs of these operators, potentially reducing retail pricing.

Cons:

• Drastically increases the cost of providing a national service for those operators who do not have a large existing network.

• Potentially reduces retail competition due to reduced number of players.

In the interests of fairness, the Government decided that the Australian Competition and Consumer Commission (ACCC) should review the options and decide on the number of POI that the NBN should provide. After completing their inquiry, the ACCC took a “middle ground” position between the demands of the small and large RSPs, and directed NBN to build 120 POI (later increased to 121) across the country.

 

The upshot of the POI decision:

It should be clear from the above, that no matter what the ACCC decided in relation to POI, there would be winners and losers in the RSP industry. In the end, they went with a compromise solution that makes it viable for many RSPs to make direct connections to the NBN, while allowing smaller ISPs to continue to operate nationally by taking up wholesale services through the larger RSPs. Additionally, smaller RSPs who wish to remain in a certain area (eg: Adelaide’s Adam Internet) are able to connect to just the POI they wish to, with the potential to expand their customer base by gradually adding new areas or taking up wholesale services for those areas where they only have a small number of customers. The NBN Co’s Jim Hassell says that the NBN Co want to encourage such regional RSPs to thrive.

The POI issue is an inevitable part of any major telecommunications upgrade. No matter what technology is used or how it is implemented, there will always be winners and losers during such a massive shakeup of the industry.