NBN Co has announced that it has settled on the locations for its 200-plus points of interconnect, and with that, has sparked a new discussion on the contestability of backhaul.
ISPs, while backing NBN Co’s general view that there needs to be backhaul competition for its network to be viable, are still going to wait impatiently to find out just where the NBN’s POIs will be.
In theory, if the NBN Co’s strategy is right, it should not much matter. Because the NBN will be locating its POIs where there is backhaul competition, ISPs should be able to expect stable pricing to get their traffic from the customer back to their own network.
Whether it works out that way, however, will depend on many more questions.
What is backhaul?
Most people, if they think about their broadband connection at all, probably think the Internet starts pretty much at the back of their ADSL modem. In fact, most peoples’ traffic goes on quite an odyssey between the house and the host.
Let’s trace the path from the ADSL modem for a customer of a non-Telstra broadband service. The traffic traverses Telstra-owned copper back to the exchange, where it reaches the DSLAM owned by the ISP. From the exchange, however, the ISP needs to find some way to get customer traffic back to its own network – which may be quite a trip, if you’re a regional customer and the ISP’s data centre is in (say) Sydney.
(And from there, the ISP then needs to find some way to get its aggregated customer traffic onto the Internet – whether it buys its “Internet transit” or wholesale Internet services in Australia, or whether it buys its own international links and buys access in the US.)
Because the ISP is concentrating traffic from many customers, it needs fibre services to get its traffic from the Telstra exchange to its own infrastructure – the part of the network that’s described as “backhaul”.
In a perfect world, backhaul would be ubiquitous and cheap. But this isn’t a perfect world, and wherever a company has a monopoly or near-monopoly, it’s under no price pressure.
The result is that there’s a huge price difference for fibre connections – some of it depending on the distance the connection has to travel, but more of it based on how many competitors exist on a particular route.
Although all carriers will say that their prices depend on distance to some extent, a highly-contested route such as between Sydney and Melbourne offers far lower wholesale prices for fibre access than a link to somewhere out-of-the-way, served only by Telstra.
So part of what’s driving NBN Co’s choice of locations is that if it puts its POI somewhere served only by Telstra, then its customers (the ISPs buying wholesale from NBN Co) would be entirely dependent on Telstra for carriage back to their own infrastructure.
There is an important, but in price terms secondary, consideration in play. If a location has two backhaul providers, the NBN Co POI also gets the benefit of carrier and hopefully geographic diversity. This makes the network more reliable; if one carrier’s core network fails, or its cable is cut, the other carrier is able to carry the traffic. Of course, if a careless backhoe cuts both carriers’ cables out of town then you’re still completely cut off. When this happens, it’s usually because some natural funnel (like a bridge across a river) brings everybody’s cable together in the same duct.
But price is what most ISPs will notice most of all.
Competition and price
I can’t reveal anybody’s secrets here, but in the industry, it’s no secret that competition has a huge impact on the price of wholesale fibre-based services. A service which costs thousands of dollars per month in a hotly-contested location can easily rise to tens of thousands per month where competition is lacking.
My experience as an analyst (for Telstyte and then Market Clarity) suggests to me, however, that two fibre owners aren’t enough to have maximum impact on the prices paid for services.
To over-simplify the situation, it seems to work like this: when a second backhaul provider enters a market, it can compete with Telstra with a relatively small discount. A serious price war doesn’t seem to break out until there’s at least a third competitor to get things moving.
Superficially, that’s a problem for NBN Co: by accepting the presence of a single competitor as sufficient to define a location as being “contested”, it could be argued that NBN Co won’t get the most out of the competitive market.
But there’s a difference between the policy and the reality: it turns out that the vast majority of NBN Co’s proposed locations, around 175 of them according to its own analysis, are served by three or more providers of fibre-based backhaul.
There will only be a handful of POIs where the backhaul equation is “Telstra plus one” – and with Nextgen contracted to build competitive backhaul in various mainland routes under the Federal Government’s Regional Backhaul Blackspots program, even without an announcement from NBN Co, it’s reasonable to speculate that many of the two-provider POIs will be located near the routes now being built.
The tyranny of distance
The other aspect of fibre pricing is distance.
While there are exceptions (depending on how a provider’s tariff sheet is structured, and how keenly a provider wants to win a particular contract), you can generally expect long distances to cost more than short distances.
Which is the other reason ISPs are so keenly interested in POI locations – they want to work out the economics of offering services in NBN-connected locations.
Remember that NBN Co won’t be providing the backhaul, so it won’t control the backhaul price. So it’s quite likely that distance will enter the tariff equation for backhaul.
It will be a vexed question both for the competitive fibre owners and for the retail ISPs. The fibre owners won’t want an unused fibre point in a regional town, but neither will it operate the service at a loss.
And for the ISP, the question will be whether it has the chance to amortise its costs across all customers – or if it will have to apply regional premium pricing to cover the cost of backhaul from regional locations.
It’s no wonder the ISPs are so keen to see the proposed POI locations.