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August 28, 2012

New Australia National Broadband Network Plan shows Higher Costs, Lower Revenue



By Gary Kim
Contributing Editor



Everything hinges on one’s assumptions when making long-range forecasts 30 years into the future. One might even argue that it is not possible to make accurate financial projections that far into the future. Still, a best effort estimate must be made by Australia’s NBN Co. as it builds a national wholesale broadband access network expected to operate through 2040.

Among the key assumptions are that 30 year incremental rate of return will be seven percent (7.1 percent) on a capital investment of $35.9 billion through 2020, based on wholesale access rates between $20 and $27 a month.

The current forecast calls for about 44 percent take rates in 2015.

Revenue to 2021 is forecast at $23.1 billion, with operating expense expected to be$26.4 billion. Some observers will not be reassured that in the latest forecast revenue expectations were lowered, while operating expense assumptions were raised. The latest plan also raises take rates after 2021, an assumption that raises cash flow projections.

The plan anticipates connecting about 5.5 million locations by 2016, with wireless-only households growing from about 13 percent to 16 percent by 2020. That is an important assumption, as it indicates the percentage of homes passed that will not be buying any services from the NBN network. Obviously, the assumptions are sensitive to greater than expected wireless-only behavior.

Skeptics will note that a favorite device of government forecasters is to make future assumptions about revenue and cost that are not realistic, in essence overstating revenue and understating cost. It is too early to say whether that is the case here. The point is that a seven percent IRR does not allow too much room for mistakes on either the cost or revenue fronts.

The latest version of the business plan does suggest that the actual direct financial return from a fiber to home access network, built on a continental scale, is relatively small, despite its societal and economic importance.

One might argue that a less fiber intensive build strategy would be “safer,” but the long time horizon probably is an argument against such economies, though some might argue that an alternative cable TV network style build would still provide roughly equivalent bandwidth to fiber to premise networks over the long term.

What might be easier to argue is that the business case for two such networks would lead only to losses for both networks, even assuming use of satellite and fixed wireless in low-density areas. Want to learn more about the latest in communications and technology? Then be sure to attend ITEXPO West 2012, taking place Oct. 2-5, in Austin, TX.  Stay in touch with everything happening at ITEXPO (News - Alert). Follow us on Twitter.




Edited by Brooke Neuman
 
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