On the eve of the announcement of the Federal Government's preferred tenderer for the national broadband network, analysts at Goldman Sachs JBWere have questioned whether emerging trends within the sector are threatening to undermine its economics before it is even built.
The analysts argue that significant shifts in customer usage patterns within the sector, and Telstra’s response to the NBN and its proposed fibre-to-the-node network could more than halve prospective returns on invested capital, from about 15 per cent to a meagre 7 per cent.
There was a time some half a dozen years or so ago, when the usage volumes and revenue from Telstra’s copper network first started to reflect the stresses of continual reductions in access charges and the impact of wireless substitution, that Telstra and others asked whether the future of telecommunications was wireless.
Wireless can’t, because of the impact of congestion on share network speeds, be the complete answer to demand for very high-speed services. It doesn’t, however, need to be to have a material impact on the economics of the NBN.
The Goldman Sachs’ telecommunications services team of analysts revised their industry forecasts on Friday to reflect what they say is clear evidence of themes that have emerged from recent telco results and industry data.
The most significant conclusion they have drawn is that the shift from fixed line services to wireless is accelerating at a rate greater than previously anticipated. In particular, they noted an accelerating shift away from fixed line voice services and a "dramatic slowdown" in the growth of fixed line broadband.
The analysts say the Australian mobiles market is experiencing its strongest growth in a decade and that the growth reflects a clear and sustained shift to wireless. At the same time, fixed line broadband experienced a dramatic slowdown in the second half of last year, with the lowest number of net new customers since 2002.
"Net adds" for wireless broadband, they say, were six times the net adds for fixed line broadband. The major factors driving the growth in wireless broadband were lower prices, greater network capacity and speeds and the spread in use of wireless broadband datacards and USB dongles.
The explosive growth in wireless generally can probably be attributed to the launch of Apple’s iPhone in the middle of last year, followed by a swag of other smart phones. Telstra’s NextG network could also have been a factor.
If both voice and fixed line broadband services are being displaced by wireless, and Telstra migrates the residual core of its high-value capital city customer bases to its cable networks, the pool of revenue available to the NBN operator would be significantly diminished.
While wireless can’t deliver constant truly high-speed services, particularly if the rate of take-up leads to increased congestion, the NBN’s specs require minimum speeds of only 12 Mbps. By the time the NBN is built – five to 10 years out – who knows what wireless technologies will be capable of?
Telstra has spoken of a prospective worst-case loss of up to $2 billion of lower-than-average margin revenue to the NBN – eventually, and assuming it does nothing much to respond to the new network. The other way of looking at that would be to say that, if Telstra were right, the NBN operators would struggle to build a business big enough to generate a return on up to $15 billion of capital. (Goldman Sachs has estimated the capital requirement at $12.5 billion).
What both Goldman and Telstra’s analysis suggest when combined is that the preferred NBN tenderer and its financial backers will have to be confident that they can not only cope with Telstra’s responses to their incursions into its traditional heartland – and the five-year-plus lead time it will have to develop those responses – but that the wholesale users of the new network can develop high-speed services that are sufficiently compelling to enough customers to reverse the structural shift in the industry away from fixed line services.
