Supplier Risk Monitoring

Does NBN Continue to Pose Challenges for Australian Telcos?

Avatar Written by Malavika Rathore

Introduction to the NBN

Owned by the Australian Government, NBN (National Broadband Network) Co Limited was founded in 2009 to manage Australia’s National Broadband Network as a monopoly wholesale broadband provider.

Very recently, in order to substitute the prevailing broadband infrastructure with a digital, speedier, and more consistent broadband service, the NBN decided to roll-out fiber-optic, fixed wireless, and satellite infrastructure. Due to the required NBN transition to continue using landline or internet services in the coming years, the other telco players started becoming resellers of the NBN instead of selling their own broadband services.

Impact on Australian Telcos

During 2010 and 2015, Australia’s fixed-line business was largely consolidated, hence reducing the competition to only four key players: Telstra, Optus, TPG, and Vocus. This helped these companies boost their growth by increasing their market share and profit margins. Since 2015, due to the roll-out of the NBN, the barriers to entry for fixed line services came down, leading to intense competition. There are now over 180 internet service providers all competing to acquire more customers.

Telstra

  • March 2018: Telstra announced plans to cut 135 local roles or offshore jobs across its wholesale business, including finance, billing, and software engineering workforce. The company stated that as its wholesale business responds to increasing competition and prepares for a post NBN environment, it needs to evolve to support its new growth areas.
  • May 2018: Telstra announced that the company’s earnings were expected to be at the bottom end of its previous expectations as the impact of the NBN continues to drag down the company’s bottom line. The impact of customers migrating services away to the NBN would impact the earnings by A$3 B (~US$2.23 B) due to the rising wholesale prices. The company has absorbed A$870 M (~US$645.57 M) of that earnings shortfall so far, and the challenging conditions are likely to continue into FY2019. In the last 12 months, the company has moved from being one of the three big players in the mobile and fixed segment to now facing a fourth network operator entrant in mobile (TPG), an increasing number of MVNOs (mobile virtual network operators) and more than 170 resellers of fixed services.
  • June 2018: As part of a three-year strategy called ‘Telstra2022’, Telstra will cut jobs of ~8,000 employees and contractors, and remove between two and four layers of management. The company will introduce a new, wholly-owned infrastructure unit called InfraCo, with an aim to drive performance and provide a future option for a demerger or the entry of a strategic investor in a post-NBN rollout scenario.

Optus

  • May 2018: The Federal Court fined Optus with an amount of A$1.5 M (~US$1.11 M) for making misleading representations to customers about their transition to the NBN from its Optus HFC (hybrid fiber-coaxial) network. Optus was also accused of wrongly telling customers that they had to sign up to Optus’ NBN services when they had the option to choose any ISP (internet service provider).

TPG Group (iiNet and Internode)

  • March 2018: TPG Group’s profits in the first financial half of 2018 were impacted due to headwinds related to the migration of its DSL customers to lower-margin NBN services and rising electricity prices.
  • ISPs, iiNet, and Internode (owned by TPG) agreed to compensate 11,000 customers who could not reach the internet speeds of 100Mbps on the NBN that was advertised by the ISPs between 2015 and mid-2017. Also, Telstra had agreed to compensate customers in November 2017, followed by Optus and TPG in December 2017.

Vocus Group (Dodo, iPrimus and M2 Commander)

  • March 2018: To address the NBN customers’ complaints, Dodo, iPrimus and M2 Commander (owned by Vocus) agreed to compensate 5,000 customers who did not receive the internet speeds that they paid for. Vocus Group stated that the speed expectations were not met on 6% of its NBN services in operation.

NBN Consumer Complaints

  • According to a report from the Telecommunications Industry Ombudsman (TIO), the number of complaints about the NBN tripled in the second half of 2017. There were a total of 22,827 complaints about the NBN from July 1, 2017 to December 31, 2017.
  • The reasons for complaints were charges and fees, unsatisfactory response from providers, poor service quality, service update, faulty equipment, absence of any service at all, and poor service quality.
  • Complaints were predominantly from residential consumers at 74,729 complaints or 88 percent of the total. Complaints from small businesses were at 9,947 or 11.7 percent. By State, Queensland saw the highest growth in complaints, increasing 39.3 percent to 16,418, followed by 36.5 percent in Western Australia with 7,381 complaints. New South Wales had the highest total complaints with 26,914, up 27.9 percent, followed by Victoria’s 23,954 complaints, or a 30.5 percent increase. South Australia made 6,552 complaints, Tasmania made 1,614, the Australian Capital Territory made 1,184, and Northern Territory made 504.
  • The main cause for disruption was the significant increase in NBN connections and migration.

Conclusion

  • According to a report by S&P Global Ratings, the NBN may not generate enough revenues or expand its market share and hence may need a Federal Government bailout eventually. The reason being, the NBN continues to negatively impact the Australian telecommunications sector due to the network’s high access charges, ambiguous service offerings, and inferior technology. The Finance Minister Mathias Cormann rejected the S&P analysis, saying that the government was confident that its projections would be met.
  • The cost for customers and taxpayers is high when compared to the benefits expected from the NBN i.e. to bridge the digital divide between inner and outer metropolitan areas.
  • The emerging 5G mobile may also pose a competition to the NBN.
  • In July 2018, Australia’s Department of Communications (ACMA) released new rules requiring Telcos to help their customers move smoothly to the NBN.
  • The Telcos will be obliged to give consumers the information that is essential for them to choose an NBN plan; test that their new NBN service is working as promised; provide an interim service to the consumer or reconnect the consumer’s old service if there are delays in getting the new NBN service working, as well as move swiftly to resolve consumer complaints.
  • The new rules will be directly enforceable by the ACMA. Any breaches found, will allow the ACMA to commence court proceedings seeking remedies such as injunctions and civil penalties of up to US$10 M.
  • We have seen the impact of NBN on the suppliers in terms of job cuts or role changes, earnings, and reputation. Also, slower revenue growth has led to increased competition across the sector. Only time will tell if the price paid to reduce the digital divide in Australia is worth it. Till then, the suppliers need to follow transparent NBN policies and strengthen their service delivery to regain consumers’ trust and find avenues to expand revenue while restructuring costs to reduce the burden on the company’s margins. With respect to consumer satisfaction, measures from ACMA or the Telecommunications Consumer Protections (TCP) Code that is currently being revised may help to improve the overall customer experience.

For more insights and updates on the telecommunications industry, subscribe to Supply Wisdom SMTake a free trial to see how we can help you stay up-to-date on the latest company and industry changes and be more proactive about monitoring and managing risks across your global suppliers.