Damian Ivereigh, head of Launceston-based Launtel, who predicted a few months ago that smaller NBN RSPs could be in trouble after October due to the bundles sold by NBN Co becoming mostly the single way that RSPs bought bandwidth, pointed to the closure of Mungi, a small Melbourne-based ISP as further proof that his theory was correct.
In August, another small ISP, Telecube, again based in Melbourne, went under. Additionally, Ivereigh pointed out in a blog post, MVNO amaysim had exited the NBN market, and Vodafone had decided to merge forces with TPG Telecom rather than compete on its own in the NBN space.
Explaining its decision to go into administration, the owners of Mungi said in two posts on Whirlpool that, given the squeeze exerted by big players, the company was unable to compete on economies of scale. Cutting prices could only take a company so far.
"An aggregator is a large telco who has paid for the physical fibre access to all the PoIs and agrees to on-sell capacity in the form of aggregated bandwidth across all the NBN PoIs to the small provider," he said. "The aggregator simply charges an access fee per connection and a price (per Mb) on the sum total amount of bandwidth allocated to the provider’s clients."
But there were four downsides to this:
- The small provider had little or no control over congestion at each PoI on the upstream aggregator’s network as there were numerous others on the same deal. Given that, no small provider could promise high quality as they had no control over the one factor causing most congestion -the connection to the PoI or the CVC.
- There were only few aggregators so prices for bandwidth were quite high (about $15 to $20 per Mb).
- The small provider was limited to offering the same products that their aggregator offered and end up competing on price. Some aggregators refuse to provide the NBN’s new (cheaper) bundled plans.
- The small provider has no direct access to NBN Co and NBN Co’s management systems. They have to go to the upstream aggregator for everything. To address a fault, the client calls the RSP, the RSP calls the aggregator, and then the aggregator deals with NBN Co.
Ivereigh said this had been a major point of frustration for Launtel and, as a result, they had decided to connect to as many PoIs as possible on their own. But given that they were a small company, they lacked the means to connect to all 121 PoIs and had to forget about national coverage due to this.
He provided some back-of-the-envelope calculations to show how unrealistic it was to try and compete on price with bigger providers.
The first chart below looks at how much a small ISP would have to charge for TPG's 50/20 unlimited plan which that company sells for $69.99; bundled pricing is not factored in as few aggregators use it:
Working backwards from that price shows what kind of margin TPG is likely to be obtaining:
And since TPG also offered unlimited phone calls, it was very likely that they were actually losing money on these plans.
Given this, he said there was no way for a small RSP to compete with a big provider on price.
"The only way to survive is to not play this price game. At Launtel, we found we had to connect directly to the NBN to improve our ability to provide a good service, be innovative and flexible in the type of service we provide that allows us to charge a little more," Ivereigh said.
"For example there is no way we could offer our daily pricing system through an aggregator. We knew that if we were competing on price, we would lose the game."
He said sooner or later something would have to give. "Either NBN Co has to lower their prices (very unlikely) or the telco industry has to start raising their prices. If nothing happens the NBN market will continue to be dominated by the same big players whose only interest is to spend as little money as possible in providing the most minimal service with which they can get away."