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The 2.5 million connection question

The 2.5 million connection question

As you may have read in the press, NBN Co Limited intends to expand its rollout over the coming year such that they’ll achieve 2.5 million serviceable connections by 2016. Considering this in the context of NBN Co’s performance, there’s obviously some work to do before we hit the rosy heights of 2.5 million customers.

In terms of current performance, NBN Co’s half-yearly result showed it incurred a loss of $902 million. Taxpayers have so far contributed $10.4 billion to the project and serviceable premises are up to 748 thousand, with actual connected premises up to 322 thousand.

The 2.5 million serviceable connections could potentially be achieved via the HFC (hybrid fiber coaxial) network that NBN Co recently acquired – however this is where it gets interesting.

Currently most of the connections on this network subscribe to either Optus (ASX: SGT) or Telstra Corporation Limited (ASX: TLS), firms who presumably would be very happy to keep these customers paying even after the NBN takeover. But what of TPG Telecom Limited (ASX: TPM), iiNet Limited (ASX: IIN) and M2 Group Limited (ASX: MTU), shouldn’t they get a bite at the apple too?

Normally I would answer yes, however it’s going to be much easier for NBN Co to hit its targets if their customers were to stay with their current providers. This means that it’s in NBN Co’s interest for customers to stay where they are, rather than choose another provider, even if the other plan would be cheaper or more suitable.

NBN Co’s HFC rollout policy is under review by the ACCC. It’ll be interesting to see their findings given this dynamic.

I’d further note to those of you using a HFC network. Your future internet speed may not be as you would expect. The NBN rollout requires that in future approximately 3.3 million customers will be utilizing the HFC network, relative to its 1 million customer utilization now. HFC like ADSL is a ‘contended service’ which means as more customers use the network, the slower it becomes (kind of like a freeway becoming congested in peak hour).

Our HFC technology will hence need an upgrade in order to handle the extra capacity resulting from so many more users on the network. ARRIS Group has been contracted to perform this work, but I’m personally curious as to how fast the network will be post-upgrade.

Quotes of circa 300 mbps have been thrown around, however as we know, internet performance can vary extremely widely as more people use the network, especially around peak times. As a result, whether satisfactory performance will be seen in the network is still up for debate.

Scott Shuttleworth is an analyst at Montgomery Investment Management. To invest with Montgomery, find out more.

This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.

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2 Comments

  1. Being familiar with the industry, there is no doubt in my mind that the HFC upgrade works will absolutely revolve around the idea’s of ‘average utilisation’ and ‘acceptable speed on average’ – which are either completely subjective, or, don’t take in to account what you mentioned above: there are peak times, much like everyone trying to use a highway. Essentially people will just be getting a slightly faster ADSL connection, with the same ebb and flow throughput issues, getting continuously worse as population grows.

    I find it funny that the conversations being debated about the NBN and what is considered acceptable speeds (throughput) by politicians (on any side) is different to what those in the industry are saying what should be done. The exact same scenario has occurred when highways/tunnels have been built: a 4 lane motorway leading into a 2 lane tunnel creating a funnel effect, and the people building it are sitting there knowing whats going to occur before they’ve even finished (congestion). Follow this up with 10 years of political tug-o-war until someone actually kicks a project off and the cost of the new work is 10 times as much as if they had of just built it properly in the first place.

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