Has FTTN paid for itself?

I will analyse Communication Minister Fletcher's recent claim that NBN's FTTN has paid for itself. FTTN is the poor cousin to FTTP, the gold standard of broadband. Where FTTP is capable of terabits per second (10 ^ 12 bps), but twice as expensive as FTTN to install ($4000 vs $2000),  in contrast, FTTN suffers from degradation over distance from the fibre at the node, so 1/3 get very fast (<500m; up to 100Mbps and a bit more), 1/3 fast (500-750m; up to 50Mbps) and 1/3 slow (>750m; less than 50Mbps). NBN's plans in 2020 include enhancing half of NBN's FTTN footprint with fibre on demand, and upgrading FTTC and HFC to gigabit speeds, giving 75% of NBN's fixed line customers access to gigabit speeds.

 

Background

FTTN is one of the fixed line technologies, NBN (the National Broadband Network) uses to deliver broadband to Australian homes. It is part of Australia's MTM (multi-technology mix) approach that aims to deliver broadband to Australians at lowest cost to the Government and as early as possible, ensuring that nearly all Australians were ready to connect with broadband when the COVID-19 pandemic arrived in 2020. In contrast, Australia's prior government envisioned an NBN with largely FTTP broadband delivery, which is more expensive to install, but capable of very high speeds over potentially future decades. 

FTTN uses copper phone lines to deliver the last stretch of broadband, while FTTP takes fibre right into the house. The longer the copper, the more the interference through the medium and the slower the broadband speeds to the user. NBN Co reported in its Corporate Report 2021 that FTTN users fell into one of three categories; 1. 1.2M who could get 100Mbps; 2. 1.9M who could get 50Mbps, and 3. 1.0M who could only get the baseline 25Mbps. FTTP in contrast currently enables 1000Mbps, with some countries now activating 10,000Mbps access speeds over fibre. 

Australia's current government argues that most households are satisfied with their current access speeds, but are providing a way forward, as households demand higher speeds. NBN for instance launched cheaper 250Mbps and 1000Mbps services in May 2020, which attracted a few thousand new subscribers to these high speeds, and may have caused a 25% uptick in Australia's average broadband download speed.

Upgrades Corp Plan 2021-24

Following NBN Co's completion of the volume rollout in 2020 (99% complete, with 100,000 more difficult premises to finish), its Sept 2020 three year Corporate Plan announced investment to lift Australian broadband performance. To that point, NBN's goal in its Statement of Expectations was to provide all premises with at least 25Mbps by 2020, and 90% of fixed line premises with 50Mbps (as soon as possible). The Corporate Plan announced several investment strands, including:

- business zones where businesses could get fibre services connected for $nil upfront on committing to a service

- upgrade to HFC and FTTC technologies to gigabit service levels

- upgrade of 50% of FTTN footprint to enable fibre on demand, when customer demands a fast service, which its FTTN can not provide, for $0 install cost to customer.

Minster Fletcher

In announcing the NBN Co Corporate Plan and committed investment, Minster Fletcher stated:

"By 2023, the FTTN network will have generated $9 billion in revenues, cost $7.3 billion to build and $1 billion to operate. FTTN will have effectively paid for itself - and will continue to provide a very good service to millions of premises for many years, generating cashflows well into the future". CommsDay Speech, 27.10.2020. 

Let's look at the "paid for itself" claim. 

Assessing the claim

The claim consists of three parts;

- FTTN has generated $9 billion in revenue - I agree

- FTTN has cost $7.3 billion to build - my estimate $11 billion

- FTTN has cost $1 billion to operate - my estimate $2 billion, but full costs add another $20 billion.

Revenue

The NBN has generated $10 billion in revenue in the last five years (2016 - 2020); NBN Co Annual Report 2020, p.56. Over the next three years, NBN is budgetted to generate another $15.6 billion (Corporate Plan 2021, p.54). NBN revenue can be prorated by the types of technologies to apportion their revenue by technology type. At 2020, FTTN/B has 3.1 million activated premises from a total of 7.3M active connections - 42% of connections. By 2023, FTTN drops to 36% of connections as another 1.5M premises are activated but very few are FTTN (less than 10%). A first cut estimate of FTTN revenue is 43% of pre 2020 revenue, and 36% of post 2020 revenue; equating to about $9.6 billion. So close to Fletcher's claim.

Build Cost

NBN reports cost per premise (CPP) by technology. Per NBN Corporate Report 2020, NBN had 4.7M homes serviced by FTTN/B as CPP of $2340 (NBN Corporate Plan 2020, p.52). This gives total Build Cost for FTTN of about $11 billion. Added to this should be a proportional share of common CAPEX. The 2020 Annual Result presentation shows Commons CAPEX at only around 10% of total CAPEX, so would only make a minor difference. The NBN Annual Report does not break down Network assets by network technology type, nor identify levels of common capex. But NBN shows on their books a network worth $42.5 billion less $9 billion depreciation, for 11.7M premises ready to connect - an overall average of around $3600 per premise. So, overall the Minister's claim of FTTN costing $7B to build seems low compared to my $11B estimate.

Cost to Operate

In 2020, NBN reported Direct Network Costs of $641M, about 30% of total Operating Costs ($2.0B) NBN Operating Result Presentation 2020, p.11. From 2016 - 2020, NBN reports Operating expenses totalling $9.4B (NBN Annual Report 2020, p.56). Using the 42% share of revenue as above, the FTTN share of Operating Expenses would be around $4B, and likely direct network costs at 30% of $1.2B. For 2021 - 2023, Operating Expense can be calculated as Revenue - Subscriber Payments - EBITDA or ($15.6B - $1.4B - $8.6B = ) $5.6B. The FTTN share at 36% would be close to $2.0B, with Direct Network Costs (30%) around $0.6B. So my estimate of total Direct FTTN Network costs of ($1.2B + $0.6B) around $1.8B, close to double Minister's Fletcher's estimate.

However,  how much of non-direct Operating Expenses should be attributed to FTTN. Should it include employee costs (around 30% of operating expenses), subscriber acquisitions costs (close to $10B). Addition of these costs would increase FTTN related expenses to $2B (employee costs) and roughly $4B for related subscriber costs). There is also depreciation and interest cost incurred by NBN, which in 2016 - 20 are in the order of $15 billion. A share of FTTN would add another $6B to FTTN's bill. Thus total expenses related to FTTN would be closer to $14B (2016 - 20) while the direct costs to operate, I estimate are around $2B (2016 - 23). To add the 2021 - 23 portion of FTTN costs, would add another $2B of employee expenses and 3/5 of depreciation/interest, so close to $3.5B. Grand Total Expenses: $21.5B  Thus the $1B FTTN Cost to Operate is extremely light on in excluding employee costs, subscriber acquisition costs, depreciation and interest, understating total costs by close to $20 billion over 2016 - 23.

Conclusion

Thus I would argue that FTTN has not paid for itself. Even with a narrow view of network operation costs, margin earned by FTTN services has contributed around $7 billion to NBN operating funds, while I estimate build costs at $11 billion. A fully expensed costs of FTTN is closer to $20 billion for 2016 - 23, including employee costs, depreciation and share of subscriber costs.