That sensitivity became real financial pain for David Teoh's TPG Telecom on Tuesday when the company warned its future earnings would be lower and it laid the blame for this on the excessive CVC charge. NBN levies the CVC charge on telcos or retailers of internet services that sell its ultra-fast broadband to customers.

By the week's end investors had wiped $2.2 billion from TPG's market capitalisation. Meanwhile, one of Fifield's advisers was dismissing the fall in TPG's market cap as not a big deal.

This was almost two months to the day that Fifield had become acutely aware at the awards ceremony of the sensitivity around the CVC charge.

Going for broke

Following the TPG warning industry professionals spoke out, claiming some telcos and internet companies providing NBN packages could go broke if the government didn't act to address the CVC charge. These included telco entrepreneur Bevan Slattery and the Competitive Carriers Coalition that represents a group of small to medium-size telcos. Vocus Communications chief executive Geoff Horth cautioned that customers could end up shunning the high-speed internet plans on offer if the NBN persists with the high CVC charge.

So what is the CVC? The NBN applies two charges to companies that sell its ultra-fast broadband.

The first is a charge to access the NBN, known as the AVC. This is applied on a sliding scale according to speed. If a telco or internet company is providing an internet package where the download speeds are only 12 mega bits per second the monthly fee it pays to the NBN for each customer is $24. This climbs to $34 for speeds of 50 to 100 Mbps and then to $150 if the download speed is 1 Gigabyte.


The CVC charge is for volume, or how much data a telco or internet service provider purchases from the NBN. This charge was originally $17.50 per Mbps. Even though this was lowered to $15.75 per Mbps in June it has proved way too high for the industry – giving rise to this week's crisis.

The high cost has crimped how much data telcos and internet service providers are willing to purchase. Frustratingly, this has occurred at a time when customer demand for data has exploded with the popularity of streaming services such as Netflix, Stan and live sport.

Turns out the problem with the NBN is not the slow roll-out, but the slow speeds, compared to the rest of the world, and now the high price. Rob Homer

The result has been poor-service issues for users of the NBN. And this makes it harder to convince customers to switch from older broadband services such as ADSL2+ to the NBN, until those older services are turned off.

'CVC not set in stone'

NBN plans to connect 8 million homes and business by 2020. Currently, the NBN has 1.09 million active users. However, only 942,356 users can access speeds of 100 Mbps and of those 14 per cent are paying for that service.

Earlier this year, technology group Akamai released its State of the Internet connectivity report, which it has been producing for almost a decade. In that report, it looked at what percentage of broadband customers were achieving speeds of 15Mbps or above across the globe. In Australia, it estimated at 10 per cent; in New Zealand 15 per cent, the United States and United Kingdom at about one-third, and in Hong Kong almost half of all customers.

Central to boosting the NBN's revenues is getting more users and data usage onto its network. NBN's average revenue per user has grown from $37 to $43 in the past two years, and is forecast to be $52 by 2020. (It combines residential and business when calculating that ARPU)


Everyone's got a reason to be worried. TPG's David Tehoe, ACCC's Rod Sims and the communications minister Mitch Fifield. David Rowe

The NBN responded to the telco industry's complaints about the CVC charge by introducing what it calls "dimension-based discounts" (DBD), which are being trialled. Under this plan, the CVC charge falls as more data is bought by telcos and internet service providers.

"NBN is acutely aware of this issue. It has been consulting retail service providers," says Fifield. "It's trialling offering a discount for those retail service providers who purchase a greater amount of network capacity. NBN have indicated there will be further unit price reductions of the CVC. This isn't set in stone and the NBN isn't going to cut its nose off to spite its face."

It's a view shared by Dr Mark Gregory, a senior lecturer at RMIT's School of Engineering. "The NBN can do little else other than to decrease the CVC charge or to consider getting rid of it altogether and going to a flat fee like other countries," he says. New Zealand charges a flat fee of $44.

"If you get more customers you offset the loss of decreasing or getting rid of the CVC charge. The problem the NBN has got at the moment is they're not getting the 80 per cent of customers that they need onto the NBN and not fast enough. NBN Co has got to get more customers onto it as quickly as possible. That has to be the imperative."

Complex discount scheme

Under the complex discount scheme NBN has introduced the 50 or so telcos and internet service providers it works with currently pay a CVC fee of $15.75 per Mbps.

This fee applies to an average taken of the data purchased per user by those 50 companies. Currently the average sits in a band between 700 to 849 kilobytes per second. For this usage NBN applies the $15.75 Mpbs fee. When those 50 companies increase capacity to customers so that it moves into the next band where the end user is receiving 850 to 999 kpbs, the CVC fee falls to $15.25. This step down continues to a current floor for the CVC charge of $11.50.


The complaints about the fee should be seen in the context of NBN noting in its annual report that it had exceeded its revenue targets for the year, with revenue having grown from $257 million to $421 million in the year to June.

Telco companies have asked Rod Sims, chairman of the Australian Competition and Consumer Commission, to review the CVC charge. This week Sims told The Australian Financial Review that a balance must be struck between the telco industry and the NBN, with the latter needing to earn a modest return on its investment.

"The idea that people want to pay a fixed price and get more and more data over time may not be realistic," he said.

The battle over the CVC is just another stumbling block for the NBN, which was conceived as a driver of economic growth – a new telecommunications service that would deliver ultra-fast broadband, with download speeds of 100Mbps. In theory, faster internet would lead to the creation of new businesses and applications in tele health and education; make consumers, government agencies and companies more productive and competitive with the rest of the world.

But in other parts of the world download speeds of 1GB are now being offered, which has some questioning the technology of the NBN. When the NBN was originally proposed by the Labor government it was to be rolled out as a network built with fibre to the premises at an estimated cost $36 billion. Fibre to the premises has been rolled out in countries from the United States to France.

Multi-technology mix

However, to save money, the NBN roll-out was changed to a multi-technology mix under pressure from then prime minister Tony Abbott after his Coalition government won office.

Latest estimates are that the NBN may cost between $46 billion and $54 billion by 2020.


Debate continues to rage as to whether the switch in NBN technology by the Coalition was a mistake in terms of the quality and speed of the service delivered. Both Labor and the Coalition have staked claims on a superior and less costly NBN.

As a project the NBN also draws criticism because of its cost. It's the biggest spend undertaken in Australia's telecommunications sector in at least half a century. It's fiercest critics argue it could have been built by the private sector. But it's unlikely the private sector ever would have delivered ultra-fast broadband to regional and remote Australia without government support.

If the NBN costs $50 billion, it will be a price tag similar to what the federal government is spending on buying 12 French submarines to upgrade the country's defence capacity. It will also be a similar spend to the $50 billion the federal government has earmarked for investment in road and rail infrastructure over a seven-year period until 2020.

"It's perplexing why so much fuss is made," says Dr Gregory.