Telcos react against NBN access undertaking but experts say prices can’t fall forever

Telcos have reacted harshly to the National Broadband Network’s special access undertaking, which sets out wholesale prices for the foreseeable future, saying it is out of line with current industry trends in which prices are continuing to fall.

But industry experts say prices have not always fallen in the telco industry and the days when costs would continue to decline may be over.

“The cost for producing anything is actually increasing,” Telsyte director of research consulting Chris Coughlan told. “I’ve been arguing for awhile that possibly prices should go up in the telco space.”

The NBN announced the SAU yesterday, after making several changes from its original version. Now, the NBN Co. has said wholesale access will not increase in price for the next five years. But after that, it confirmed that prices will rise – but by no more than the rate of inflation.

This release comes after the NBN Co. confirmed the Wholesale Broadband Agreement last week. Co-head of product development Jim Hassell said in a statement the NBN corporate plan does not envisage prices will need to rise to achieve long-term objectives.

“Not only does the SAU provide industry certainty of accepted by the ACCC, it is in the long-term interests of consumers and businesses because it supports the objective we have been set to offer a uniform national wholesale price for our basic services.”

Some disagree. Vocus chief James Spenceley and AAPT head David Yulie have both told the Australian Financial Review they are hesitant. Spenceley noted the ongoing trend for prices to continue to fall, while Yulie said the agreement could have been more definitive.

But Ovum research director David Kennedy says while it is true prices have fallen over time, it’s not necessarily true to say this has always been the case.

“I would also point out that this is the first type of guarantee any wholesale operator has provided for a cap on price rises. In that regard, I think this adds a lot of certainty.”

“The NBN is also a big capital investment, and that investment needs to be recovered. This is a new infrastructure that does require returns to be generated, and that needs a price trajectory.”

Coughlan agrees, saying that while telco prices have fallen in the past, this may be due more to efficiency gains than anything else.

“You also had Telstra pulling monopoly type rents out of the infrastructure. Going forward, if you’ve got a government-owned monopoly, and providing a service, you’re going to see more utility-like rents coming out.”

“There can’t be an expectation that prices will continue to fall. But a five year window is pretty good, and linking that to CPI is also a good outcome.”

Coughlan says that like other areas where prices are increasing, telco access may not see the large falls that it has in the past.

“Costs for production are increasing. You could say that prices have fallen for equipment such as handsets, but that’s driven by economic trends and cost curves more than anything.”

Kennedy agrees, saying the days when customers assumed prices would be substantially lower every year “are now probably coming to an end”.

“That doesn’t mean prices will have extraordinary rises, just that the rates at which prices fell may not be as much.”