Whenever this site posts an article discussing home broadband Internet services, readers respond with emails - and mostly, they talked of their anger with the existing services. Many dislike the pricing structure put in place recently by Telstra, which now charges hefty fees when monthly downloads exceed three gigabytes. Others object that Telstra, Optus and ADSL broadband providers haven't found a way to get broadband service to them.
Almost everyone who responds feels that the broadband providers are getting away with murder.
Are they right? Is supplying broadband an instant formula for riches?
Not yet.
The finances of Australia's broadband industry aren't exactly transparent, but the basic picture can be assembled without too much trouble. You can see the picture best in recently-published seminar proceedings of the Network Insight Group, an RMIT University think-tank in Sydney. Back in December it pulled together a swag of Australia's major broadband players for a day-long conversation, now published at $50 a copy as "Broadband For What? Driving Demand". Among the proceedings' merits is that all the participants were performing for their peers, and clearly felt unable to lay on too much of the usual industry spin.
And their discussions make broadband sound a pretty unpleasant business:
- First, no-one is making much money out of retail broadband services right now - Telstra, Optus or anyone else. Accenture's Chris Leptos stated this plainly at the start of the seminar. No-one disagreed - and if they could have done so, they would have done so.
- Connecting a customer to broadband remains expensive. Lynn Canalese of investment bank J.P. Morgan estimated that Optus spends more than $1000 to connect the average new user. Among the key costs of connecting cable customers: paying skilled installers who can configure a user's PC without messing it up.
- The cost of hauling packets across the Pacific still hampers Australia's broadband industry. Roughly three-quarters of Australia's broadband Internet downloads originate in the US, and moving them here still costs almost 8c per megabyte. That means a typical broadband customer downloading 600 megabytes each month will cost their provider more than $20 a month, before the provider even starts to count local costs. Heavier downloaders cost their provider proportionately more.
- At such prices, and with profits either thin or non-existent, both Telstra and Optus are trying to restrict broadband usage. Telstra broadband manager Omar Khalifa told the Network Insight seminar that both Telstra and Optus were wearing average downloads of more than two gigabytes (2000 megabytes) per month per user. On the figures mentioned above, this makes unrestricted broadband Internet a less attractive business. Perhaps even more interestingly, Khalifa claimed the top two per cent of Telstra's broadband users were responsible for 50 per cent of all its downloads. This group were typically using between 30 and 160 gigabytes per month, he said.These figures underpin Telstra's recent decision to charge high-volume broadband users more, while trying to attract lower-volume users with a cheap package. (Of course, it also helps that Telstra was willing to raise charges on users originally attracted by unrestricted download packages.)
- As you'd expect, the small group of heaviest (and most expensive) broadband users are doing more than just browsing the Web and sending emails. They're downloading free music, movies and software. "We found that we already have video-on-demand in this country," said Khalifa. "We have video files flying across this network like you would not believe. We have movies that are being released on our network before they are being released in Blockbuster video stores." And file-swapping services such as Morpheus and Gnutella are fuelling the traffic, Khalifa added.
- Most broadband analysts can't see consumers getting excited about the product while it remains priced around $70 - yet they fear anything much below that means selling the product below cost. "I am a cable modem user at home, and it is magic," said Stephe Wilks, managing director of business broadband provider XYZed. "But is it enough to pay $70 or $80 a month for? The answer is emphatically 'no'."
Telstra and Optus aren't angels. But it's easy enough to see why home broadband Internet costs what it does, why it now comes with strings attached, and why no-one's rushing to install more broadband capacity in Australia right now. Broadband's riches are in the future - and its providers must pay the bills and dividend cheques today.
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