commentary While everyone was distracted by the NBN, a revolution was under way in the supply of fixed line broadband.
It involves the wide availability of great value DSL broadband plans with big download limits and high speed connections.
This revolution is a direct result of the industry settings forced into place by what many have claimed is a flawed and poorly functioning regulatory system.
The regulated price of access forced on Telstra by the Australian Competition and Consumer Commission is fuelling a profit bonanza for selected internet service providers.
How many industries can you think of where it is possible to get access to a service for $2.50 a month and then sell that service in a competitive market at $50 a month?
Gross profit margin for a broadband customer on the iiNet network is about 60 per cent
Those are the basic numbers that underpin the profitable business models for naked DSL broadband offered by iiNet, SP Telemedia (TPG and Soul), Internode, SingTel-Optus and Telecom New Zealand subsidiary AAPT.
Administrative and market costs have to be included in any calculation of profit margins. But the iiNet figures released this week show gross profit margin for a broadband customer on the iiNet network is about 60 per cent.
The Perth-based ISP is currently spending huge amounts on promoting its naked DSL connection technology called BoB. This is aimed at encouraging customers to dump their Telstra fixed line in favour of voice over internet protocol (VoIP).
Not only is iiNet heavily investing in promoting its naked DSL product, it is planning about $30 million in capital expenditure to bring more of its customers on to its network.
Internode is another ISP willing to invest in more DSLAMs in Telstra exchanges so it can put more customers on its own network. It is going to spend about $20 million in capex.
Other ISPs are enjoying the fruits of the fixed line broadband bonanza. The biggest winner is likely to be SP Telemedia which has a 31 July balance date and won't report until next month.
SP Telemedia is actually a beneficiary of what you might call a reverse cartel.
Telstra is sitting on 50 per cent market share and is happy to be priced out of the market by all its competitors. It relies on complacency, ignorance and inertia to charge more for its broadband plans than anyone else.
Why cut your prices if customers are happy to pay?
However, the result is that rivals sit just below the Telstra high watermark offering better value in terms of speed and download limits.
Telstra's competitors are reaping the financial benefits of the ACCC ruling in 2007 that Telstra can only charge $2.50 a month for a line sharing service.
Telstra originally fought this ruling very hard. But it has since raised the white flag and allowed the revolution to happen.
The ACCC set an access price of $14.30 a month for unbundled local loop access, or Band 2, the most popular band, including metro and suburban areas. Wholesale line rental was set at $23.12 for residential access.
The prospect of the NBN arriving in five years time has got some ISPs thinking that they should maximise their current opportunity to increase customers.
The idea is that access to the NBN will not be a flat fee but have some entry price that will be shared pro-rata among the users. Analysts have rejected the idea that there will be volume discounts because this would give Telstra too much of an advantage.
The more customers that an ISP can win before the NBN is switched on the better they will be when the access negotiations begin.
With gross profit margins of 60 per cent, it will only take about two years to recover the cost of capital. That gives three years of fat profits before the NBN is a reality.
However, one tricky question to emerge from the revolution is this: why are Australians paying so much for "great value" broadband when it is delivering such fat profits from prices set by the regulator?
This article by Business Spectator's Tony Boyd is reproduced on ZDNet.com.au courtesy of a reciprocal publishing agreement.
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If it costs $2.50 a month for ISP's to get access to Telstra's copper who pays to fix it if there are any problems with the line?