How Netflix's popularity will change the shape of the NBN

Orange Is The New Black. Photo: screenshot

It looks like online streaming service Netflix isn’t just disrupting both free-to-air and pay TV, it also has the potential to dramatically reshape the NBN’s business model according to iiNet boss David Buckingham.

The ISP’s chief executive has given a fascinating interview to Fairfax Media, arguing that Netflix’s popularity is making the NBN’s broadband plans unsustainable and the prices need a drastic haircut.

Buckingham says data growth jumped in six weeks after Netflix launched in March to consume 6-to-12 months’ worth growth.

The company was blindsided and forced to buy extra capacity after a slowdown in data speeds as everyone began streaming movies on Netflix.

“Nobody can forecast that. This is an unprecedented shift in the market that no one anticipated,” Buckingham told Fairfax.

While iiNet, Optus, TPG and some other ISPs are offering unlimited downloads via Netflix as part of a marketing pitch, the problem Buckingham identifies for the NBN is that they’ll struggle to attract customers on the current pricing scheme when all the nation wants to do is binge watch House of Cards and Orange is the New Black.

The NBN cut its wholesale price by 12.5% in February, but that was before Netflix turned up. iiNet CTO Mark Dioguardi has already dubbed the likely cost as a “Netflix tax”, saying it would work out at around $26 a month for moderate HD streaming, and $60 a month for Ultra HD 4K streams.

That additional cost also takes away the commercial advantage streaming services such as Netflix, Stan and Presto have with a circa $10 monthly fee, against pay TV rival Foxtel.

Fairfax details that the biggest issue for the telcos is an NBN fee called the connectivity virtual circuit charge (CVC), at $17.50 per 1 megabit per second.

Bevan Slattery, CEO of the ASX-listed dark fibre infrastructure provider Superloop said that price needs to drop 70%

“The CVC construct before Netflix turned up in this country was significant multiples higher than the cost-base we’re experiencing on our own networks or even under Telstra,” he said.

Either way, it looks like NBN is being seriously disrupted before it’s even had the chance to roll out and communications minister Malcolm Turnbull, who’s responsible for the government-owned network, and treasurer Joe Hockey must be sweating on how things will pan out financially, although it suggests Turnbull was on the mark to pull back on the $41 billion budget the ALP had for the project.

The NBN Group had an operating loss after tax for the six months to 31 December 2014 of $902 million and telecommunications revenues of $64 million. Its financial forecasts assume a 7% internal rate of return in order to repay around $30 billion in government debt, plus private debt, by FY2040.

Read David Buckingham’s interview in full here.

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