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Can you make money and save the environment?

It’s no secret that fashion isn’t my strong suit. In fact, I have as much interest in it as watching paint dry. So when Anna Walsh walked into the Tank to spruik her clothing business, I braced myself for an unfamiliar ride.

Anna started Bodypeace Bamboo Clothing six years ago which makes a range of eco-friendly apparel from shirts to dresses and even jeans.

For years she ran boutiques that dabbled mainly in cotton but in an effort to “go green” the Byron Bay native began researching different materials and realised that cotton actually uses more chemicals than any other crop.

She was seeking $90,000 for a 15 per cent stake, valuing her business at $600,000.

And why should we invest in her company? Her big pitch was that because bamboo was good for the planet.

She wasn’t clear how the funds would help and would defer to the investor for advice.

This was early in the piece and I was sceptical that it was a viable business (although the products were good quality). Anna didn’t do herself any favours when she couldn’t answer a simple but important question: what’s your revenue?

I was quite surprised. When pitching your business for investment, you have to get your numbers down pat: profit, loss, sales, margins … the basics of any business.

To her credit Anna later redeemed herself and revealed that the business had registered revenues of $1.7 million, was up 83 per cent every year and making $150,000 in net profit.

Perhaps her temporary blackout was a result of first time jitters in the Tank but those figures really impressed me.

When asked if she wanted to have run a big business or save the world, Anna replied “both”. She openly stood by her convictions despite being grilled by potential investors. That’s a good lesson for entrepreneurs – if you don’t believe in what you’re doing or what you can achieve, why should I invest in you?

Anna surprised me yet again when she somewhat rejected my $90,000 for 25 per cent offer, saying she felt her business was undervalued at $600,000.

She held her ground and that really impressed me. It’s important to know what you’re worth and not let anyone devalue you or your business.

I revised my offer to give her exactly what she wanted, followed by Janine Allis’s $90,000 for 20 per cent proposition. Anna wanted both Sharks in the mix and we settled on $180,000 for 30 per cent in total ($90,000 for 15 per cent each).

What did we learn from Anna? A solid business with good returns coupled with unwavering faith in your enterprise will surely whet the appetite of potential investors.

Four Queenslanders walk into a bar …

Speaking of appetite, Friday Beers came about when co-founder Lee Mathers was too busy to stock up the fridge on a Friday afternoon. He dispatched his friend Keegan Sard to the bottle shop but the beer selection left much to be desired.

They pondered over what could be and the idea to deliver craft beer at your work place on Friday afternoons was born.

Friday Beers wanted $25,000 in return for a 10 per cent stake, making it worth $250,000. Operating in Brisbane, it had plans to expand to Sydney and Melbourne.

The beer was of high quality, and a great way to usher in the weekend. No lock-in contracts, hidden fees and you can start and stop as you like.

More importantly, the company was already looking to diversify into wine, cider and food to cater to office parties and other occasions.

The Sharks were told the two-month old company could easily manage 5000 deliveries around the country.

It was an impressive potential pipeline of well-heeled corporates which got me doing my numbers and thinking of the bigger picture: at $50,000 a week, Friday Beers would be hitting $2.5 million a year by selling beer alone. But yearly sales could probably double as the company expands its range of offerings.

This proved that Friday Beers wasn’t a one trick pony – an important factor when I decided to provide the capital required since delivering beer isn’t new and the model could be replicated by others.

Investors need to be able to visualise a rosy future and Friday Beers had the right value proposition to make me drink up!

Steve Baxter is an entrepreneur and investor, founder of technology startup hub River City Labs, founding director of StartupAUS and a Shark on Shark Tank Australia.

Missed an episode of Shark Tank? Watch full episodes here.

This article was originally published on Linkedin. Read the article here.

How these startups made us all bite on Shark Tank

On the surface there couldn’t be more stark of a contrast between the two founders I chose to invest in on Shark Tank last night – Mick D from The Adventure Group (TAG) and Michael Timbs of Betswaps.com.

But when you look deeper both shared common traits that had more than one Shark circling. In the end the thing that led to the quality of the outcome for the entrepreneur was the fact that multiple sharks competed for the deal. This drove up the valuation from initial low-ball offers. He who has the gold sets the rules; if you NEED investment and only one investor wants in then your chance of a cracking result are low indeed.

It’s hard enough to whet the appetite of one investor, let alone two or three at one go. Getting them to fight over you is really no mean feat. So what made them so special?
TAG.

Mick came into the tank looking for $100,000 in return for a 20 per cent stake in his company, valuing his business at $500,000.

TAG offers high-quality, unique and adventurous outdoor experiences for clients alongside some of Australia’s former special forces operators (like Mick, a 20+ year armed forces veteran serving in the Australian and British Special Air Services units). I had previously invested in two of his comrades from the Australian Special Air Service Regiment (Indoor Sky Diving Australia ASX:IDZ – a great investment that will return my fund), as such I know that that unit tends to select and then train individuals who have a low tolerance for mission failure – I already knew the calibre of the individuals involved.

We were told that TAG offered “unique sensory experiences with a strong special forces flavour”. I can believe that from the memorable entrance – first impressions count and are quite helpful. Being ex-Army myself that got me intrigued (to be honest the sight of special forces soldiers rappelling from up high at the beginning of Mick’s pitch was quite exciting).

TAG aims to build resilience, teamwork, and leadership through two “experiences”: the Cave consists of the ex-Special Ops forces teaching small groups of people skills that could save lives.

SOE simulates what it’s like to be on a real mission. It comprises seven different high-end experiences where a small team of clients are taught how to plan, prepare and carry out a mission including hostage rescue, and escape evasion recovery.

Depending on which mission is chosen, it typically involves parachuting, planes, trains, automobiles, and boats.

I thought this was clever – it meant TAG could upsell customers six other times after they’d done it (SOE) once. I was sitting back thinking, “I’m liking this already”. But there were lots of reasons not to like it, including:

– The main risk – whilst Mick uses and will bring on more ex-special forces personnel to the deliver the authentic experience to customers he is fronting the business

– It is a body shop – you leverage people to get extra revenue and that is tough – it can be done and lots of businesses do it but if you had the choice you wouldn’t.

TAG’s conservative revenue for next year was $500,000, and triple that a year later.

Fellow Shark Andrew Banks got the ball rolling an offer $100,000 for a 35 per cent stake.

While I liked it, I felt there were many moving parts with the business but was willing to go in halves with Andrew ($50,000 each for 17.5 per cent apiece). Andrew is a great investment partner in this business, the target market for the flagship product are senior executive with decent disposable income looking for an experience they can get nowhere else – Andrew has amazing exposure to that space.

Naomi Simson then decided to throw her hat into the ring with a $100,000 offer for 25 per cent of TAG — plus a business manager — conditional on her being able to list it on her online platform.

The advice to Mick was to decide who he wanted to do business with before negotiating.

Mick’s gut feel was two sharks would be better than one so he asked Andrew and I to reconsider for $100K for 30 per cent, which we agreed.

FIRST IMPRESSIONS

One of the biggest mistakes an investor (or anyone for that matter) can make is to judge a book by its cover.

Thankfully, I did no such thing when the baby-faced Michael Timbs walked into the tank. The 24-year-old turned out to be a shrewd businessman – four sharks ended up taking the bait before a deal was finally done.

Unlike TAG, there was no sensational entrance for Betswaps … just a screen and a portable poster.

Betswaps is touted as the world’s first sports tipping marketplace. It essentially sells information. Michael was asking for $200,000 for 10 per cent equity, valuing his startup at $2 million.

Betswaps is not an online bookmaker – which I’ve got a real issue with. It sells tips or information for more than 40 different sports and over 100,000 different betting markets.

For example, if you’re a novice punter on Melbourne Cup day, Betswaps allows you to compare top horse racing tippers, see their win-loss record, profit and return on investment (for those who followed their tips).

Customers can then see who has tips available for sale and securely purchase them.

Michael was confident in his pitch and knew his numbers well: $100,000 in revenue, including $25,000 last month alone. It’s forecast to pass the $1 million sales mark next year.

Most of the revenue comes from selling advertising.

I was first out of the gate with a $200,000 offer for 35 per cent. I wanted to get this into play, I knew it had legs and wanted to smoke out any other interest.

Michael was resolute. He refused to budge, saying he was set firmly on 10 per cent and I was asking for too much.

Andrew came in with 30 per cent for the same amount while Naomi heated things up at 20 per cent.

New Shark Glen Richards made the playing field very uneven, agreeing to take 15 per cent equity for $200,000.

I lowered my 35 per cent offer by 5 per cent but to avail. Michael just stuck to his guns. It was annoying but I respected that. He could only do that (with confidence) because he had forced four of us on the hook.

He revealed that Betswaps had recently started raising capital and was overwhelmed with interest. A common tactic in this process but I was not surprised, if it was not true it sure worked as a negotiating ploy.

At that point I could have taken a punt or let it slide. Every investor knows they’re taking a risk in these situations and that you win some and lose some but I was confident that Michael and his team could deliver the goods.

In the end Glen and I agreed to take a 15 per cent stake for $200,000 in Betswaps. Michael got a great result only because he left lots of sharks in the game – if you are selling you want an auction with lots of bidders – the vendor always does better in that situation.

Unlike TAG, Betswaps gets to leverage network, software and a marketplace, its revenue is not proportional to its staff count. These businesses are enticing, they are the ones you want to own, run by good, capable and eager founders in an area they have a head start in.

Both TAG and Betswaps were successful on the day because they had the basic ingredients to succeed: a compelling offering, good business acumen and a passion for their venture.

It’s important to stick to your guns and have a clear plan when negotiating – always have a bottom line, middle and walkaway point. Otherwise you might give up too much equity and live to regret it.

Steve Baxter is an entrepreneur and investor, founder of technology startup hub River City Labs, founding director of StartupAUS and a Shark on Shark Tank Australia.

Missed an episode of Shark Tank? Watch them here.

This article was originally published on Linkedin. Read the article here.

Why this Perth inventor scored an own goal

There are times you come across a homegrown business idea with the right ingredients to succeed or a stellar product that’s destined for big things.

When Perth-based David Lambasa walked into the tank last Sunday to spruik Clever Score — his modular scoreboard business – there was a lot of promise. The product was cleverly designed and easy to use – two very good ingredients to have in any offering.

David was seeking $200,000 in return for a 25 per cent stake to help Clever Score expand internationally. He had been running the business for 10 years with no margin erosion – factors that looked good on the surface. But as we digged deeper there were some clear red flags which later turned into no-go zones. David was repeatedly asked how much sales Clever Score registered each year but somehow kept avoiding the question. Getting him to share some basic numbers on how his decade-long business had been performing was like trying to get blood from stone.

As a potential investor, I found that extremely frustrating. It felt like he had something to hide. It felt like I couldn’t trust him. And this is a major problem in any relationship. We gave him a chance to redeem himself and he finally revealed that he makes roughly $200,000 a year in sales. He insisted though that his profit margins were good. As we probed further we were told that his costs fell between $70,000 and $80,000 per annum, leaving a balance of $120,000 if the top end figure is used.

We’re later told that he takes home less than $75,000 in salary. How the remaining tens of thousands of dollars are spent remained a mystery. I found it to be the most confusing thing ever pitched to me. I had no idea what I was investing in, no idea what was on offer, and I had no details of what the required $200,000 would be spent on. In the end, I decided I couldn’t work with him and was out.

Here are some tips on how David could have done better:

1) Explain what the investment would cover. Whether it’s $200,000 or $2000, investors want to know how their money will be spent. Don’t forget that most investors have had their fair share of long nights, challenges and struggles to achieve success so why should they just sit back and freely dole out cash?

2) What problem are you trying to fix and how do you fix it. David wanted to expand internationally as he felt he had done enough to corner the local market. However, he no idea how to go about it and wanted ideas from us Sharks on how to maneuver international markets.

3) What are the forecasts or success metrics? Details were again scant and David had no data or numbers to explain the return on investment in return for $200,000. When buying property, would you part with your money without getting an understanding on the suburb, its median prices, growth potential and demographic information? So why are investors expected to give anything away without first understanding what’s in it for them? My advice to anyone pitching their business is to have precise answers when asked how their money will be spent. No pussy footing, no beating around the bush – just get to the point and back it up with facts.

Steve Baxter is an entrepreneur and investor, founder of technology startup hub River City Labs, founding director of StartupAUS and a Shark on Shark Tank Australia.

Missed episode one of Shark Tank? Watch them here.

This article was originally published on Linkedin. Read the article here.

Don’t forget to ask for help

Say you scored a mentoring session or some time with somebody who you think can help with your business, excellent and well done – good people are busy people. Whatever you do make it count – a mentoring session isn’t just a verbal website tour or pitch – don’t forget to ask the mentor how they can help. They can only help if you get them fully into the picture.

Talking to people about their business for the first time can be a lot of fun, I often find that I get a good lesson in an area of commerce that I may have never had direct exposure to before. There are some constant fundamentals that are important but not everybody can be an expert in everything, and sometimes an outsider’s perspective is very valuable.

There are some valuable things to make sure you’re prepared to tell the person you’re chatting to. That person is probably hesitant to enter into a Non-Disclosure Agreement (NDA) for many reasons, if you can’t trust them do not talk to them. You need a high degree of confidence and faith in who you’re talking to. If you’re not comfortable do not talk to them.

Whenever I get the opportunity to mentor businesses, I want to know big picture things like:

What does your business do? Why does it exist?
Type of business (Software as a service, app, fast moving consumer goods etc.);
Stage of business maturity (pre-sales, post revenue, cash flow positive, profitable etc.);
Goal – how big do you want this business to be?

I tend to get down into the weeds pretty fast and get a sense of how well you know your business and market. This gives me a good illustration of you – a way to affirm that you are the right entrepreneur with the right mindset and skills.

Whilst a lot will depend on the type of business and its maturity level I usually start with my old favourites – tell me about you, your team, the problem, the solution, traction and other big picture items. Then I follow with lots of boring financial stuff like:

– What does your product/service cost to provide?

– What do you sell it for?

(BTW – if you stumble here get ready for grief)

– How do you find your customers?

– What does it cost you to get a customer to be a paying customer?

– How is your customer churn? (How many customers do you loss versus gain/keep)

– Who are your competitors?

– Why do people buy from you?

– Why do people buy from your competitors?

The list could go on forever but generally any advice I give will relate to the above topics. You are in business – that may be a startup but forget the romantic notion of entrepreneurship and startup – you’ve already made that leap – you now have to make money. If you do not make money you are a charity! Save the startup bravado for the bar or a meetup!

I also want to be sure that you understand the cost to deliver your product or service. I want to know that you know or are in the process of finding out the best way to get customers – the only really hard thing about business is selling (the second hardest thing is collecting the money – maybe for another article).

Understand how to find the customers and what their drivers are. Understand who your customers are – some sectors are amazingly stratified meaning that you may get better success using channel partners, integrators and the like. All of that comes with margin and cost overhead. I want to know that you understand this.

At the end of the mentoring session you need to remember to ask the mentor how they can help further. If you’ve had a productive session and they haven’t been put off by your approach the mentor will most likely ask if there are introductions they could make for you to customers or other stakeholders. Don’t blow your chance to ask for something.

All mentoring relationships start with a first session, some (not many) continue on. Subsequent sessions should be an update, they should also come with a request for more help or introductions.

It is rare that any two mentors will give the same advice in a given situation, everybody provides their own perspective. Before you chat to a mentor, research and try to spend five minutes thinking about their business journey – the advice you get from a successful ex-telecoms entrepreneur will be very different to that of an experienced digital marketer. Not that either are necessarily wrong – they have just been coloured by different journeys.

And the best part is that you don’t need to take any of it. It is advice, not a dictator’s edict. Understand the context, understand how or if it applies to you at all and most importantly – keep listening.

This article was originally published on Linkedin. Read the article here.

More entrepreneurs, less innovation please

I have just returned from a federal government trade mission to China, the bi-annual Australia Week in China. I attended the Innovation stream starting in Shenzhen, then Beijing and finally Shanghai. There were other streams with over a 1000 Australians attending, culminating in a very Australian lunch attended by the Prime Minister and many other government representatives.

I went to look and discover new networks. I did not go trying to promote any particular business as I was totally unfamiliar with the landscape in a business sense and truly went to discover. I had been many years ago as a guest of Huawei in 2007 but that was to look at fibre optic transmission equipment. This was a different trip.

A few years ago I attended a trade trip to Israel with the Australia Israel Chamber of Commerce but this was far different to that. Given the recent signing of the China-Australia Free Trade Agreement and the fact the trip was done under the auspices of Austrade this style of visit was very different to something organised by a private chamber. Not better or worse just very different – more diplomats. As a regular attendee at conferences over the years I can assuredly say that this was no conference but it was a stage managed and deliberate attempt to join Australian business to Chinese business. I congratulate the government for the week – Australia-China trade will be all the better for it.

China is big. Big cities, big regions, fast grown regions (from fishing villages to 30M+ residents in 30 years). Regions of 20 million and 30 plus million just roll off the tongue. They are doing lots things in many places at once. If we, in Australia, are doing or would like to do one thing, each region has at least 4 or 5 different versions of it underway. Is that a reason not to do it – hell no – it is a reason we must; we just need to understand where we fit and/or who we can cooperate with.

A good example of this was our visit to HAX, the world’s first and largest hardware accelerator, situated in Shenzhen next to the largest electronic component retail space in the world in a district renowned for their design, manufacture and support of all things hardware. If you are going to do anything in the hardware space you need to understand their story as much as you can, whilst they have recently opened in the US it is their proximity to this density of electronic manufacture that makes HAX in Shenzhen a worthwhile place to visit and understand.

The Internet in China is hamstrung by the information restriction policies of the government (the great firewall) making Internet access hard if you like certain things that the Chinese government doesn’t. VPNs I found to be a so-so solution – they had a habit of dropping and/or not establishing and whilst I found that my iPhone worked OK in Shenzhen on 4G it only had sporadic Edge network access elsewhere. In Shanghai some overseas websites actually “slipped” through the firewall. One speaker mentioned that the Internet in China was a parallel universe and they weren’t wrong. For all of that it has not held them back – they have embraced ecommerce voraciously where local firms – thanks to the trade barrier that is the great firewall – can get a leg up past their overseas rivals.

One of the first speakers mentioned something that caught my attention, something we don’t seem to get in Australia – they spoke of the Mass Entrepreneurship and Innovation program (MEI). The subtly of the statement is as important as the scope of it: mass – they want lots of it. Importantly it places the correct emphasis on Entrepreneurship first – good entrepreneurs will use innovation to seize market/create share. It seems to me that everybody wanted to be in business, maybe that is an artefact of some other economic factor but from the people launching tens of thousands of startups each year in the Shenzhen region alone to the lady on the street recycling old mobiles for their constituent components and resources to be recycled, they talked about enabling business and having that drive/ innovation – they get it. They want businesses to use research and employ PHDs and understand that PHDs and research alone does not grow a business.

Want to go to China and check it out? Just go and do it. It is probably easier than Silicon Valley – it is surely cheaper. Just like Silicon Valley though do not go there and expect to have any impact early, if you plan to do business there (maybe raise money) you need to be all in. You need to learn the local language, you really need to use WeChat, you have to learn the cultural things that will see you have a value rich engagement. This is not that different to Silicon Valley – people over there do not like blow-ins, they want to see you operate maturely in that market and China, in that respect is no different. Before you go make sure you learn some Chinese, understand cultural habits to help ease into relationships, make sure you understand issues around intellectual property, talk to others who have been and get warm introductions.

Everybody we met was warm and friendly, one example outlined starkly how much you need to be prepared to enter any market when five Aussie investors took an hour to catch a cab (and a special thanks to the two girls in Beijing on the street who helped us get the hotel address translated into Mandarin on a post-it note so cab drivers could have some idea where to take us), if you can’t catch a cab then you probably aren’t ready to boot up in China. That being said, you need to start somewhere. #startsomething

This article was originally published on Linkedin. Read the article here.

If innovation really counts

I watched a debate recently on innovation on Q&A on the ABC that descended into an expert-free, free-for-all on NBN, where a quantum physicist had the ‘best’ opinion – where the desire for people to have the nation subsidise their internet connection came through loud and clear. I do not like the NBN, it was foisted onto us by dishonesty and naivety, it has proved very hard to unpick but there is maybe a way we can turn it to the good for our economic future. Before we try that – how about we all try to understand it ?

How much do we really care for innovation in Australia? I hope you can continue reading to the end as this is really important, there is tech and economics in this as there has to be. There is no quick understanding of the issues around NBN but if people are to have a debate they need to be better informed and as a nation we need a goal for such an undertaking as the NBN. If we are going to pour tens of billions of dollars into this maybe we should be even braver yet – stay tuned to the end please.

If the goal is ‘to have fast internet’ then we are missing the bigger picture. The NBN in Australia needs to be turned into a network that will ensure that innovation and enterprise in Australia is that well positioned that we will reap the benefits of it over the decades to come. No current NBN proposal from either side does this. The NBN we are getting will not allow that – it needs to change. And none of this has to do with fibre versus copper, vendor, Telstra or anything else.

Journalists who, in the same the article, decry that they do not understand this topic due to its technical nature but then bay for the NBN construction without any clue or understanding into what is being forced onto us carry much of the blame for the state of the debate. This is a complicated topic and unless you get it then you actually shouldn’t have an opinion – not when tens of billions are at stake not to mention the shape of the most important infrastructure we are yet to have. There are too many parts to this puzzle to pick and choose which bits you want to understand. There is no easy button on this one. You need to understand the technology and the ramifications of the new competitive landscape if you are to have a voice in this debate. Simple ‘fibre versus copper’ sound bites have led us into where we are today.

There are many other things you can do to fix competitive telecoms in Australia before you bring back a monopoly owner, things like straightening out land access for network build to prevent gaming including road, rail, power utility carve outs; regulate facilities access and similar competitive regulations to prevent richer carriers gaming them; undertake a re-costing exercise of duct and facilities access; the number and location of network interconnection points, concentrating on outside metro areas where service levels and choices are diabolical – but given some recent press and a looming election campaign I will stick to access related issues around NBN.

I encourage people who want to be informed to research these topics – where research isn’t reading the blogs of pundits! I am out of the telco game and have no dog in this fight – I just want a real debate fuelled by facts where experts get to supply the facts, not politicians, theorists, academics and those NBN fans who want ‘NBN or bust’ because ‘NBN and bust’ is an option here.

Before you start you need to know a few things about networks. If you own a network that has a certain amount of capacity – say 100mbit/sec then the cost to operate that network (not the price charged to the user) is materially the same between 1% of utilisation and near 100% utilisation.

Before NBN, a broadband provider could build a network out, connect up customers based on relevant technology for their product offering, the technology would vary based on local issues and market factors. But the provider would make its own investment decision, own the network and have a fixed cost to operate regardless if it operated at 1% or 95%. The cost to service the customer for access was fixed, the only time you really started adding incremental costs was when you had to purchase capacity from outside your own network (international Internet capacity or networks you didn’t own for example, this term is transiting off network).

What’s more, adding capacity later is usually cheaper than the original construction because telecommunications equipment has reduced in price per unit of capacity in line with Moore’s Law for the last thirty years. There is no sign of this slowing in the foreseeable future.

Network ownership is great as the upside leverage is huge. So why price in scarcity when it does not exist?

If you build and own a network it has a fixed cost to operate – so why would you bother to set speed hurdles for customers to access it? Sure there are some contention issues in the network – the FTTH network has about 80Mbit/sec to each house[i] – not bad; where you have an xDSL last few hundred metre FTTN solution there is no sharing but the headline speed may be lower[ii]. The point is – why do we have access product speeds such as 12/1, 25/5, 50/20, 100/40 when the network operational cost for everybody to run at top speed (up to 80Mbit/sec on FTTH) does not increase[iii]?

People will say a few things on this – if you use more it must cost more? Wrong. We are just talking about using the NBN here – not transiting off it and using the internet in general where real expenses add up pretty fast. This is just about going from your home on NBN to the edge where NBN hands you off to your ISP. There is zero incremental cost in this if it is engineered correctly[iii] – it sounds illogical but it does not cost any more if it stays on network. If we can keep all of the network traffic inside of Australia there are further cost and economic benefits as well – see interconnection points further down.

Other will say – but it should cost you more – if you use it more then you should pay more – that is just fair right? Why? I pay one charge to use the road for my car – registration, a little more through petrol but I can regulate that through fuel efficiency choices. I do not get charged more if I travel at 100km/hr instead of 85km/hr, nor do I get charged more if I fill all 5 seats instead of just one. Why don’t we have this approach to the network ? Why can’t we view NBN more as a road network in the way it is paid for, used and charged for?

The next mind warping feature NBN has baked into it is the Connectivity Virtual Circuit charge – the CVC. This is a fee levied onto your ISP to connect to NBN concentration points, it is a fee charged per megabit per sec (Mbit/sec) per month and currently stands at $17.50 which in volume can come down[iv] to $11 (if you average 1.5M per user per connection point under a current 2 year trial). ISPs gets to aggregate this across all users at a connection point but if you use 1mbit/sec for one month (320G downloaded in one month is 1Mbit/sec) then you will cost your ISP at least $11 and generally around $16 with various standard volume discounts[v]. They will have to recoup that or go broke – economics. Right now, under a temporary fast start plan each ISP gets 150Mbit/sec CVC thrown in, this has led to the cramming of users into this free allocation, it doesn’t take very many users to overflow 150Mbit/sec – 2 technically who enjoy a 100Mbit/sec home connection. This is temporary.

Under the previous, non NBN, competitively owned setup this did not exist at all. Operational expense was present in the form of aggregated and average fixed costs to operate a network but the operator got to set those costs through investment decisions in many cases and a competitive market for backhaul[vi]. It would come in costing a lot less on average and it would be fixed and known, this cost to the ISP was closer to $1 per month[vii] if you were to calculate it.

CVC was included in order to induce a commercial return to ensure the cost of NBN stayed off the budget as it was a ‘commercial’ return – and that is the hard part about changing it – monkey with that and the build cost goes onto the budget. Mind you we are still borrowing and paying interest on NBN capital – we just ignore it for the most part as if it is irrelevant. Magic puddings taste great.

Netflix, Stan and others have brought the realities of the broken NBN model into clear focus. No longer is it if we will use heaps of data across a modern broadband network because we are, every day we seem to get more ways to view, download, post, update etc – more data usage is a given. What does 1Mbit/sec mean – it means 320 gigabytes per month if you use it 100% flat out every last second of the month. For the most part we do not use our internet connections that way but the rise over the last decade of the Silicon Cockroach (a term invented by John Sidgmore[viii]) whereby things, programs, software will, at all hours of the day and night tend to our needs has increased the average ‘noise floor’ of home minimum usage at all hours of the day. Think of your iCloud, Drobox and other similar things constantly syncing up files or transferring our sleeping/walking habits etc to the cloud. Lay on top of that the multiple devices we own, the rich media that we now want streamed (and are finally being allowed to acquire legally) in ever increasing numbers, to ever more rooms in the house… we need the speed a modern broadband network can offer and we need the ability to move traffic over it at an economically rational cost to us. Having a network charge us at least $11 extra for every new increment of traffic/speed is not that network.

For every 320G of extra data you need 1Mbit/sec ($11 to $17.50 per month under NBN), if you download that faster than every 30 days you need more. It is also true that not everybody uses all of that speed all of the time and some efficiencies can come due to the distribution of usage patterns but, and the introduction of Netflix is testament to this, users are starting to use more and more. We get around this currently by the data quota – how much we are allowed to download before some form of extra tariff or some technical means of speed limits come into place. If the network costs no more to operate then why charge more to the end user, why do we ration a service that has no coupled cost for additional use ?

Now for the really innovative bit.

Open the ports, remove restrictions – give us all the highest speed the network will allow for – not the solution the budget needs to hide the cost from us. Opening the ports means no speed tiers (you connect at maximum speed for your technology) and no data usage charge (no CVC) therefore no quotas for downloads. Will it cost more to build? – Not materially, if at all[ix]. Will it cost more to operate? – No. Will it charge customers less? – No it shouldn’t, if the requirement to meet NBN Co operational expenses is not coupled to usage of the network (NBN expense does not materially rise for usage) it can generate the same revenue but allow end users to grow their Internet use so Australia can be more productive after its introduction, don’t link price to variable usage. Will customers use it more? – Yes, and isn’t that the idea. Remember that the way the NBN tariffs are currently structured means that if you have a 6 seat vehicle you pay more than a 5 seat vehicle and if you drive that vehicle at 100km/hr instead of 80km/hr you also pay more.

This is for using the NBN only – as soon as you transit off NBN[x] there will be external charges but this would also give a non-incrementally charged data path between every Australian on NBN. This is how it essentially works now under a non NBN model – an ISP has a fixed low cost to operate their network but a high variable (in many cases) cost as soon as traffic goes to another network.

Without artificial speed and data transfer constraints the NBN would be a world leading innovation fostering tool that would see us actually be able to hold our heads high in these stakes, it would be the equivalent of a 4 lane road on every street with accompanying highways to handle the load – a revolution.

While we are at we need to fix interconnection – this is how ISPs in Australia exchange traffic between themselves, sometime separated by mere metres in a data centre, many times this can cost more than to buy internet access from overseas – ridiculous. Through a small enquiry and regulatory instrument the government could make modification to carrier licences and service provider conditions to mandate that they interconnect and exchange traffic on a more equitable basis. This has improved over the years but needs to be streets better. As part of a license to connect customers to the Internet there needs to be a mandate to interconnect more rationally – maybe as a requirement to connect to NBN as an ISP. If this is done right we will also assist in the building of more local content for these NBN wide open customer connections to consume.

Why is it we can have a Hume or Bruce Highway without per kilometre per hour levies, kilometre travelled fees or toll gates that restrict shape, colour and speed of vehicle. We seem to be content to understand that the cost of the road will be paid for in time with an increase is economic activity, community benefits and subsequent lift in the revenue base – we do not restrict their use because that makes no sense. We do tax vehicles through registration and fuel excise but the spending on roads has been decoupled from the revenue for some years and the cost to build them does squarely sit on the budget. When the amazing positive upside of an NBN style network is actually clear to all in the debate why don’t we take a highways style approach?

Many dangers lie ahead with proceeding on the NBN even on the terms I am proposing, let’s not see a repeat of the regulated return on asset shambles that have dogged the power industry, where gold plating is seen as a way to increase the asset value and therefore allowing for a greater actual revenue take based on the asset value. Putting a network in the hands of a monopoly provider WILL lead to monopoly behaviour, fibre networks will fail and need repair, their failure mode is different to copper but if the owner of the NBN displays as much care for the asset as Telstra showed for its copper network then it will break and this problem will just be kicked down the road.

There are real risks with this more utopian style NBN but the reward can be amazing, if we build it for innovation instead of as a way to win an election then we can start to realise the benefits of what could be a truly world leading network.

NBN is currently about the monopolisation of the telecommunications access networks in Australia, it is the emasculation of facilities based competition and in return we are getting the world’s most expensive and commercially inflexible network – if we are truly going to reregulate ourselves into this corner let’s at least make the prize worth the pain.

If the answer is to build a new monopoly – did we really understand the issues and then ask the right question?

[i] FTTH based on a 2.5G GPON drop, 32 homes using 2.5G equates to about 80Mbit/sec each

[ii] FTTN speeds average 46M – up to 100mbit/sec if close.

[iii] Work in the core of a network may be required to ensure large capacity throughput in the entire network such as increasing trunk capacity.

[iv] $11-$17.50 bracket is a two year trial of dimension-based discount tiers

[v] As of March 2016 a mbit/sec/month of internet from LA to Sydney cost less than $5/mbit/sec/month – under NBN that same traffic transmitted from your local NBN exchange will cost between $11 and $17.50!

[vi] Backhaul is the carriage of data between different location on a network

[vii] Highly depend on user penetration, technology choice and other factors and could include a variety of other costs such as end customer access, depreciation for build, exchange access costs and many others.

[viii] http://whatis.techtarget.com/definition/silicon-cockroach

[ix] This will depend if intra NBN trunk routes need to be re-engineered to remove contention in the core

[x] Transit is when your internet data leaves one network to go to another, in the NBN context when your data leaves NBN and goes overseas to (say) Facebook, it would also mean when you exchange data between to an Optus user if you are a Telstra user.

Stephen Baxter (@sbxr) is a telecoms and Internet Entrepreneur with over 20 years actual and successful experience in ISP and telecommunications companies, he foundered early Internet Service Provider SE Net; co-foundered PIPE Networks – a wholesale provider of data centre, internet interconnection, backhaul fibre networks, submarine fibre networks and more; he worked with Google Inc in California building multi terabit networks across North America before becoming an early stage investor in tech startups and foundered Brisbane tech startup co-working space River City Labs, foundered and underwrite the Startup Catalyst program; he has been on the boards of listed carriers including Vocus Telecoms; he has been heavily involved in the early days or founding of numerous industry groups and forums such as the South Australian Internet Association, SAIX, ADNA, AuDA, INTIAA, IIA, AusBone and AusNOG.

[I want to get across some core concepts and realities in this article but I have deliberately tried to mainstream many technical concepts, probably not well enough but too much for some, to help the reader so I apologise to my former industry colleagues for some parts of this, I thank JSL and others for the proof read – all mistakes are mine not theirs]

This article was originally published on Linkedin. Read the article here.