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NBN to be worthless in decades

In the technology industry, things change quickly. Forecasting future demand and revenue from an infrastructure project is not easy and nothing is certain.

Just ask NBN Co chairman Ziggy Switkowski who, in an interview with The Australian Financial Review, explained that forecasted future demand and rates of return on the country’s massive fibre-optic project are almost impossible to accurately predict after 10 years.

“You can’t claim to make anything future-proof and in this business to look much further out than a decade is to accept that there’s huge uncertainty beyond that time period.” Mr Switkowski was quoted as saying. The NBN rollout is estimated to be completed by 2021.

In the past year, the NBN has been front and centre of both sides of government as the budget deficit comes into focus. The Labor government’s NBN would have provided downloads speeds up to 20 times faster and upload speeds 40 times faster than the Coalition’s NBN. However, it would have cost around 30% more.

Certainly the Labor strategy would be much more advanced but the payback period and rate of return is so difficult to forecast that the increased spending might not be feasible. According to previous estimates published by the NBN Co, the rate of return would be approximately 7.1% however a revised estimate, released last week, has lowered that figure to 5.3%.

Mr Switkowski says the only way to lessen the risk and improve the rate of return was to use more of the 100-year old copper network and cut infrastructure costs. However cutting costs is only half of the ingredients needed to make the NBN Co successful.

The forecasted rate of return was lower as the result of lessened customer spending and slower growth, both of which could be dwarfed by the biggest question facing the NBN in coming years: Will we need a fixed internet connection?

In the next decade, if faster wireless alternatives appear throughout the country the NBN may be a complete failure. For example, Telstra (ASX: TLS) has recently announced it has begun trialing new 4G technology that can produce speeds of up to 450Mbps – dwarfing the Coalition’s NBN which is capable of only 50Mbps.

Although many people believe they will never have use for such high speeds, the internet is constantly evolving and our dependency upon it is only getting larger. Movies, music, news, communications technologies such as VoIP and 3D printing will soon be accessible only via the internet. Professor Rod Tucker from the University of Melbourne recently said, “Appetite for bandwidth in Australia is growing at about 40 per cent per annum, which means that in five or ten years we’ll be needing something like… a few hundred megabits to a gigabit to each home” – more than the copper network can provide.

Foolish takeaway

Telstra and Singapore Telecommunications’ (ASX: SGT) Optus will be basking in the fact that they sold their old networks to the government for $12 billion because the future of internet is unlikely to be fixed underground in cables. If the NBN Co truly want to compete with faster wireless technologies they should start by offering a product customers will want for years to come – and that’s not 100 year old cabling.

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Motley Fool Contributor Owen Raszkiewicz does not have a financial interest in any of the mentioned companies. 

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