Lost Opportunities and hypotheticals

In 2002 TelstraClear approached the Auckland City Council with a view to rolling out its cable TV network in Auckland. A FUD campaign by the New Zealand Herald put an end to that (read the intro to Bernard Orsman's piece) and Auckland missed out on the opportunity to have the Holy Grail of telco deployment - network competition.

Imagine the scenario if TelstraClear had been given the go-ahead. Auckland would have provided a customer base of well over a million potential customers, giving TelstraClear the ability to scale its services up far more than it could with just parts of Wellington and Christchurch. It would have become a power house in the home broadband market at a time when regulation was "light handed" to put it mildly. This was before unbundling, don't forget, when you could have any broadband you liked so long as it came from Telecom.

A resurgent TelstraClear would also have given Sky TV a run for its money in the content world. Less than a year earlier, TelstraSaturn (as it was then) and TVNZ had signed a joint venture to provide set-top boxes throughout the market to offer a new wave of TV services. The content market would not be quite so one-sided and we'd have at better range of choice in the  market, even without regulatory intervention.

Unbundling may or may not have happened. I'd like to think Telecom would have gone out of its way to win other retail partners to its network, competing on price and service, instead of "walking backwards slowly" fending off regulatory and competitive pressures. If TelstraClear had opened its cable network to the wholesale market we would have two well-placed providers offering network competition at both domestic and national level. I would expect that within the decade both would be fighting to deploy their own fibre upgrades to these networks and by now we'd be well on the way to a fibre to the home service. Competition in the pay TV space would have been far more dynamic and we'd have multiple operators offering differentiated service.

Instead, TelstraClear was knocked back and couldn't compete in Auckland. The Commerce Commission decision not to allow unbundling put the company back even further and eventually, as we know, the whole thing was sold to Vodafone and Telstra exited the market, turning its attention to Asia instead. Sky TV is the only pay TV operator in the market and Telecom was forced by the government to split into two businesses. We're now on to our third Telecommunications Act in a decade and a significant competitive opportunity was lost.

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Mobile network operator 2Degrees has made a huge impression on the mobile network, offering products and services the other mobile operators seemed reluctant to consider. Shared data, rollover minutes, simple pricing tariffs.

But 2Degrees is a mobile-only operator, which means the big guys still hold sway in the all-important "one throat to choke" market segment. Plenty of customers, business and residential, want to deal with one provider and if 2Degrees is mobile only, that limits its appeal to the truly cost conscious.

What if 2Degrees had bought Orcon? The combination of fixed-line capability, including unbundled exchanges and cabinets, plus a mobile network would open doors that previously hadn't existed for 2Degrees. Not only would the customer base be able to opt out entirely from the big two, but 2Degrees would in turn be large enough (and diverse enough) to offer wholesale services to smaller ISPs.

In the fixed line market there isn't much margin, to put it mildly, but in mobile 2Degrees would be able to undercut Vodafone and Telecom in terms of MVNO offerings, and essentially use that as leverage to shake up the entire telco market.

Years ago I read a paper about the psychology of the Apollo space missions (back when the human race cared about such things) and why having three astronauts was important. You never end up with a split decision - each decision is either overwhelmingly for or against - it's always two to one. That gave the mission a kind of stability that was vital when you're millions of miles from any kind of command or support structure.

Markets operate in much the same way. With two players the opportunity to "take a breather" and to "sit back for a bit and recoup on our investment" becomes an option. We see the "cosy duopoly" form and any dynamism is muted.

With three players (or more - I'm happy if we have more so long as it's sustainable) that situation never arises. You can't rest on your laurels and eyeball the other guy across the divide because that whipper snapper will jump up and bite you on the leg. And if you and the new guy reach some kind of stalemate you can be the other big guy will have some offering that you have to respond to.

Having 2Degrees in the total telco market would, I hope, do something along those lines. It would keep the other players honest and would potentially mean we see more differentiation right across the board.

It's an expensive business though, being a fixed-line ISP, and with narrow margins and an impending 700MHz spectrum auction, I can well understand 2Degrees' decision to stay out of the bidding for Orcon.

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Vodafone has yet to announce its plans for UFB retail, but it has announced a trial of LTE in rural areas.

I've been using Vodafone's LTE for a couple of weeks now and while the speed is quite variable (ranging from download scores of 3Mbit/s up to 80Mbit/s) it clearly provides a competitor to a fibre network I won't see for at least another four years.

So imagine if Vodafone decides not to bother with UFB. Imagine if, instead of deploying its marketing might on fibre, it pushes big into 4G throughout the country.

Vodafone could quite easily deploy LTE capability around New Zealand prior to UFB arriving in town. It could bite the bullet and introduce far greater data caps (50GB, 100GB) on its LTE network and take the hit in the short term for long term market share gain.

(By quite easily I mean "if money were no object" naturally. This is a hypothetical).

After all, given the choice between 50Mbit/s download speed today, but with a smaller data cap, and 30Mbit/s download in four or five years' time, I know which I'd opt for, especially if Vodafone did away with capped plans and let me use data and pay for it as I go as I do with electricity or voice calling at home.

Vodafone would gain market share, but more importantly the customers would be on its own network, free from regulation and from government intervention. No need to worry about the price of copper or the cost of the fibre deployment artificially hiking it up - just put all the customers on your own networks (unbundled, cable and 4G) and move on while the rest of the market gets bogged down in regulatory reviews, UBA pricing determinations and all the rest of the distractions that come with the current market.

Telecom would dominate the UFB market, Chorus would still have to offer fibre backhaul from the RBI towers at a regulated rate, Vodafone would eventually move all of its traffic over to its own fibre backhaul (thanks TelstraClear) and would use cable and LTE for the last mile service to customers. Eventually you could even see Vodafone deploying its own last mile fibre connection, if it really wanted to, using open access ducts.

But without Vodafone's support in the UFB market, uptake rates would be a lot lower and potentially Chorus would miss its targets. The other LFCs would, presumably, still make theirs but for large swathes of the population, UFB deployment would cease as the money-go-round stopped. Either the government would have to rethink its level of investment or do something else equally as radical.

The upside to it all is that you'd have infrastructure competition, albeit in the bizarro world of fibre versus LTE, and that I for one would get better speeds sooner, which is clearly a win for me, but the downside is the possible failure of the UFB and that's not something I'd like to see.