Chorus ups the ante on fibre speeds

Chorus has announced a new line-up of fibre products designed to encourage uptake of the UFB.

In essence, this is a very good move. In a world where VDSL can offer equivalent speeds (albeit with caveats on that) at the same price but without the horrendous experiences of having your street/garden/house dug up to connect, any fibre service will need to offer significantly more in order to compete.

Chorus is proposing a 100Mbit/s download speed and 20Mbit/s upload speed service s its new entry level product for residential customers.

Business customers can get a 1Gbit/s symmetrical service for a wholesale price of $275 a month.

This is great news as it gives customers a real reason to move to fibre. Stuff 30/10 – if I can get 100/20 for the same price, I know where I’m going.

It’s good for Chorus too, because the more customers taking up fibre, the fewer there are on copper which, as you know, is fully regulated and will be providing far less revenue in the future than it did in the past.

Ultimately, we want more investment in fibre, more customers using fibre and less effort and money spent on the copper network. Once the fibre has been installed to my house, I’ll be ringing someone (Telecom, presumably) to come and take out the copper connection.

For many in government, this question of what happens to the copper network is a big issue. I don’t see it that way. Eventually, 75% of the population will have fibre to their home. At that point, the copper network in those areas can be switched off and pulled out of the ground. It is surplus to requirements and given the price of copper on the open market, should fetch quite a pretty penny.

On top of that, Chorus won’t want to keep two networks operating when it doesn’t have to. I would back switching off copper to that 75% as soon as the lines are in. It’s not forced migration, but it is a one-way door. There is no going back once the fibre is connected.

That leaves us with the 25% of the population that won’t get fibre under this current project. That’s also clear cut, in my view. Chorus is still required to offer those essential services, the old Kiwi Share services, to that population base, and until there’s an alternative it must continue to do so. Of course, we need to come up with that alternative as quickly as possible, and make sure it’s capable of delivering on the broadband future promise.

At the recent NorthPower launch celebration, the Prime Minister hinted that the UFB network isn’t going to be static once it’s completed. He suggested (vaguely, mind you) that there could be more to come, and frankly that’s a good thing. Solving the rural broadband problem is going to be key to any future economic strategy in New Zealand.

There are caveats around Chorus’s new product set. These are commercial offers, and exist outside the Crown Fibre contractually-obligated regime. They’re Chorus offers, so may not be offered by the LFCs who will once again be miffed at Chorus making changes they’ll have to either match or ignore. By going it alone, Chorus runs the risk of alienating its LFC partners and we could end up with a two-tier structure of Chorus versus the LFCs. That’s down to Crown Fibre’s management plans, and I’d strongly urge CFH to do more to coordinate these kinds of activities.

The devil will be in the detail, as ever, and we need to know about the quality of the service. What will the committed rates be, what happens next year when these contracts expire – will the prices go up – and what role, if any, will the Commerce Commission have in the future fibre price disputes, because these are commercial products, not the ones offered through the Crown Fibre contracts and so, presumably, are open to regulation.

But when you’re facing declining revenue in the copper world, as we’ve said all along, the best way forward is to encourage the migration to fibre and these new plans should certainly help with that.

Shuffling the cards, but no new hand for Chorus

Chorus and Crown Fibre have announced several changes to the UFB contracts that should help Chorus better manage its costs.

There are a few changes that seem quite reasonable.

Chorus will have more flexibility about work within a candidate area and what order it does stuff. Apparently the original contract was quite specific about the process – Chorus now has some latitude to do things the way it would like to. 

That will leave 12,000 households without fibre in the short term when they were expecting it, but they won’t miss out entirely. They’ll just have to wait a bit longer.

EDIT: I’ve misunderstood that bit. This, apparently, relates to business areas where Chorus has an existing point-to-oint fibre footprint that pre-dates UFB. Previously they were required to dig a lateral to every premise boundary and make every area GPON-ready by December 2015 regardless of demand. Now they will be allowed to do these works on demand, provided all the work is completed by December 2019. Apologies for the mis-reading.

It also gets a more regular round of progress payments which should make it easier for the company to manage its cash flow. Having been involved in a building project last year, I know how hard it is for contractors to manage cash flow when customers want to see an end result before paying. Sharing that load out on a monthly basis will no doubt help Chorus tremendously.

And instead of having to replace perfectly acceptable Cat5e or 6 or even fibre deployments from a business park or apartment building or school, for example, Chorus will now be able to make use of existing networking gear, so long as it’s up to spec.

That’s all fine, but I can’t imagine any of it will make a huge difference to the costs of deployment.

There are a couple of issues that concern me, however. Chorus gets to use its existing fibre networks and simply upgrade them to UFB capability. In this case, ‘upgrade’ is something of a misnomer – it will run UFB over the top of point-to-point fibre. If that sounds familiar it’s because last week Vodafone suggested Chorus do just that with its fibre and HFC networks and both the minister and Chorus dismissed the option out of hand.

But Chorus’s own fibre is perfectly acceptable.

This is very interesting. It makes me wonder – again – why Chorus isn’t using existing fibre from other providers. It may well be doing so – ministry officials tell me Chorus is allowed to roll out UFB over existing infrastructure if it’s up to the job, but I haven’t found a single instance of that happening. Instead of signing deals with Vodafone or CityLink or Unison or Network Tasman, Chorus has overbuilt with its own network.

Now Chorus will be allowed to use its own existing fibre to compete with these outfits as well. Chorus will be paid to take on its competitors – paid by the government with public funds to potentially crush the commercial ventures that are in the market today.

If Chorus is going to use its own fibre assets, it should be required to use other companies’ fibre assets as well on a commercial footing. Otherwise we’re paying to remove competitors from the market and I’m not sure that’s the ideal outcome.

Finally we see Chorus’s marketing budget slashed in half – from a paltry $5m a year to a pointless $2.5m.

Currently Chorus’s efforts in this area have been woeful to put it mildly. Filming a TV commercial in New York to demonstrate the power of the UFB is a bizarre way to spend your money (what on earth does showing art on an electronic bill board in New York have to do fibre in New Zealand?) and the Gigatown campaign has created more noise than it has benefit.

I’d expect to see the government step up and promote its UFB initiative but there’s no sign of that happening. The onus is on the retail service providers to promote the UFB, but of course that ignores the all-important pre-sales role of telling customers what the UFB is all about. Nobody’s selling the sizzle – and the RSPs will only sell their products, naturally – and now we have Chorus to all intents and purposes withdrawing from that marketing campaign.

So what of the other players in this fibre deployment? Will the Local Fibre Companies also renegotiate their contracts? There’s nothing planned but I’d expect to see some of them come to Crown Fibre with a few changes they’d like based on this. I’m sure they also would like to avoid having to re-fibre a building that’s already got decent infrastructure and the like. The ball, apparently, is in their court to do so.

The changes as laid out in the press statement aren’t going to set the world on fire. Sure, they’ll enable Chorus to avoid some stupid costs and to better manage its cash flow, but unless something changes radically we’re not going to see Chorus bring down the price of each connection or increase the speed of the rollout. Northpower Fibre, by way of contrast, will finish years ahead of schedule and do so at a fraction of the cost per premise passed.

I’d rather hoped we’d see a radical overhaul of the way Chorus is doing business. Instead, this feels very much like a re-shuffling of the same cards.

TUANZ welcomes Vodafone’s offer (but does Big Red understand what it’s saying?)

I think it’s great that Vodafone has offered to let us use the cable network it got from TelstraClear as part of the UFB build. Just think of the cost savings it would deliver to Chorus, and of course Chorus would be freed up from working in Wellington and would be able to fibre up my house sooner rather than later.


But I wonder if Vodafone has worked through all the ramifications of its offer, not least of which is that the UFB contracts were awarded on the basis that the winners have no retail business. Vodafone will, presumably, have to structurally separate to take up the mantle of UFB provider.

It would have to spin off its cable and fixed network assets into a separate business or, depending on which way you look at it, sell off its retail arm and mobile phone network. Then the fixed line business (let’s call it “Saturn” because that has a nice ring about it) would be free to pitch for the UFB business.

Interesting times.

Putting aside that approach, Vodafone’s suggestion does raise a very interesting question: why is Chorus overbuilding networks at all?

In the Hawkes Bay, Unison Fibre is an offshoot of the power company and has an extensive fibre network around the main centres. Yet Chorus has overbuilt it street by street.

In Nelson, I attended the opening of the UFB network build with the minister and the mayors of the region. The mayors were forced to point out to the minister that in fact the UFB wasn’t a bright and shiny new toy for them to play with, that they’d had fibre in the region for a decade or more and that a community initiative had built The Loop long before central government came knocking. Again, Chorus has overbuilt the network already in place.

Why is it that we’re seeing new fibre laid side by side with existing fibre (and yes, with existing cable) when Chorus should be working with these partners rather than excluding them? The UFB network deployment doesn’t require Chorus to build every kilometre of fibre in its region, but rather to provide a service at a certain service level. So why overbuild when there are places that don’t even have fibre?

I’m all in favour of infrastructure based competition, but not when there are still areas that don’t have access at all. Rather, we should build out the network and then see about building competing technologies.

I would hope someone at Crown Fibre Holdings is making this suggestion to Chorus right now, because it still has a lot of Auckland and Wellington to build and plenty of that already has fibre owned by FX Networks, CityLink and even Vodafone and Telecom. Leasing capacity is a lot cheaper than building, but of course Chorus wouldn’t then be able to reap the rewards of owning the infrastructure for the next hundred years.

It also raises another key question, that probably should have been asked before the “fibre to the home” project began. Should we have defined the technology we wanted or should we instead have demanded a certain level of service and been technology neutral?

I for one don’t care how the hole in the wall connects me to the world, so long as it’s blisteringly fast. If it’s copper or fibre or fixed wireless or 4G or bean cans on string, I really don’t mind so long as I get high speed, low latency and a consistent service.

A technology neutral approach would mean that Vodafone’s offer could be considered and that the model we are using for rural New Zealand would be applied to the entire country. We’d have more ultra fast broadband service offerings and more competition, and that’s not a bad thing. As it stands, however, we’re wedded to fibre and unfortunately cable isn’t fibre any more than copper is. 

I think Vodafone would be unwilling to structurally separate the company in order to deliver UFB over its cable network, but I do think Chorus and Crown Fibre Holdings need to take a close look at what’s already in the ground and whether or not UFB can be delivered over existing infrastructure. 

Chorus 2.0

The Terms of Reference (ToR) for the review of Chorus’s financial situation are out and Ernst & Young has been appointed to undertake the review.

The ToR are brief and to the point. The review will focus on the impact of the Commerce Commission’s UBA price determination on Chorus and its ability to take part in the UFB and RBI projects.

The review will also look at Chorus’s financial capability to deliver the TSO and abide by any standard Terms Determination (STD) that has been decided by the Commission.

Then the review will look at what Chorus could do to increase its “financial flexibility” including making changes to its costs, its debt facilities and any change to its dividend policy that may or may not take place.

The second half of this review is the key to this whole issue and to my mind it needs beefing up somewhat.

I don’t for a second believe that reducing the earnings from one part of the wholesale regime will cause the company the kind of trouble it claims. The numbers just don’t stack up and Chorus simply should have known this was coming. If it’s claiming that it didn’t expect the drop, questions must be asked about management’s ability to run the company. We all saw this coming, and by all I do mean all – even the Minister of Communications who introduced the bill knew the impact would be severe, and so built the three-year delay into the Act.

It’s not revenue coming in that’s the problem. If there is a problem,  it’s the costs going out at the other end of the business that is driving Chorus’s actions.

Currently, Chorus is paying more than double the amount it expected to connect each property and that’s after a project to reduce its spend.

Each property costs around $3000 to connect. By contrast, the OECD tells me that in Europe, fibre to the home costs tend to run at around EU1200 each, while B4RN in the north of England (a community-led project running fibre to rural and remote communities) spends around GBP1000 per premise connected.

We’ve all heard the horror stories of UFB connections that take days if not weeks, that involve teams of contractors standing around wondering what to do next. I’ve seen pictures of holes drilled in walls, of drive ways dug up and then re-dug. I’ve heard failure rate figures of up to 80% even after the connection is made, and that all adds up to two things: unhappy customers and huge cost overruns.

This is the problem that needs resolving. Forget about the Commerce Commission’s look at copper pricing, Chorus’s spend on fibre is the problem.

I’ve seen Chorus installations, and I’ve seen Enable and Northpower installations and there’s not a lot of difference on the surface.

Enable was drilling in a line down a drive way when I visited and the team of three were working efficiently and well.

Northpower was connecting via overhead lines and each two-man team can do three properties a day without too much hassle.

So where does the cost difference come from? Why is it that smaller LFCs can complete their builds ahead of schedule and at a reduced cost while Chorus can’t? That’s a question I’d like to see the E&Y review address – perhaps we can compare and contrast Chorus’s build with another company doing the same work here in New Zealand.

One thing all the UFB and RBI contractors would benefit from is a review of the laws regarding access to buildings.

This is a replacement network – it’s a once in a generation upgrade that will result in a new infrastructure for the country. It’s high time we treated it as such and stopped getting in the way of the fibre deployment.

I’d like to see the Telco Act reviewed to make it easier for companies to deploy fibre. Currently roughly half of the costs go towards getting the right stamp on the right piece of paper and that’s just unacceptable. We’re replacing like for like (well, fibre in place of copper) so let’s just treat it as such and stop all this nonsense.

On top of that, I’d like to see some real stats from Crown Fibre on the deployment itself. We get a national average of uptake and how many properties are now able to be connected, but how are the LFCs and Chorus tracking against service level agreements?

I’ve been hearing some shocking stories of delays in getting orders through to the start line (the clock doesn’t start ticking until orders pass through the design phase, apparently, and many of them are delayed at that point for months in some cases) and missed installation dates that are driving ISPs crazy. Remember, the ISPs are the customers here – Chorus and the LFCs don’t work for us, they work for them.

CFH has a major role to play in sorting out the mess at that end of the process and that’s something TUANZ would wholeheartedly support.

Radically changing the regulatory environment to overrule the Commerce Commission to change one price input at the other end of the process is a mistake on many levels, but perhaps most significantly, I don’t think it will get Chorus out of this hole.

Bonfire night

So what’s it to be – a sky rocket or a damp squib?

Tomorrow is November 5 and for most people of UK decent that
means Guy Fawkes, gunpowder, treason and plot and, of course, the burning in effigy of a 400 year old terrorist.

This year, November 5 is also the day the Commerce
Commission comes out with its final price for the regulated UBA service – that
is, the price ISPs pay for part of the wholesale service they buy to sell us

The draft determination knocked almost 25% off Chorus’s UBA
price and that apparently was a surprise to all concerned. It wasn’t, of course
– we were expecting more than that given how much CallPlus can sell its
wholesale service for – but both Chorus and the Prime Minister were apparently
gobsmacked by it.

Chorus says the reduction will take $160m off its annual
revenue and will require a major rethink in terms of how it operates. Well, yes
– that’s probably why the Telco Act included a three year moratorium on the in
introduction of the new regime in order to give Chorus time to do just that.

The Prime Minister says Chorus will go broke, although
Chorus was quick to deny this and the stock markets in both Australia and New
Zealand were happy enough with Chorus’s comments about its ability to function
as a business.

The Minister pulled the review of the Telco Act forward from
2019 to now and decided rather than reviewing the entire piece of legislation
she would focus with laser-like precision on one problem: how to make sure
Chorus doesn’t have to reduce its income from copper lines.

Tomorrow the Commission will announce its final price and,
if it’s high enough, the government will put its review away and we can go on
about our business. If it’s not high enough, then Chorus will call for a Final
Pricing Principle (FPP) review of the Commission’s workings which will take a
couple of years and will likely result in the price falling even further, so
I’m told by the economists who look at this kind of thing. The government will
declare that it has consulted broadly with all interested parties and that
given the choice of three options (all of which see the price of copper
wholesale rise well above the draft determination) it will pick one and
introduce new legislation before the next election.

How on earth did we get to such a stupid point? It really is
quite remarkable – we spent the better part of the 1990s with no regulation at
all and as a result fared quite poorly on all counts. Even when regulation was
introduced in 2001 it was so weak we managed to avoid doing anything useful for
five years and it wasn’t until 2006 that the Commission was given the teeth it
needed to do the job properly.

Now, after what must be seen as a brief but golden era, we
are back to the position of the minister trying to set prices in closed-door
meetings with providers with no transparency, no independence and no thought
given to the ramifications of these decisions on the broader market.

It all boils down to Section 18 of the Telecommunications

S18 is short but quite incomprehensible.

To avoid doubt, in
determining whether or not, or the extent to which, competition in
telecommunications markets for the long-term benefit of end-users of
telecommunications services within New Zealand is promoted, consideration must
be given to the incentives to innovate that exist for, and the risks faced by,
investors in new telecommunications services that involve significant capital
investment and that offer capabilities not available from established services.

In essence, so far as I can tell, what it says is that while
the Commerce Commission must act in the long term best interests of the
consumer, it must also give consideration to the risks faced by investors in
new technology. Quite what “consideration” must be given isn’t spelled out, nor
does the Act describe how the Commission must decide what is a new technology
and what isn’t.

How would the Commission differentiate, for example, between
fibre as a new technology (it isn’t) versus LTE as a new technology (it is).
We’ve had fibre for years, but LTE is brand new and clearly can compete with
copper lines if not with fibre itself.

The Commission has left LTE out of its determinations but
has been told to include fibre because the government is investing heavily in
UFB and therefore we should consider it. Let’s not worry about Telecom,
2Degrees or Vodafone’s billion dollar investments in LTE because that’s
different, somehow.

It’s all rather vexing.

The Commission did the only thing it could really do in the
circumstances – point out that S18 doesn’t really seem to have any real bearing
on the UBA determination, which is entirely about copper lines don’t forget,
and move on.

The government would like the Commission to benchmark the
UBA costs against the UFB deployment costs on the basis that it’s a “modern
equivalent asset”. Today, they argue, you wouldn’t deploy a copper network,
you’d deploy a fibre network and we know exactly how much that costs because
we’ve just run a tender process for one so that’s the price you should use.

Even the Europeans have backed away from this view. The
government’s discussion document hinges in large part on a draft policy
from Europe that does indeed say you should rely on the price of a
fibre to the home rollout, but the final version changes that to a comparison
with a fibre to the cabinet rollout – in effect, the network that Telecom
completed before it was structurally separated.

When the Telco Act was being introduced in 2010 I met with
the minister responsible for its creation, Steven Joyce. He joked that so far
we had changed the governing legislation three times in a decade and that was
no way to run an industry. I couldn’t agree more, but now we’re up to four
times in a decade and that’s just hopeless.

Tomorrow the Commission will either move the price enough to
satisfy the government, but in doing so betray the consumers of New Zealand, or
it will stick to its guns and face being regulated by the government of the

Either way the industry loses, and the country as a whole
will continue to look at telecommunications as some kind of high farce,
although from where I sit it’s more like a tragedy than anything else.


Fibre to the country

On Friday I spent the day in Whangarei, visiting NorthPower and having a look at the UFB rollout in the city.

It’s nearly done.

When I say that, I mean the entire city will soon be completely fibred up. Every home and office, school and hospital, everything.

This is an extraordinary achievement, particularly when I look at the Chorus map for my home and see I’m not slated to even see a fibre network for two years or more. It really does mean Whangarei and other regional centres will have stolen a march on the big cities and, as Northpower FIbre CEO Darren Mason says, it gives people a reason to move out of the main centres.

Mason believes Whangarei can become an exemplar of what a fibre-rich city can truly be. Not just an offshoot of the big city but an alternative.

He says families will move to the regions if they can find work, can be assured of good schooling and that employers will find staff more willing to stay for the long term because they have what they need locally.

Whangarei is bustling along if my brief visit is anything to go by. The region’s attractiveness will only increase once the motorway goes through (you can forget the “holiday highway” nonsense – it’s a vital road link that should have been upgraded years ago) and as a place to do business you’d be hard pressed to better it.

This is one of the major advantages of a fibre deployment that runs faster in the regions than it does in the two main centres. Uptake is higher than in Auckland or Wellington (Enable in Christchurch is pushing 6%, Northpower close to 7% and Mason expects to see that hit double figures before too much longer) as residential and business customers feed off each other’s experiences.

We went out on a site visit to see a team in action. Northpower has pioneered a new approach to connecting properties to the network. Instead of digging a trench and putting all the equipment under ground, they put everything in a box on the pole outside the customer’s house. Overhead fibre lines are impossible to tell apart from the power lines and Northpower has designed and built a splitter box that sits on the pole making it both quick to deploy and easy to revisit should the need arise.

Each box serves four households (with another four splitters in place for any future unbundling move) and as a plug and play unit is so simple even I could connect each house, although I’m happy to say I wasn’t allowed to have a go.

The time to connect each property is reduced – on average it takes a couple of hours but the record is just over an hour from the time the team of two arrived on site to fully connected to the house. Mason says the advantage is twofold – a faster deployment and a cheaper one. Much cheaper than digging trenches and laying cable and much less invasive.

I wonder why Chorus doesn’t do this where it’s able – given its cost blowout (the last news story I saw quoted a figure close to $300m) surely this is a viable alternative?

Northpower does trench where it needs to but where it doesn’t the savings are tremendous.

So what’s next for Whangarei and Northpower? Mason would like to see the company deploy fibre further into the surrounding areas, but one thing is holding them up – access.

Access is the 900lb gorilla in the room when it comes to fibre deployment. Costs balloon out of all proportion when the lawyers get involved and working out access rights to drive ways, right of ways and multi-dwelling units makes it almost uneconomic to deploy fibre without a government level investment.

Much better to change the rules to allow fibre deployments along existing utility corridors and to give the network companies the right to connect customers up by default. Opt out if you must but most people adopt the line of least resistance and we would see a much faster, cheaper deployment if we turned the rules around.

Mason has volunteered Whangarei as a test bed. Try it out in Northland, he suggests, and if it works roll it out nationwide. If not, no harm done.

I like that idea. I think we should change the rules and make it easier to deploy networks without having to pay lawyers a fortune to say it’s all OK, and if it works in Northland we should move swiftly to do it for the rest of New Zealand because that would mean phase two of the UFB could be really quite powerful – fibre to the country.

Northpower sees no reason why a combination of cost savings through using overhead lines and having access to properties guaranteed shouldn’t lead to us become a Giga-country, and that’s something TUANZ wholeheartedly supports.

Imagine that – every home and property in the land connected to a fibre network in much the way they are connected today via the power lines.

Now that’s something worth changing the law for.

More, Better, Faster but at what cost?

Chorus is to launch discussions with interested parties
regarding re-working the UFB fibre plans and prices.

The entry level 30Mbit/s down, 10Mbit/s up plan costs $37.50
per line per month (increasing to $42.50 by 2019) at a wholesale level.

That doesn’t include national backhaul, international
backhaul or any of the other stuff – it’s just the Chorus bit, so don’t expect
to pay $50/month for fibre services any time soon.

What’s interesting is the range of new products – from a
50/20 plan through to 200/200.

Most of the current plans have a committed information rate
(CIR) of 2.5Mbit/s – that is, if your line is utterly saturated with use, that’s
the minimum you’ll get.

That sounds awful, until you consider the CIR on copper
wholesale, which at the basic level gives you 45kbit/s, which is dial-up speed.

See the full line-up of prices and speeds here.


You’ll see the biggest mover is in the business space with a
doubling of the high-end plan’s speed from 100/100 for $175 to 200/200. Now
that’s a plan to get excited about.

But what will the costs be like for the retail service
providers? Don’t forget, if you as a customer want to see these speeds
throughout your entire network, your ISP is going to have to buy a lot more

An anonymous ISP source has done some numbers for TUANZ on
the Gigatown promotion that Chorus is running. Gigatown, you’ll remember, is
the plan to offer 1000Mbit/s service for the 30/10 price. However, Chorus is
unable to sell directly to users, so it has to bring in a retail ISP to do that
side of things.

Let’s assume a town of 40,000 people is chosen for Gigatown.
Chorus will provide the ports at entry-level price, so 40,000 customers x
$37.50 = $1.5M/month

Upfront costs are not cheap:

First you’ll need equipment at the exchange to handle
the traffic.  A fully-loaded chassis will
handle around  7,000 ports, so that’s six
chassis and 100x10Gbit/s backhaul.  Roughly a $6 million cost for exchange

The absolute minimum price for a box that can handle a
10Gbit/s backhaul is $1200 for a Mikrotik CCR, so the RSP has at least $120,000
capex spend to get in the game.

Then there are the recurring monthly charges:

Either co-locate the equipment at the exchange or get
100x10Gbps backhaul to premises, either way it’s roughly $30,000 per month.

The RSP needs to provision bandwidth for the
customer.  Let’s assume a generous $1/Mbit/s
for national, provision – 100Gbit/s will cost $100,000 each month.

Then there’s international capacity at $17/Mbit/s
equivalent (ISPs don’t buy international bandwidth in these terms so this is a
bit of a translation), so to provision 20Gbit/s assume a cost of $340,000 a

“With no other costs, the RSP would be at $2M/month,
with over $1.5M of that going to Chorus, assuming 100% penetration.”

At today’s rate of about 5% penetration (current UFB
stats), your costs would come down but so too would your earning potential.

Five percent uptake means 2,000 households, so only
one chassis is needed, 14x 10Gbit/s backhaul and an upfront cost of only $1
million capex at the exchange, and $20K capex for the RSP.

Backhaul or colocation costs would come in at $10,000
a month,  national backhaul would be
another $20,000/month and then your international would add another

Those 2,000 customers would earn $75,000 a month
(assuming no calls to the call centre etc)  but the costs per month would be around
$205,000, so you’d have to bill customers around $102.50 a month to break even –
no profit for you.

I’d pay $102.50 a month for gigabit speeds without a
second thought, but would you get 100% uptake at that price? I don’t know.

What does all this mean? If the sums are right (and do
let me know if you think they don’t stack up and we can discuss tweaking the
model) then selling UFB is going to be a big chore for RSPs. They’re going to
need faster speeds (but that comes at a cost) and will need to give customers a
reason to move (content, for example, which also isn’t cheap) and they’re going
to need help with the marketing to get the general population excited about it.

These really are interesting times.


Unintended Consequences

Content is king, and
will be the driving force behind any significant uptake of the UFB.

It’s a given – certainly among users – that without the
content there can be no success story for UFB. Why would mums and dads in
middle New Zealand bother upgrading given the current state of access to

Certainly in the UK the pressure for content has seen some
remarkable changes to the telco landscape.

BskyB, the UK’s leading cable TV provider, has bought
its way to number two in the ISP market and is now growing at an astonishing

To compete, BT has acquired rights to major sporting events
and given them away to fibre customers for free.  In less than a year it has added 1 million
customers to its subscriber base.

Clearly, content is what will drive demand and if buying
rights to the footy (or local variant thereof) brings in the punters, that’s
the way to go about business.

But the flip side of this story is quite sobering.

I was at a Commerce Commission conference on Friday on a
panel with Telecom CEO Simon Moutter when this issue came up. Moutter pointed
out the big difference between BT and any telco in New Zealand – we have
dis-integrated the telcos and in the UK they have not.

BT is a fully integrated player. It owns networks, it
wholesales and it retails directly to customers, in competition with its own
customer ISPs.

No telco in New Zealand in the fixed-line space can lay
claim to that.

Moutter pointed out that BT offset the cost of buying the
content against the profits it makes from the sunk-cost network, and that New
Zealand telcos don’t have the same ability. Profitability in the fixed-line
broadband market in New Zealand (let’s talk fibre as that’s the direct
comparison with the UK) amount to only a couple of dollars per line, after you
take into account call centre staff, buying backhaul and international capacity
and so on.

But these are high value customers, right? They’re the
future of the network, and BT was right to entice them over.

BT spent GBP1 billion on the rights to various sporting
events and has given those rights away for free to its retail customers. Sure,
it won 1 million new subscribers as a result, but that’s a purchase price of
GBP1000 per customer. The payback period at even $10 a month is not
insubstantial, let alone at the lower profit margins the telcos in New Zealand expect
to make.

If we look at the landscape in New Zealand there isn’t a
single fixed-line operator that could do to our market what BT has done in the
UK. Instead, all our telcos can do really is look to partnerships with content
providers in order to offer more to customers, and even then it’s more likely
that the ‘over the top’ (OTT) providers will sweep in with a more comprehensive
offer and scoop up most of the revenue that might be on offer.

This is one of those unintended consequences of market
intervention. By splitting Telecom into two parts, we secured a more level
playing field for the future, but the downside is a lack of cross-subsidisation
for the telcos.

On the plus side, that’s probably a good thing for
customers. I don’t want to find my content locked to a particular provider, and
I’m ever hopeful that the whole model of distribution that the content makers
are forcing on is eventually goes away. I don’t want to have to sign up to
Telecom in order to get rugby but Vodafone in order to get rugby league, for
example. Much better to sign up to the internet and get whatever sport or other
entertainment I require when I require it.

But his does pose a problem for New Zealand UFB retailers.
How will they entice customers to the shiny new network if sports and
entertainment content are out of reach?

It could well be that the only telco able to deliver the
content needed is already in the market today. It’s Chorus, the owner of the
copper network.

It’s an interesting old world, isn’t it?


After Fives after match report

Enable put on a great After Five session last night in

As you know, Enable is building the UFB in Christchurch but
what I didn’t know is it’s also responsible for another area around the main
city – in effect the satellite towns that feed Christchurch.

The project is going well. I went out on a site visit and
saw a crew drilling along a 30m driveway to reach the property at the back.
Even though the other two residents hadn’t signed up for UFB at this point, the
team were laying in the spurs ready to hook them up should the need arise and,
given the rest of the street’s willingness to swap to fibre (there were four
connections being put in on that street alone) it’s surely only a matter of
time before they put in the call.

What interested me most about the deployment is the uptake
rate – Enable is running at over double the national average at 6% uptake.

That may seem like peanuts but don’t forget the main
residential build doesn’t start for another couple of years yet so to see such
good numbers come in when the country as a whole is barely hitting 3% means
it’s worth taking a second look at Enable’s model.

Enable is co-marketing the fibre deployment alongside its
Retail Service Providers (RSPs) and even without the two big names in the fixed
line broadband world – Telecom and Vodafone – it’s still signing up a
tremendous number of new connections each month.

In addition, word of mouth is strong and that’s in no small
part because of the excellent clean-up job the crews do when laying the fibre.
Instead of the nightmare of trenches, refurbishments, multiple holes in walls,
delays and the like, the teams make sure they clean up after themselves, that
reinstatements of driveways and footpaths are of a top-notch nature and that
they are constantly communicating with both residents and RSP partners. It’s
clearly paying dividends.

Enable has all but completed deployment in some of the
smaller dormitory townships outside Christchurch proper, which means those
people who do live outside the city bounds will find they can work remotely via
fibre instead of driving in and out of the city every day. Enable CEO Steve
Fuller says that’s important to his team as the company is mostly owned by the
council which also needs to consider usage of the roads. If only other councils
were so engaged in the UFB’s potential.

We didn’t agree entirely on the government’s review of the
telco act but I can see where Enable is coming from with its views on investor
certainty and I hope they can see what we’re talking about when I say I don’t
want the Commerce Commission sidelined as regulator.

What must be a concern for both LFCs and customers is that
the move to allow Chorus to pocket price its copper lines in areas where it
doesn’t have the UFB contract is unfair and unacceptable. Quite why MBIE
included the concept in its discussion document is beyond me but the idea that
Chorus will be allowed to keep copper prices high unless it faces competition
is bizarre at best and anti-competitive at worst. I’d hate to see Enable and
the other LFCs go to the wall because Chorus can lower its copper prices and
block migration to the UFB (to follow the government’s own logic), especially
given the stark differences in deployment results.

Thanks again to Enable for a great day and a great After

Next up for the After Five sequence we have a change of
pace. ASB’s chief economist Nick Tuffley will be talking about the state of the
economy and ICT’s role in it and ASB is hosting it at its new building in
Auckland’s Wynyard Quarter.

After that we have Network 4 Learning talking about its role
in education and what N4L hopes to achieve in the coming years once all the
schools in the country have access to high-speed broadband.

Times and dates and places will be posted on the website on


NB – the newsletter version of this post differs somewhat owing to my poor handwriting skills. 


The Copper Tax

This month’s After Fives saw the Telecommunications
Commissioner tell us about the state of the industry, revenue trends,
investment and what the future could hold for the industry.

Unfortunately, I’m less sure the future of the
Telecommunications Commissioner role itself.

The government’s stunning move to make pricing decisions in
the Beehive means the role of the Commissioner is, to all intents and purposes,
surplus to requirements, at least as far as the government is concerned.
Suddenly it’s the 1990s all over again.

For close to a decade the government of the day dithered
while Telecom (as it was – Chorus now) sent most of its earnings offshore to
its US shareholders, failed to invest in basic infrastructure, blocked
competitors coming into the market (remember Clear taking them to the High
Court?) and generally offered a very poor service to its customers.

The change in government saw regulation introduced for the
first time, albeit at the light end of the scale. Eventually we empowered the
Commission with teeth to do the job at hand and the industry has flourished
ever since.

More importantly, the consumer has also benefited. We’ve
seen prices tumble as speeds and data caps increase. Increased investment means
we have three cellphone network operators each with extensive networks and more
to come. We have a fibre network deployment underway to satisfy pent up
customer demand. We are addressing rural New Zealand’s broadband needs, and
while I’m clearly in the “more, better, faster, sooner” camp, we are heading in
the right direction.

Unfortunately the government and in particular minister of
communications Amy Adams has derailed all the good work of the past decade with
one announcement.

Chorus’s shareholders’ needs 
are now the key driving force behind the government’s approach to
telecommunications, not consumers.

The side-lining of the Telecommunications Commissioner means
we have no way of ensuring users’ needs are first and foremost in our
regulatory landscape. In effect, the minister will be setting the price of
service directly, with little or no regard for either international
benchmarking or the contract her government signed with Chorus.

The fibre rollout will only ever reach 75% of the population
and most of those users won’t be signed up until after 2020. That means the
quarter of the population who won’t get fibre will forever more be subsidising
fibre users. It also means that most of us will be paying the Chorus tax for at
least the rest of the decade.

This, then, is the heart of the matter – we have a contract
with Chorus that has now been renegotiated without input from the rest of the
industry, without reference to international best practice, without even a
tender process to see what’s available in the market today.

The minister is now entirely responsible for the regulatory
regime in which the telcos operate without the safety net that the
Telecommunications Commissioner brings to that regime. Not only is the
government the investor in the network, it has now taken over as regulator and
that’s an appalling position for the industry to be in.

What next? Will she decide that Vodafone’s 4G network is a
threat to uptake rates on the UFB and regulate Vodafone? Will she decide that
the price of UFB is too low to ensure returns to the shareholders and put up
the price? Will she allow Chorus to pocket price in areas where the other LFCs
are building our network? Will she encourage Chorus to buy up those LFCs on the
basis that having one network operator is better than four?

Governments that invest in infrastructure should stay out of
the business of regulating the same investment. They can’t wear two hats, they
can’t be both investor and regulator. They can set policy directions and try to
encourage investment all they like but if they’ll also regulate to protect
their own investment the whole thing will come apart at the seams.

We now face a monumental struggle to ensure the Chorus tax
is repealed, that the government reinstate the Telecommunications Commissioner
as the regulator and that the Beehive stops introducing more uncertainty into
this sector. It’s too important to leave it up to the politicians.