The S-Curve

Sales conferences have their J-shaped hockey stick graphs, but in ICT, uptake conversations turn to the S-curve.

And rightly so – the early days of any tech are generally best informed by the phrase “nobody cares” shortly followed by “nobody saw this coming” and the geeks among us smile smugly, assuming they got it right in the first place.

Currently there’s much angst about uptake on fibre because, apparently, it’s a white elephant and nobody really wants it anyway.

I am smiling smugly, content in the knowledge that we loiter at the end of the first curve and are starting to see uptake ramp towards that “overnight success” leg of the journey.

Chorus’ annual briefing to analysts seems to back me up on this.

Page 52 has a lovely chart that shows premises passed by region, with uptake rates for each region.

Auckland has the highest uptake, according to Chorus, with 8.5% of customers who can get fibre actually signing on for it. In Auckland, Chorus has completed only 20% of the build, but clearly it’s this kind of market that the main ISPs are focusing their marketing efforts on. Blenheim, by way of contrast, has 90% of its build already completed, but uptake is a woeful 5%.

Clearly, demand for services is driven by retail partners promoting and selling the product. Sadly, in the outlying areas where service is available, the larger RSPs aren’t yet offering the product, presumably because of the cost of back office connectivity with the local fibre companies (LFCs).

On top of that, ISPs only sell their products and services. They don’t not do a pre-sales “this is why you want fibre” service and sadly, as we’ve discussed before, the LFCs, Chorus and the government all point the finger elsewhere whenever I raise the matter.

Someone needs to be out there selling potential customers on the benefit. Nobody is currently doing that job and without it, uptake will continue to languish. We need to get the country as a whole moving up that S-curve before some nervous politician decides to make mileage out of ditching the whole thing altogether.

The benefits are easily expressed for anyone with half an interest in the matter. For home users you get access to the world of online content. You can have your kids doing their homework while you watch TV or save your photo gallery to the cloud. The home of the future is here today and already I’m backing up a dozen devices on a regular basis. Woe betide the family that doesn’t have UFB when that list of devices includes the fridge, the car and the burglar alarm.

For SME business, the benefits are absolutely astonishing. You can catch up with your slow, clumsy corporate competitors simply and cheaply without having a huge capex outlay. You don’t need to buy servers and hardware, all you need is a browser and a fast internet connection and you too can have an ERP system, a customer relationship management system, state of the art live accounting processes that connect your customers with your suppliers and which take all the drudgery out of doing the chores each night in the form of paperwork. You can free up your time to do the job you love enough to go into business for yourself and you don’t need a fortune to do it.

These are easy wins. Health, education, government interaction, entertainment, economic gains… these are just the things I can think of right now, off the top of my head. Once you’re connected, the world is your oyster, make no mistake.

The country needs to move up that S-curve and someone needs to drive this to make sure it happens.  Chorus and the LFCs say it’s not their job. The RSPs will spend lots of money promoting their own schemes. The government is the only one that has a vested interest in uptake and a need to see this project become the success we all know it can become.

If they can spend $14m of public money telling everyone to buy a new TV set, surely we can find something to promote the benefits of the UFB?

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?