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Business case for high-speed broadband
Sat, 1st Aug 2009
FYI, this story is more than a year old

The National Government's $1.5 billion fibre to the home broadband initiative will undoubtedly change the face of telecommunications in New Zealand. But there are still many questions to be answered, not least of which is: how to make it pay?

At the recent Telecommunications and ICT Summit it was clear that the industry consultants who had tried to model a fibre rollout could not make the economics work. Reports by Network Strategies and Milner Consulting suggest the total cost of the backbone network is likely to be around $3 billion - $4 billion (excluding drops to households), or about $2000 per premise passed.

Add to this $1000 per household on average to link to the network, and the total cost is more than $5 billion, with only half the country's households connected. Sharing existing poles and ducts has the potential to reduce the cost by $2 billion, but that assumes access to poles and ducts will be free.

That does not appear to be what the power line companies are considering – my understanding is that they see this as an additional revenue stream or cost-sharing exercise to improve returns on their infrastructure. To generate substantial take-up, the wholesale pricing of dark fibre or bitstream access needs to be low.

Where take-up has been high internationally, retail fibre pricing has been similar to DSL pricing. Network Strategies suggests it is unlikely that significant residential take-up could be generated with broadband priced at more than $50 at retail level. If that is the case, then we can do some simple maths on a fibre network. Current DSL pricing (excluding add-ons like video content) averages just under $40 per month at retail level before GST, or about $20 above the price of an unbundled copper line. ISPs might be prepared to pay up to $30 for wholesale fibre access.

To that we could add small amounts for services such as smart metering, plus whatever video service providers might be willing to pay for last-mile transport. However, the business case for IPTV remains unclear at this point.At $30 per month my own modelling suggests that even with government co-investment of $1.5 billion the economics of a fibre network to 75% of New Zealanders remain problematic.

Which is probably why responses to the government's initiative have so far been supportive in principle, but short on definite proposals to invest. To make the fibre network an attractive proposition the government contribution might have to be a grant, with no residual public ownership but with an ongoing oversight through regulation. That might not be politically palatable.

Alternatively, the Government could modify its goals by putting a less rigid timeframe around the subsequent household rollout. Telecom's competitors hope the new network will be the final nail in the coffin of the incumbent's industry domination. However, another theme that came through strongly from the Summit was that a network which doesn't involve Telecom isn't realistic.

Former Telstra CEO Ziggy Switkowski has made similar comments on the Australian Next Generation Network proposal (which is starting to look quite similar to New Zealand's). He believes Telstra's existing network should be at the heart of the Australian fibre build, along with telecomm assets from other entities, and that Telstra's copper network should be vended into it so that the transition to fibre can be managed coherently, in return for a shareholding (which as in New Zealand cannot exceed 49%) and possible network management rights. New Zealand is too small to have competing major infrastructure.

Some form of combined network which puts together the relevant assets of all the players into a common network, to which all have access at a cost-based price, would make good sense. This might mean Telecom's current fibre-to-the-node rollout, CBD fibre rings from various players, plus national and regional high-speed backbone networks.

It might also include access to or ownership of poles and ducts from Telecom and the line companies, and may need to include Telecom's copper assets as well as fibre links, with a more staged progression to fibre as needs increase. There are bound to be a number of compatibility and valuation issues in the creation of such a hybrid, but it would meet the key government criteria of open access, avoiding overbuild, and stranded assets.

It would probably need to be managed by Telecom's Chorus unit, but if Telecom ownership was a major stumbling block this could potentially evolve to separate ownership over a period of years. *Guy Hallwright chaired the recent Telecommunications and ICT Summit in Auckland.