Rosalie Nelson is Senior Research Manager, Telecommunications, at IDC New Zealand, a provider of market intelligence, advisory services, and events for the information technology, telecommunications, and consumer technology markets. In this role she is a leading independent voice on the telco sector, and will chair the upcoming Telecommunications and ICT Summit. TR decided to pick her brains on the current state of the industry.Q: If you had one word to describe the telecommunications industry today, what would it be and why?A: Transforming: The industry has undergone two years of fundamental restructuring as a consequence of regulatory reform. Economic recession has reset pricing and expectations. Changing user behaviour and new over-the-top competitors are changing traditional value chains and business models. New revenue growth is providing elusive. Add to this the implications of shifting to a new fibrebased industry structure and it is clear that this is a time of industry deconstruction and reconstruction.Q: The government’s $1.5 billion Ultra Fast Broadband network appears to be having a huge impact on the industry and yet not one cable has been laid to date. Do you think it was the government’s intention to disrupt the industry or do you think this is an unintended consequence?A: That really is a question only the government can answer. The UFB Initiative was originally an election promise – a headline target with a price tag – rather than a fully-fledged telecommunications policy. Its founding fibre principles appear to be founded on minimising the regulatory risk of creating a fibre access bottleneck, and attracting investment from new types of infrastructure player. As such it does not incorporate existing investment or account for current technologies and industry structures. However, it is inevitable that a government-funded nationwide fibre-to-the-premises network is going to disrupt the industry. The issue is therefore how to ensure the economic and commercial risks of structural invention are mitigated, and the opportunities amplified. The UFB Initiative represents a fantastic opportunity for NZ – but execution is critical.Q: The UFB, and even the Rural Broadband Plan, is very fibre-centric.Is this really the only technology that should be considered – what about wireless?A: Fibre has the very real advantage of being future-proof; it allows for symmetrical bandwidth and has virtually unlimited upgrade potential. It forms the core of all modern telecommunication networks. However it has quite different characteristics to fixed wireless and cellular technologies, which offer flexibility and mobility. If we limit ourselves to specifying goals by technology, as opposed to outcomes and performance, there is the risk that we marginalise alternative technology innovation. Ultimately endusers will take up the technology that best suits their purposes – the challenge is to ensure there are continued incentives to invest and upgrade complementary technologies to deliver affordable choice.Q: There appear to be three main contenders for the UFB – Telecom, NZ Regional Fibre Group (an alliance of lines companies and independent fibre providers) and Axia Netmedia. What’s your impression of the way the process is being conducted by Crown Fibre Holdings and the MED?A: The process is being conducted under conditions of strict commercial confidentiality and protocol – as indeed it should be. Theirs is a very tough task within tight timeframes. I don’t envy them!Q: At the centre of this change is Telecom. It recently announced that it may separate its access network in order to participate in the UFB. You’ve said in the past that structural separation is not an easy task to achieve – can you explain why that is?A: Structural separation is not simply a case of asset re-allocation and a new operational structure; it requires deep systems separation. Those systems support a complex ‘spaghetti’ of processes with transition and traffic occurring across the boundaries. Redesigning this – whilst maintaining services – is hugely complex and costly (although it is hard at this stage to quantify that cost – it will depend upon where boundaries are drawn). Telecom has already spent $294 million directly on operational separation, in addition to $1.4 billion on its mandated broadband upgrades and FTTN programme. Commercially, Telecom will need to weigh up whether the benefits of separation outweigh the costs. But there is a wider issue: the government’s UFB Initiative will not just split Telecom; it will structurally separate the industry. The access fibre network will by its nature be an open access, (increasingly) monopoly resource – duplicative access fibre investment is not viable. This separates traditional industry structures, and has significant implications. On the plus side, it drives services competition and innovation; network control ceases to be the competitive differentiator. But ownership separation risks distancing network investment from end-user influences – the network business case becomes self-contained, and there is a risk that network development moves to a lowest common denominator approach, failing to keep pace with rapidly evolving technological demand. Industry separation also draws absolute network/service boundaries at a time of rapid technological change. If these complex risks are not managed proactively, we risk unintended outcomes that affect all of us.Q: According to IDC research, Telecom has a 54.3% share of the total revenue in the telecommunications market. Is it conceivable that the UFB could take place without the carrier’s participation – whatever form that might take?A: IDC believes carrier participation is essential; they have the customer scope and scale. The business case for fibre will vary by region, and payback expectations. Nonetheless revenue needs to either be predicated on higher revenues per user for broadband or mass market take-up. International fibre experience suggests only 15% to 20% of users will value higher speeds enough to pay a premium – and that premium is not significant. It makes mass market adoption a critical part of the business case. This is one reason why IDC believes a copper-to-fibre migration strategy will be critical here. It makes more sense to have Telecom service providers as anchor customers, rather than competitors who pitch copper’s lower cost base against fibre capability. And it makes sense to utilise existing infrastructure wherever possible to get best bang for our buck in the build. Publicly we have an increasingly polarised debate about who builds the fibre network. It misses the point that this will be a wholesale-only, open-access resource. The real issue is, how do we stimulate demand and who is best placed to drive and deliver fibre-based services?Q: We’re told by Telecom that the XT Network is running as it should be. Do you think the much-publicised outages have damaged the brand for major users? And, how do you think mobile revenues will compensate for the decline in fixed line voice revenues?A: There is no question Telecom sustained considerable brand damage from the XT outages; any future problems will be played up and scrutinised in the light of that. Having said that, both Telecom and Vodafone have invested considerably in mobile broadband capability, which remains one of the few unregulated growth sectors. We anticipate this will be the battleground for market share growth. New Zealand’s telecommunications is a mature lowto no-growth market, based on IDC forecasts to 2014. In 2009, mobile and fixed voice services comprised 65% of $5.55 billion total telecommunication revenues, and these are rapidly declining. Broadband, mobile data and IP-based services will help to offset this decline but it will struggle to really kick-start topline growth. As a consequence we see the strategy shifting to cost cutting, customer retention and a focus on profitable sectors.Q: Earlier this year you published your Top 10 predictions for 2010 and called it “Increasing Pressure to Transform” – what did you mean, and were you referring only to the telco industry, or its major customers, or both?A: The pressures of transformation are far from exclusive to the telecomms sector, but this prediction was very specific to telcos, which will need to redefine themselves for growth for the reasons outlined above.Q: With the telco industry in a state of flux, what’s your advice to CIOs and IT managers? Should they be postponing investment decisions, or are initiatives such as the UFB designed to serve a social need, not an economic one?A: The UFB is a 10-year initiative; if a company is not in a position to procure fibre now (and most large enterprises are), then it will be an evolution over the next six years. But fibre is ultimately an enabler for services – particularly cloud connectivity. Despite the hype around cloud services, this is a fundamental and transformational shift for businesses. Consequently the bigger issue for CIOs and IT managers is therefore understanding what potential cloud services offer their business in terms of flexibility and scalability, what a ‘fit for purpose’ migration path might look like as connectivity constraints are lifted, and how to best harness and maximise the potential of growing mobile data capability. Given the rapid services evolution, the real challenge is how to ensure decisions made now will support their future business.Q: Finally, you recently contributed to an IDC paper entitled ‘The Move to an All–IP Network: Lessons From Around the Globe’. Are you able to give us an insight into what this means for the business user, and how organisations here compare to what’s happening overseas – are we behind, out in front, or in line with international trends?A: There can be no one-size-fits-all answer; business decisions will be shaped by the complexity of requirements. New Zealand business is defined by its predominance of small-to-medium businesses facing the same challenges of scale, value and growth as their counterparts do globally, but with the additional challenge of operating within a small and geographically isolated market. However, the Kiwi character of down-to-earth pragmatism mixed with savvy emerges in our business surveys. A strong sense of value of money and desire for a sound business case means we are neither leaders nor laggards, but pragmatists.