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Fibre 2010

01 Jul 2010

The government is poised to spend $1.5 billion on a fibre-to-thehome network, and in so doing it will irrevocably change the New Zealand telecommunications industry. Telecommunications Review ran a series of online articles examining a different aspect of the Ultra Fast Broadband Network. Here are the highlights.If you build a national fibre-to-the-home network without Telecom, will enough people use it?That’s got to be the question taxing Crown Fibre Holdings, the MED, the office of the Prime Minister and Cabinet, Treasury and all the other experts advising the shareholding Ministers – Bill English and Steven Joyce – on this $1.5 billion project.Telecom’s copper network might be old, its loops too long, its infrastructure creeky in places, but it has something very powerful – it serves most of the country’s home and business line customers (give or take TelstraClear’s cable, CBD fibre and the odd wireless connection).Now that Telecom is finally considering structural separation, how attractive are the alternatives? Here we look at three subjects covered in the online series – the New Zealand Regional Fibre Group bid, the Axia Netmedia bid, and what might have occurred if the government hadn’t decide to help fund a fibre-to-the-home network.Telecom’s rival – the New Zealand Regional Fibre Group (NZRFG)Before talk about selling Chorus, the New Zealand Regional Fibre Group (NZRFG) was considered by many to be the front runner as the government’s preferred partner. Indeed the whole structure of UFB would tend to favour regionally based players. The country is to be divided into 33 areas that are served by a Local Fibre Co (LFC) – which doesn’t rule out a national solution because one LFC could cater to all 33 areas.However the NZRFG, which comprises 19 electricity and fibre companies, is well placed to provide an alternative solution to Telecom. In a nutshell, here’s why:Electricity companies are familiar with regulated environments. Vector CEO Simon Mackenzie says 60% of its business is regulated.These regionally based companies are usually part or fully owned by community trusts. In the case of Enable Networks, it’s owned by the ratepayers. In the case of CityLink it began as a council network and is now privately owned. So they generally have strong community support.Electricity companies can use existing infrastructure such as power poles and underground ducts to lay fibre optic cable. Indeed, most already deliver telecommunications services. They are only interested in the infrastructure, and not the services, making them compliant with one of the government’s key criteria – a company can’t be a majority owner of an LFC and provide services on the same network. Being electricity companies, they are well funded. Vector, for example, has a $1.2 billion annual turnover.Vector’s Mackenzie says that Telecom’s FTTH solution is designed to lengthen the life of the copper network. “It’s around preserving the legacy copper network – it’s just clear as day. Second issue is that it’s still shackled to all the legacy systems and issues that they currently deal with. Does that actually facilitate new retail-solution providers being able to easily access the network? I doubt it,” he told TR.Mackenzie claims the NZRFG can offer an entirely new network, but is it? Vector isn’t about to dig up the streets of Auckland to lay its fibre network; it will instead string fibre along power poles in large areas and the fibre cable will be undergrounded as part of its overall strategy to underground electricity.Vector is proposing GPON architecture, rather than Point to Point – which is the same architecture as Telecom is proposing. Basically it splits a fibre connection among many homes – usually 32 premises. OECD economist Taylor Reynolds told a TUANZ conference last month that GPON architecture can have consequences for future unbundling. What makes GPON attractive is that it’s 15- 20% cheaper to deploy.The Canadian way – the Axia NetMedia bidThere is another way the government can go – the Canadian way. Axia NetMedia has put in a bid to provide a national solution. When everything kicked off in March last year, Axia requested its submission be kept private, and when it put forward a bid in January it refused to provide public confirmation that it had done so. But earlier this month it called a press conference and announced it had a high profile partner in its bid – Vodafone.Based on its submission to the UFB process, a 10-page press kit and comments made by CEO Art Price at the Vodafone press conference, here’s what Axia proposes:Build a fibre grid across the country that wholesales fibre services (or layer 1 and 2 services) to retail companies offering voice, data, video, cloud computing and other next generation network services.The grid will not only extend the fibre network, but can provide backhaul for wireless solutions including 3G, 4G and WiMax .Use taxpayer subsidy and get the government to commit its own traffic to the network to provide base revenues. In return, operate as a kind of regulated monopoly that offers the same services to all retail providers (ISPs, etc.) at the same price, wherever they are located in the country.If its bid is successful, look to fund the fibre rollout via the capital markets (in addition to the taxpayer contribution, there could be an additional $3.5 billion required for the UFB, according to market commentators). Axia has some kind of deal with Vodafone which could see the mobile giant invest up to 49% in a public company Axia would form in New Zealand if it won the bid.Other than a plan and some pedigree (it’s created similar grids in Alberta and France, and is embarking on one in Singapore), Axia brings almost nothing else to the table. It’s publicly listed on the Toronto Stock Exchange with a market capitalisation of $110 million and employs 231 staff.But it is quite a plan. It’s simple and it not only ticks all the boxes in the government’s proposal; it adds a few bonuses. For example, Axia appears to welcome regulation and its fibre grid idea provides a way to encompass wireless solutions, which many argue have been ignored in the whole process.The counterfactual – if there was no UFBSo what would New Zealand telecommunications look like if the government had not decided to invest in a fibre-to-the-home network?There would still be a national fibre network – in the form of Fibre to the Node, or cabinetisation, because the rollout is part of Telecom’s operational separation undertakings. There were some ISPs that were outraged when cabinetisation was announced, notably Orcon and Vodafone, who claimed it would dampen their investment in Local Loop Unbundling.Telecom Wholesale CEO Matt Crockett cites their reaction as one of three lowlights in his career at Telecom. “When we confirmed our cabinet plans, our senior customers got taken by surprise, which surprised us because we’d shared a huge amount of information around where cabinets were going because we knew it would have an impact around their LLU investment.”LLU investment has continued, with Vodafone and Orcon being joined by TelstraClear, Compass and CallPlus in providing unbundled services. It might seem as if it’s proceeding at a snail’s pace, but according to the latest Commerce Commission audit, the growth in unbundled lines after 18 months appears to be better than international experience.The good people at Bell Labs and other research and development powerhouses continue to come up with ways to make those copper speeds faster. Currently ADSL2+ will provide maximum speeds of 24Mbps (with the emphasis on maximum). Meanwhile VDSL2 services, which Telecom has been trialling for a year, will launch in mid-August. Crockett says 15% of all telephone lines will be able to receive VDSL2 services on day one, by the end of the year it will be 35%, and by the end of 2011 when cabinetisation is finished, it will be 60% of all lines.The catch, of course, is that you have to be located within 1km of an exchange or cabinet to get the speeds, which Crockett says are a minimum of 15Mbps down and 5Mbps up.So broadband speeds would get faster, probably keeping pace with customer demand – as new applications came onto the market, broadband services would improve to cater to the increasing demand for bandwidth.But it’s fair to say there would be a digital divide – not just between those living in the city and those on the farm, but between those living in the same neighbourhood. It could become like zoning for high-achieving state schools; those on one side of the street would get 50Mbps, those on the other 24Mbps.Meanwhile, on the margins, there would spring up boutique fibre networks. Maybe a bit like what happened with the North Shore Education Access Loop, where Vector received a $4.5 million government subsidy to connect 45 schools at a concessionary rate but was able to charge businesses market prices to connect to the same fast fibre pipe.Crockett points out that there are over 50 ISPs in New Zealand – he should know, they’re all his customers. Without the UFB it’s likely they would all still find a way to stay in business. “Naturally occurring in UFB will be some consolidation in the ISP retail market,” says Crockett. “That’s the trends that are currently playing out internationally. We’ve probably seen less of it here than I would have thought. So we are seeing very few ISPs go out of business in the last two years.”Of course there were some who thought LLU would see a reduction in the number of ISPs, and that hasn’t happened either. Commentators point out the effects of the UFB won’t be felt in the residential market for five years, so ISPs will continue to do business in the copper world for some time.What they must be now asking themselves is whether the UFB will be a threat or an opportunity.