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FIBRE 2010: Telecom's rival

25 May 2010

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 otherexperts advising the shareholding Ministers - Bill English and Steven Joyce - onthis $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 – itserves most of the country’s residential customers (give or take TelstraClear’scable, CBD fibre and the odd wireless connection).

Now that Telecom is finally considering structuralseparation, how attractive are the alternatives? Before talk about sellingChorus, the New Zealand Regional Fibre Group (NZRFG) was considered by many tobe the front runner as the government’s preferred partner. Indeed the wholestructure of UFB would tend to favour regionally based players. The country isto be divided into 33 areas that are served by a Local Fibre Co (LFC) – which doesn’trule out a national solution because one LFC could cater to all 33 areas.

However the NZRFG, which comprises of 19 electricity and fibrecompanies, is well placed to provide an alternative solution to Telecom. In anutshell, here’s why:

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  • Electricity companies are familiar withregulated environments. Vector CEO Simon Mackenzie says 60% of its business isregulated.

  • These regionally based companies are usuallypart or fully owned by community trusts. In the case of Enable Networks, it’sowned by the ratepayers. In the case of CityLink it began as a council networkand is now privately owned. So they generally have strong community support.

  • Electricity companies can use existinginfrastructure 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 keycriteria – a company can’t be a majority owner of an LFC and provide serviceson the same network.

  • Being electricity companies, they are wellfunded. Vector for example has a $1.2 billion annual turnover.

While NZRFG has appointed its own CEO Vaughan Baker (whopreviously worked for consulting firm Voco, and may still do so judging by thefact that his details remain on the Voco website), it’s the Auckland linescompany Vector, and its CEO Simon Mackenzie, that is the leading public voice on the NZRFG.

Mackenzie says that Telecom’s FTTH solution is designed tolengthen the life of the copper network. “It’s around preserving the legacycopper network – it’s just clear as day. Second issue is that it’s stillshackled to all the legacy systems and issues that they currently deal with.Does that actually facilitate new retail solution providers being able toeasily access the network? I doubt it,” he told TR recently.

Mackenzie claims the NZRFG can offer an entirely new network,but it is? Vector isn’t about to dig up the streets of Auckland to lay its fibrenetwork, it will instead string fibre along power poles in large areas and thefibre cable will be undergrounded as part of its overall strategy tounderground electricity.

Vector is proposing GPON architecture, rather than Point toPoint – which is the same architecture as Telecom. Basically it splits a fibreconnection among many homes – usually 32 premises. OECD economist TaylorReynolds told a TUANZ conference last month that GPON architecture can haveconsequences for future unbundling. What makes GPON attractive is that it’s15-20% cheaper to deploy.

Then there is the end-user pricing. As part of the ITP processto Crown Fibre Holdings, all bidders had to submit what they would expect the averagehouseholder to pay for fibre-based services. It’s commercially sensitive, buthere’s a snapshot of the interview between TRand Mackenzie that features in the May edition:

TR: How much doyou think the ordinary Auckland household would pay for a fibre connection?

SM: I think you’ve got to be really careful how you articulatethat. I think it’s about what is their total cost when they look at their communicationservices. There’s too much focus on what is the connection versus what is thetotal cost. We believe you can actually end up with a fibre-based solution tothe home on pretty typical services of voice and content at a cost that’s competitivewith current prices being paid in the market.

TR: $40 a month?

SM: No, you’re going into aconnection base. We’re talking about total cost.                

TR: So you’retalking, what do I pay for my SKY TV, what do I pay for my phone...

SM: Your entertainment, internet, and voice and relatedservices. If you look at a typical pricing around that, and you look at whatcan be delivered in a similar bundle in a fibre-based network, we believe youcan actually be very competitive in that space.

TR: Let’s add itup. $80 for a SKY connection, $40 for broadband, $45 for a home line, justroughly.

SM: Then add up on top of that your voice costs.

TR: You meananother $20 for toll calls? That all adds up to $185, do you reckon that’s whatit would be?

SM: It could be close to that, yeah.

 

This article is parttwo in TR's online FIBRE 2010 series.The government is poised to spend $1.5 billionon a fibre network, and in so doing irrevocably change the New Zealandtelecommunications industry, in this series TR examines a different aspect ofits UFB initiative. Feedback to