Article by Aaron Olphert, Kordia chief technology officer
Drivers of infrastructure investment
Like any industry the New Zealand Telecommunications industry prospers with investment, this drives innovation and benefits consumers and businesses alike. These investments are made by those service providers with the vision, energy and commitment to make relatively large infrastructure investments in a fast moving market segment.
The pre-requisite to making these investments is having enough trust in the industry and market through consistent policy that balance certainty of a level playing field ensuring the ground under your feet is stable, while also stimulating competition. The Governments investment in UFB is a great example of where the foresight and guts to make this type of long term investment can pay dividends; in this case not only for those who invest across the industry, but for the wider market and for New Zealand Inc. in general.
New Zealand’s successful UFB model
One only has to look across the Tasman to see what happens if you get the mix wrong; the wheels can fall off in terms of consumer/business uptake and industry confidence. A recent business trip overseas reinforced that the UFB model we have here in New Zealand is both innovative and market leading.
But this didn’t just happen because of the Government’s decision to invest in a nationwide access fibre rollout via Chorus and three LFCs (Local Fibre Companies - Ultrafast, Enable and North Power); a large number of retail and wholesale service providers have also made a significant investment to make this a success by providing an end-end service that can ultimately be consumed by end users.
The three excellent and original concepts of New Zealand’s UFB model that made it compelling to the industry and a global benchmark were; fibre to the premise, LFC’s de-risked by a Government contribution and LFC’s focused on the access component only.
Competition across the spectrum
The LFC and UFB model essentially created 33 fibre islands that required a point of presence in each region to enable an end-end solution suitable for end user consumption. The LFCs were unable to backhaul this traffic themselves and back then both Crown Fibre Holdings (CFH) and the LFC’s welcomed and supported service providers who stepped up to make this investment.
This enabled smaller service providers to be able to offer nationwide services without having to negotiate deals with 4 LFCs and build infrastructure to each of these 33 fibre handover locations. Kordia was one of the very first to put up its hand to make this investment and both CFH and the LFCs were very pleased when Kordia said it would step up to the plate and build the backhaul and local service aggregation infrastructure.
This was a significant investment predicated on the assumption that LFC’s would stay in the access market and Kordia (and others) could build a viable business selling competitive wholesale backhaul and access aggregation to other service providers. Other larger service providers also made the same investment. This has resulted in building a very competitive service provider industry in New Zealand and allowed a number of new entrant service providers to offer services to their customers that they may not have been otherwise able to serve.
Competition empowers innovation
New Zealand now has a very competitive service provider market selling consumers world leading broadband services at competitive prices; over the top services like Netflix just wouldn’t be viable without this. Service providers selling to businesses are also doing well from these infrastructure investments and the rapid adoption of high speeds WAN’s and cloud based services like O365 and AWS are a testament to the fact the New Zealand model was working. The industry resolved the perceived issue of smaller providers not being to physically access all the 33 remote handover locations a couple of years ago.
Market power distorts the market
Chorus recently announced its intention to offer tail extension services. This is essentially a vertically integrated backhaul option that will allow service providers to have individual customer circuits delivered from the local handover location to the closest of one of five regional points of interconnects for a small incremental cost to the UFB access circuit.
Who gains from this? Some service providers who haven’t yet invested in regional infrastructure will be able to more cost effectively deliver services to small provincial centres and Chorus shareholders of course will benefit from the additional revenue from services that Chorus previously did not offer – the same services that service providers like Kordia were encouraged to invest in and provide by both Chorus and CFH when the UFB rollout began.
Who are the losers? Ultimately New Zealand is. If we want a return to the market manipulation, monopolistic behaviour and anti-innovation environment of the early 2000’s then enabling Chorus to become a Government subsidised sole industry supplier this is the right way to go. With the stroke of a pen Chorus has shifted the ground under the feet of many in the industry.
The ability of Chorus to change the rules is concerning on a number of levels. Top of mind is that CFH and Chorus allowed/encouraged others in the industry to take the risk, invest and grow the market only to have this investment made substantially redundant in some locations
The cynical side of me thinks this is the second step (following introduction of backhaul services last year) in a Machiavellian plan to return Chorus to its roots of the incumbent monopoly gatekeeper to New Zealand’s digital future. Chorus-com would enjoy a number of market advantages – including owning the local loop and intercity backhaul, all assisted by Government and service provider revenue. Kordia’s business is diverse enough to survive, the same may not be the case for other service providers who also invested in good faith.
New Zealand’s UFB network started off with such promise. Do we really want Chorus becoming the NBN of New Zealand – or worse force NZ back into the competitive dark ages prior to the breakup of Spark? This outcome isn’t going to stimulate service provider investment, it won’t foster service provider competition and it definitely won’t foster innovation. This is my view and one shared by a number of my industry peers.
Article by Aaron Olphert, Kordia chief technology officer