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Lessons from across the ditch

01 Aug 2010

Since the start of the UFB initiative, the TIG and most industry stakeholders have been raising a key issue: the need for demand side initiatives that deliver early adoption of the FTTH (fibre to the home) services in New Zealand homes. The business case for fibre to the premises for businesses, schools, hospitals and institutions is well understood. But the UFB Initiative requires the networks to expand to cover 75% of New Zealand households, and the case for consumers to move to a new technology in significant numbers requires a compelling value proposition. Even with the government’s money injected, significant residential adoption of services delivered over the UFB network will be critical to ensuring rollouts proceed past initial builds. The government and industry money will need to be recycled several times over the 10-year project period, and this can only occur with significant early uptake. Models assessing the viability of an FTTH network build focus on four key variables (see box to the right): The model is highly sensitive to penetration – most business cases require that greater than 40% connection of homes passed is required to ensure success and enable rollouts to continue, ie: there is enough cash coming in to keep building. A similar uptake will be required in New Zealand, otherwise the cash could dry up inside 3-4 years and network builds freeze. Further, when investors leverage debt to build networks, the banks regularly demand covenants on the customer connections and if these are not met, the banks’ funds stop. Even in the countries where higher speeds have been delivered, the majority of customers are still using lower speeds at lower prices. In Singapore, where StarHub has offered a 100Mbps service for consumers at $86 per month, there has only been a five percent take-up of this service from Star Hub’s customer base. This led Neil Montifiore, Starhub’s CEO, speaking to CommunicAsia 2010, to state: “I’m unconvinced about consumer demand for 100Mbps.” As many point out, this issue can be addressed over time as applications arrive that require very high-speed symmetrical services – but how long will this evolution take, and can the businesses that build the networks wait? Through UFB, New Zealand will be at the front of the fibre revolution while the vast bulk (80% +) of the world’s broadband users will still be operating at speeds of 10Mbps and lower; therefore the major players creating applications will build services for those mass markets. Companies like Google, Microsoft, Facebook and the new players coming in will usually focus their service development on the networks that exist in their major markets. The Australian government is investing in a similar project: the National Broadband Network (NBN), which at $AU42 billion is the largest single infrastructure project in Australian history. Clearly the Australian government can’t afford to take the risk of low adoption. So on June 20th 2010 they signed a heads of agreement with Telstra to pay Telstra to transfer its current broadband customers across to the new FTTH network. This pragmatic arrangement, an 11 billion-dollar deal, includes four billion for costs incurred by Telstra to transfer customers from its existing copper and HFC networks to the Australian government’s NBN. This number divides down to around a $500 subsidy per customer that Telstra transfers. Clearly this approach will ensure that the NBN in Australia gets the 70%+ adoption rate that they are looking for to ensure the project succeeds commercially and politically. One last point that increases the need for the Australian thinking here in New Zealand is the model that is being pursued for the UFB initiative: open access. While I support open access as the only viable option in the NZ UFB initiative (otherwise the UFB initiative could create a new telecommunications monopoly), open access has its disadvantages and these must be understood. The key weakness of the open access model appears precisely when user demand is low When a telco invests in and retails a service over its own infrastructure, it has to make the investment work – so even if takeup is below forecast, the telco will continue to make (and often increase) investments in product development, sales and marketing to drive demand. This has often been the case, and stops ‘cut and run’ thinking. However, in the open access model where the network builder has no retail ability, the retailers have no such underlying incentive. If the products that the retailers develop and market don’t move to forecast, the incentives to cut losses and either stop selling or reduce sales and marketing are compelling. Taking a version of the Australian government’s approach in New Zealand may well be required, to ensure that the UFB could proceed at pace without stumbling.