Vector is leading the alliance of 19 lines companies and independent fibre companies called the New Zealand Regional Fibre Group (NZRFG). With an advertising campaign promoting fibre to the door and ambitious plans that may extend to international connectivity, its chief executive Simon Mackenzie is set to become a leading voice in telecommunications. Sarah Putt paid a visit to Vector HQ to find out more about this emerging player in telecommunications.
Q: It seems to be shaping into a battle between the NZRFG and Telecom. It’s their (Telecom’s) technology vs your technology. Telecom have said we can extend our Fibre to the Node (FTTN) programme and we can make that Fibre to the Home (FTTH). But in a speech you made recently you said FTTN is not the way forward. Can you say why this would not work for New Zealand?
A: Why is that a solution that Telecom proposed? Because 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.
And the other thing is, how long will it take to get to that position? Globally we’ve already got a lot of economies moving to Gbps service – Singapore, Asia, Australia. So what happens in five years’ time when we do actually need to go to fibre, even if you’re on cabinets? It’s going to take another five/six years to go past that. So I think from a timing perspective it’s architected to lengthen the copper life and not actually address the fundamental step change that we need.
Q: The NZRFG network is entirely different to Telecom’s – what we would call exchanges now, you would call a substation?
A: It’s (NZRFG) basically an electronic network as opposed to a copper switch network. It’s a full IP-based network. It is a completely new and transparent platform that can still interconnect into the other (Telecom’s) network. It’s a standalone, separate network. Fundamentally that’s what was asked for by the government to be compliant. So it wasn’t a link network to the existing; it was a new network.
Q: Do you favour GPON technology over Point to Point architecture?
A: Absolutely. You get the build cost effectiveness; I think that’s a huge issue. That’s potentially 15-20% more cost-effective. That’s probably the principal reason more than anything else.
Q: And Layer 2 – in your original submission (March 2009) you said we will build Layer 2 at our own cost if we become an LFC. Am I representing your position correctly?
A: Not quite. We said we believe Layer 2 is quite a critical component that needs to be considered in conjunction with Layer 1. The reason being that open access Layer 2 to any party that wants to put product or content onto the network does not create a barrier to entry.
Our concern was that if you didn’t have a Layer 2 you weren’t going to actually drive uptake as quickly. Look at something as simple as a TV operator; they want to focus on their content. They want to be able to ensure that they put new products and services to their customers. But do they really want to buy point-to-point links and then put electronics on them?
I just think that’s a completely inefficient structure to take to the market, and actually that’s pretty much where globally the design is now going. Singapore is a case in point; they’ve got Layer 2, open access. They don’t have to be the only Layer 2 operator, but they are there to facilitate access to the network and drive uptake and new products and solutions on the market.
We have a Layer 2 business, and so we would look at expanding that. But we would also look at expanding it in conjunction with the other RNZFG members, or even a party such as Axia, which is involved in Singapore. They’ve got the international experience. They’re actually developing processes and systems up in Singapore, so why not learn off that and also enable to them to kind of get those connections globally to drive up on the fibre in New Zealand?
Q: Are you talking with Axia at the moment?
A: Not at the moment, but we have. The process constrains us now from discussions [with Crown Fibre Holdings].
Q: If you could work with Axia, could you work with Telecom?
A: I think we’re realistic. Obviously we interface now with Telecom with our existing business. We provide services to Vodafone, international suppliers like AT & T, so if it was the right construct, why wouldn’t we be able to work with Telecom? I think it’s about where the incentives lined up for both parties, [are we] philosophically aligned about what is the solution? Those are the kinds of things that would have to be covered off. But currently the process doesn’t really allow those kinds of discussions.
Q: Is Vector looking at partnering with the government in the Auckland Local Fibre Co?
A: Yes, and Waiheke Island, which was identified as a separate LFC. We’ve also put forward a proposition around how Wellington might also be able to be addressed.
Q: Would that be working in conjunction with TeamTalk?
A: No, it’s a standalone because we used to own the Wellington electricity network. We sold it, but we retained the right to utilise assets down there. We still have a fibre network in Wellington. It wouldn’t be fair to classify it as in-depth a bid as Auckland, but it has an option about how what we’re doing in Auckland could be leveraged in Wellington.
Q: If you get the Auckland region, when would you expect to see a return on investment?
A: I think there are a few phases to that. I think the issue is more around the construct of the model. That’s one thing that I believe is not well enough understood by a lot of market commentators.
The [model] is designed to build down the street what are known as the communal assets, run fibre all down the street, and when that’s been constructed the government pays you back in full for that. When a customer comes and asks for a connection, then there’s a choice around saying “okay, Vector pays for a connection and then buys back a portion of the communal asset”, which is then how you increase your shareholding. So by definition we see that as very similar to how we build electricity networks now.To me there are two clear phases: there’s the construction phase, which is when you build the assets. The second phase is really the connection phase. The connection phase is orientated around how quick is the uptake, and therefore the pricing that supports that uptake that determines the return over the longer run.
Q: You build the asset, the government pays you and then you buy back a share as you connect customers – was that the change that came out in September 2009?
A: Yes, we spent a lot of time with the government discussing how you allocate risk in this project, and essentially they want an open access transparent network; they didn’t want [providers] that were vertically integrated. You are constrained to being a Layer 1 operator, which is essentially bread and butter for us. What we’re being asked to do is build an infrastructure asset down a road. We are not a retailer, so therefore we are better at managing construction risk and the government is better at managing the uptake risk.
Q: Uptake risk is the government’s, but who are going to be the first customers on this network?
A: I actually think there’s a lot more customers than people recognise. We’ve got a lot of people on our network now already. We’ve got the international carriers, Vodafone’s mobile backhaul, and solutions for a lot of corporate customers. Then through our channel partners we provide connectivity into corporates where they take voice and internet services from service providers. So I think there is a market out there and that’s just growing all the time for fibre-based services.
Q: Vector’s got a massive advertising campaign running at the moment on fibre to the door and it’s pitched at the household consumer. But Vector’s nowhere near those customers – you’re three stages back.
A: Yes, but I think when we look at it from an infrastructure perspective the purpose of the campaign is very much to raise awareness first and foremost. We see that as a fundamental requirement because there is a layer of awareness, layer of demand which is pretty strong. When we’ve built on the North Shore, going down the street, it’s amazing how many people say “when can you get it into our house?” because they’re frustrated by what they currently receive.
Q: But they’re not getting that into their house. That North Shore network is not for residents.
A: From our perspective we have to raise awareness because we see that’s important to raise demand. It will also motivate new people to come into the market and actually provide those products and services.
I think the important thing also is when we submitted our ITP [bid in CFH process] we were very humbled by the amount of letters of support that we got from retailers, solution providers in the technology space… that we’re saying, we really support Vector doing this because this is the type of network that we need to be able to deliver new services and offerings to consumers in NZ.
Q: How much to connect to an average house?
A: That’s commercial, not going there.
Q: You’ve put it in the bid?
A: It was a requirement of the bid.
Q: How much do you think the ordinary Auckland household would pay for a fibre connection?
A: I think you’ve got to be really careful how you articulate that. I think it’s about what is their total cost when they look at their communication services. There’s too much focus on what is the connection versus what is the total cost. We believe you can actually end up with a fibre-based solution to the home on pretty typical services of voice and content at a cost that’s competitive with current prices being paid in the market.
Q: $40 a month?
A: No you’re going into a connection base. We’re talking about total cost.
Q: So you’re talking, what do I pay for my SKY TV, what do I pay for my phone…
A: Your entertainment, internet, and voice and related services. If you look at a typical pricing around that, and you look at what can be delivered in a similar bundle in a fibre-based network, we believe you can actually be very competitive in that space.
Q: Let’s add it up. $80 for a SKY connection, $40 for a broadband, $45 for a home line, just roughly.
A: Then add up on top of that your voice costs.Q: You mean another $20 for toll calls? That all adds up to $185, do you reckon that’s what it would be?
A: It could be close to that, yeah.
Q: Electricity companies – and this is your roots – they don’t have a great reputation in terms of reliability. Look at the terrible example in the late 1990s (when central Auckland was without power for weeks). Yet for all the little outages that telcos have, they are a known beast to the NZ consumer. We do know that pretty much most of time you can pick up the phone and make a call. Do you think that’s fair?
A: I don’t think that’s a fair summary. I think that electricity outages are about the same quantum as telecommunications. I think electricity typically gets a little bit more publicity around outages.
The impact on a consumer is way more from an electricity outage than it is on a telecommunications outage. I think you’ve got to also understand that what has created some of the adverse perceptions around electricity is not linked to the electricity lines side solely. There’s a big component part of that which is to do with going back over 10 years, around generation outages, or shortages of energy. And the government is dealing with that now through the electricity review. I think an important context to bear in mind is that if you look at electricity performance pricing, it’s been fixed at CPI for quite a long time now. Reliability of a lot of the networks has been good, it hasn’t been any fundamental detrimental impacts. Yeah sure, okay, there was an incident in 1998 – 12 years ago.
Q: There was one at the beginning of the year, I know that wasn’t Vector.
A: Okay, but I don’t see the relevance of that to telecommunications. That’s an asset class that has to be built overhead, you can’t build that underground, so a fire will take that out. The best way you can say is, how does that stake up against international practice – given a like-for-like type asset it stacks up pretty well. Internationally you get outages up in North America, major outages with major snowstorms; you get fire outages in Australia. That just goes with the territory with that type of asset. Clearly there’s always questions about should there have been more investment, but you’re dealing with huge numbers here. For example, even just a kilometre of overhead network could be $100,000 – significantly more than a telecom kilometre of network. Then you have to always balance the trade-off of the risk to what is the price to the customers.
So I think if you turn it around, we deal in a more dangerous product than telecommunications, so there’s a really high emphasis on health and safety, we have 28,000 kilometres of network ourselves and then on top of that we’ve got gas. So with us it’s getting the right timing of investment in the network, meeting those customer services. One of the things that I’d say is, we offer service standards and there’s payment if they’re not met on time. That’s something I don’t see in telecommunications actually. I don’t see any service standards and payment for non-delivery.
Q: When someone says you’re going to get 24Mbps and they get 10 Mbps, is that what you mean?
A: Well you don’t get anything, and if it fails and nothing works for five days, nothing happens. If the power’s out for an hour or three hours, then customers can get a payment for non-service. That to me is an interesting observation; we come from the energy side of life, we’ve lived regulation, structural separation was forced on us in 1998. We’ve had extensive regulation; at the moment we’re hearing some communications analysts and commentators saying there’s a lot of government intervention and I’m thinking, well if they just looked at similar industries, this has been going on for 10 years, so there should be no surprise here.
I don’t think it would be a fair thing to say that energy has a bad reputation; I just think it’s actually got a much higher profile when there are issues.
Q: Would you underground all of the fibre?
A: No.
Q: How much would go underground and how much would be over the power poles? Can you say a percentage?
A: We would look to utilise as much of our overhead network as possible because speed of build is a lot quicker. It’s cost-effective from an end-user perspective.We’ve got an undergrounding programme and over time we’d put stuff underground; there’s no problem in transitioning fibre overhead to underground on a duct network. We’ve worked extensively to get the costs and visual impact down. It’s [fibre cable] got no metallic parts, it sits exactly on the same plane as the electricity conductors, so there’s no visual impairment, and it’s been designed to not compromise the integrity of the pole from an engineering perspective.
Q: The NZRFG has been working on national standards for interconnection – can you tell me little bit about that?
A: In a general sense what we recognise is that all of the networks, while they might have some individual, geographical, architectural requirements, still need to be designed so if someone wants to connect to Auckland and send something down to Dunedin there is a seamless path – it does not mean there’s a whole lot of hand-offs that need to be integrated on the way through. So that’s the whole purpose on getting the same alignment on standards and how that flows into operating systems and business support systems, so it’s a ubiquitous network across the country.
Q: Even though Dunedin traffic would be a lot less than Auckland, would there be free exchange of traffic?
A: I would have thought so, because at the end of the day with the government’s involvement that must be an objective for them. We’ve been proactive in saying we recognise the need for this. We’ve been working on this for six months now as NZFRG, and now our technical guys are working with the Telecommunications Carriers Forum on it as well, because that’s essentially what Crown Fibre want.
Q: International connectivity: have you been in touch with Southern Cross?
A: No, we haven’t been in touch with Southern Cross about it specifically; obviously we’ve got AT&T and Verizon and buy capacity off those networks. Our focus is very much on how we ensure we can have a point of presence to be able to provide that connectivity, but then separate to that, looking at what is the trend with regards to that international connectivity and as we’ve seen the Kordia OptiKor, Pacific Fibre, then there’s this other French-based solution [SPIN] that’s out there.
Q: Do you think that [SPIN] is credible?
A: I don’t think you can ever dismiss it. I think it’s more a matter of the motivation and the way in which the developers are working with the French government to try and find the right solution for that model. The question around that is, will it come to NZ or will it focus mainly around French Polynesia?
Q: Would Vector invest?
A: We wouldn’t rule that out, yes.
Q: Invest in SPIN?
A: What we’re saying is, we’ll look at all the options and see what makes the best sense for us, if at all.
Q: What about Pacific Fibre? Do you think that’s credible?
A: I think, as they’ve identified, that they are probably at a much earlier stage than some of the other developers. I think that at this point in time you cannot rule out that that could be a potentially credible option. You’ve got some strong parties there that are willing to make things happen. But from my perspective it needs to be more fully developed to get a good understanding of how they actually see this model working, and one of the things around that clearly is the objective of the model from a commercial perspective, and how do they see that working and competing against the other possible solutions.
Q: Are any others in the NZRFG looking at joining you in that investment?
A: I don’t know.
Q: So it’s purely a Vector investigation?
A: We’re just looking at it from a Vector perspective at the moment. I’m sure Pacific Fibre has spoken to a number of others, but at this point in time we’re just focusing on the NZRFG, how we work nationally and what’s the local solution with national; but then we see international as a separate exercise for us.
Q: What’s Plan B? What if in June the government comes out and says “Vector, we don’t need you”?
A: That’s always a risk in this process. I guess the other side from that is we may – because it has to stack up for us commercially – we may say this doesn’t stack up for us. That’s a reality too.
So what’s Plan B? We still have a reasonable fibre network now, it’s got customers that we will continue to serve, there’s a lot of opportunity to connect customers onto it and we have a lot of use for that network as it stands now. Our electricity and gas networks are moving very much to IP-based control implementation information. So a lot of functionality that’s been put into our network has to now be connected onto an IP-based network.
We have always had communications assets, back to the turn of last century almost. It started out with copper, microwave, all kinds of different technologies to coordinate and manage our networks.