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Preparing for a fibre future

01 Aug 2010

This is an exciting and pivotal time for our industry.I’m extremely proud of the progress our team of 8000 has already made in fundamentally changing one of New Zealand’s biggest and most important companies for the better. Of course there have been some massive challenges along the way, and there are many more challenges ahead – not least some huge decisions about how we align our business with the government’s Ultra Fast Broadband plans in a way that benefits not only our shareholders, but also New Zealand as a whole.

Make no mistake, Telecom is up for fibre, big time. But UFB signals a massive change and it’s critical for every one of us in the industry. UFB has the potential of having every bit as large an impact as such massive changes as privatisation, the emergence of the internet and mobile businesses, the dot com boom and crash, and the operational separation of Telecom. Each one violently shook our industry, and reshaped the landscape.

In fact New Zealand’s telecommunications industry has already seen as many twists and turns – arguably more – than any other around the world. Seismic change can be good. If we embrace it, it can be a catalyst for dramatic and sweeping improvements for customers. But it also carries significant risks, not just for Telecom but for all of us. That’s not to say we shouldn’t face up to the need for change – we need to shake things up.

But we need to make the right choices because the size of the overall telco market is unlikely to grow over the next few years. Yet we have more investment than ever before, funding ever shorter investment and technology cycles.

We also face higher costs through regulation and far greater competition than ever before. There are more of us, spending more than ever, chasing a slice of the pie that is staying about the same.

The risks attached to every dollar of investment have risen dramatically. That’s ultimately unsustainable and it will become ever harder to attract investment to telecommunications if it continues. So we have to manage the transition to a capital-intensive, fibre world very efficiently if we are to make it sustainable and encourage further investment risk.

We must build on the significant strides that have already been made. In the meantime, our nationwide programme of broadband upgrades has been quietly chugging away, delivering milestone after milestone on time and on budget. It has been like shelling peas. This programme is putting more fibre optics closer to more New Zealanders than ever before, with the resulting step change in broadband performance.

Telecom is a huge fan of fibre and its potential to reshape our economy for a digital future. In fact, we have more than 25,000km of fibre already in the ground. Our fibre-to-the-node programme has been held up as one of the best practices anywhere in the world, and we are regularly being contacted by other telcos to ask if they can study how we’ve done things. Certainly, there are very few countries with a public target of 85% coverage of fast FTTN broadband.

And so, we have moved steadily up the international league tables for broadband speed. For example, the average available download speed for customers whose connection has been upgraded through FTTN is 13Mbps. Akamai’s recent research shows that the average speed experienced by customers in the country for the fastest broadband connections in the world – South Korea – is around 14.5Mbps.

Once completed, FTTN could enable New Zealand to have some of the fastest average speeds in the world; FTTN is consigning New Zealand’s historic view of being broadband laggards well into the past. And all this will be before we shortly begin offering VDSL2 services, which are delivering real-world speeds of up to 40Mbps. Not all customers will be willing to pay for the fastest possible connections, but increasingly if people want world class broadband speeds, the network is able to deliver.

When it comes to fibre, our Chorus business has proven expertise, has delivered, and we have more of it than everyone else in New Zealand put together. That’s why we fully support the Government’s vision of getting more fibre closer to the doorstep of more New Zealanders than ever before. One of the National government’s key election promises was to deliver a direct fibre optic connection to the doorstep of 75% of New Zealand premises within 10 years. The government’s fibre vision would mean delivering yet another step change in broadband infrastructure.

The speeds unleashed by fibre to the home have the potential to be astronomical and they’re currently well ahead of the demand curve, but Telecom agrees that we need to take this next leap forward. We all know the economics of delivering fibre down every street and to every doorstep are incredibly challenging – hence the need for the investment of public funds – but I think it’s a conundrum that can be solved if we are all open to new ways of doing things, without wasting what has already been built. We’re not a large country and we certainly don’t have huge amounts of surplus capital washing around looking for an infrastructure project to invest in.

To me, any duplication or wasted investment would be criminal. Replicating the 25,000km of fibre Telecom already has makes no economic sense whatsoever.

In fact Telecom’s network has been designed from the ground up to allow for the extension of fibre, ultimately all the way to the doorstep. We need to build on it. So we are working hard to align the government’s $1.5b investment with the capital Telecom invests every year. For example, over the last two years alone Telecom’s capital investment has amounted to over $2.5bn. One way to align these goals is structural separation of Telecom’s network and retail businesses. It’s crucial for Telecom – and probably for government – that the benefits must outweigh the costs, but it is my belief that we have a combination of circumstances that may allow this and find a way that works for everyone.

The last thing New Zealand needs is for Telecom to be outside the tent looking in, forced to compete with government-backed infrastructure. Ultimately that would end up with both sets of infrastructure being uneconomic to both parties’ detriment. But New Zealand – and the industry – needs us to be able to work together. We are absolutely open to finding a solution. Such a seismic shift in the industry structure would definitely require a redrawn regulatory landscape.

Working this out is no mean feat. We have a team of 100 of our best people, including three executives working full time, dedicated to understanding our options. Not to mention a posse of advisors! This is potentially one of the biggest corporate restructurings in recent times. It’s a massive commitment, and potentially distracting, but we are committed to doing it right, not only for Telecom but for all of New Zealand.

Because from day one in this job I’ve seen it to be in the best long-term interests of all stakeholders in Telecom if we can work with the grain of public policy, not against it. And we will be flexible, innovative and open to any solution that will work for New Zealand, our shareholders and most importantly of all, our customers. The last thing New Zealand Inc. needs is for our largest private sector investor to be forced into competition with state owned infrastructure.

That’s just going to end with mutually assured destruction. Quite simply, it would be crazy. The Australians seem to have recognised this. They have acknowledged that for the NBN to work they need Telstra – its infrastructure and its customers – on board. They have acknowledged that this solution means delivering more fibre to more places faster and with the minimum of waste. We agree. The best solution is for Telecom to be right at the heart of UFB.

We have the fibre expertise, we have more fibre in the ground already than everyone else put together, and we have the customers. This is a golden opportunity to continue New Zealand’s development as a world-leading telecommunications environment that delivers for customers, allows investment and competition to flourish, and takes our nation forward. ]Let’s get it right, for everyone’s sake.