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Pricing: How will a new international cable benefit NZ?

By Brendan Ritchie
Wed 13 Aug 2014
FYI, this story is more than a year old

DTS CEO Brendan Ritchie writes the second of his three part series of posts on the subject of the additional undersea cables planned for New Zealand in the coming years.

A couple of years ago there was a very real argument to be made that New Zealand ISP’s paid too much for international bandwidth, and in turn data costs to consumers were also too high.

However, the threat of real competition in the form of the now defunct Pacific Fibre, kick started a drop in international pricing in NZ. As I stated at the time of that ventures demise;

The legacy Pacific Fibre (PF) will leave is that of lower pricing from Southern Cross (SCC), yet ironically that contributed directly to their downfall.

The moment PF was launched, the very threat of genuine competition made SCC jump into action and offer volume deals on fixed terms, which in one act both locked away a large portion of the market and forced PF to adjust their business model.

Lower $/Mbps = more Mbps that need to be sold for breakeven to be reached in the same period as initially planned.

In the two years since, we have seen NZ and Australian transit pricing merge to the point that market offerings now largely match each other in terms of price and data offered.

Contention is still modelled in the same way by ISP’s, with low cost flat rate pricing usually meaning it is highly contended, and a higher cost p/GB in the business space reflecting reduced contention, but the price points for each in Australia and NZ are almost mirrored.DTSLogo

The difference in market factors for Australia is that they have several undersea cables connecting them to the world, yet the price per Mbps is almost identical in both countries.

This suggests that one cable or many, there are costs that need to be recovered on these massive projects and at this stage in their life cycle we have reached something of a stable price point for this part of the world.

Will the Vodafone/Telecom cable drop prices?

The impact of this cable depends on whether access over that service will be available via wholesale channels. If access to other ISP’s is not offered, market impact will be muted.

This cable has a much lower cost to build given its shorter direct path to Sydney (AU$60 million to build 30Tbps versus the US$350 million for Hawaiki to build 6Tbps of capacity), and with the destination of traffic coming out of New Zealand set to be a 50/50 split between Australia and America, the financials look much better for the TGA link.

If the price point offered by TGA reflects the points I have just made, and if ISP’s can be smart about how they route traffic over the cheaper path and utilise peering arrangements out of Sydney, then costs can be lowered. A LOT of “ifs” there though…

But, do lower international bandwidth prices = lower consumer prices?

Not really. International bandwidth sits well behind staff costs, domestic transit costs, tail circuit costs, hardware costs and some others I am probably forgetting right now.

It is a fairly small part of the overall cost structure that goes into providing services to end users. Market maturity and rationalisation has lowered pricing, and ubiquitous access to UFB at regulated pricing has helped lower retail pricing.

The market is crowded at the retail level, and the industry is now 20+ years old, margins are falling as services are becoming commoditised, and UFB is driving that.

Quality circuits for SME’s and consumers now cost less than ever, the companies selling services over those tails are competing harder than ever, and even though providing UFB circuits to consumers brings increased costs in terms of how many regions an ISP needs to deploy hardware in and how much grunt the hardware deployed needs to have, market pressure is demanding that scale is the answer to ensuring profitability.

In summary…

* New Zealand and Australia currently have very similar rates for international transit, leading me to believe that additional cables to the USA from NZ will do little to reduce international transit costs

* TGA may, in the right environment, provide lower p/Mbps costs than SCC/Hawaiki, but even if that does happen, international transit costs form a small part of overall ISP costs, so will provide little scope to reduce consumer pricing.

By Brendan Ritchie – CEO, DTS

The last post in the series will detail the benefits brought about by the existence of additional paths to the world in terms of redundancy...

For part one click here

Brendan Ritchie is the CEO of DTS, a business focused ISP that has been supplying clients across Australia and New Zealand with internet, voice and tailored WAN solutions since 2002.

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