Another cable won’t lower NZ internet costs

There is a good reason to build another submarine cable linking New Zealand to the world. Cheaper internet is not that reason.

A press release from the Internet Party suggests a second international cable would bring down prices. The release quotes Internet Party leader Laila Harré:

If prices for international Internet traffic don’t come down, New Zealand can’t grow in a digital age.

The problem stems from the monopoly of Southern Cross Cable Network. Our policy position is to create a more competitive environment, leading to significantly lower retail prices, higher data caps and new pricing models.

This may sound plausible, but it doesn’t stack up economically. Vodafone CEO Russell Stanners told me the overseas part of the costs for each Vodafone internet customer come to less than $5. I heard similar numbers from CallPlus. Cutting that figure in half would bring down a customer’s monthly internet charge by $2.50. Given most people pay more than $50 a month, that’s not going to make much difference.

Even if international traffic was free, internet costs wouldn’t come down more than 10 percent.

Brendan Ritchie of DTS explains this in more detail in his blog:

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.

The best reason to build another submarine cable linking New Zealand to the world is security. The existing Southern Cross Cable Network has a good design and a solid track record. There are two lines and a figure of eight design reducing the chances of New Zealand being cut off.

But it isn’t bullet proof. If there’s a one-in-a-million chance of both lines breaking at once, that’s too big a risk given our entire economy is at stake. One operator can also be a single point of failure.

New Zealand needs another cable to reduce the risk of being cut off. If anything, that could drive end-user costs up as someone has to pay to build another cable.

2 thoughts on “Another cable won’t lower NZ internet costs

  1. It may not lower costs but continually threatening to build one is cheaper than actually building one. And SCCL keep reducing their charges, making another one unviable every time someone sounds serious. 🙂

  2. Spot on Bill. If you speak to anyone in a product role working for a NZ ISP, they will tell you the same – the average international bandiwdth cost for an internet broadband service is a small component of the overall cost of providing the service. I’m surprised that a political party with “Internet” in its name does not understand the economics of an internet service!

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