Backhaul competition in regulator's spotlight

The Commerce Commission’s move to investigate backhaul comes at a time when the sector has never been more competitive. Yet that’s not how everyone see things. There are issues that may need resolving by a regulator.

Although few everyday users hear of it, backhaul is vital part of the telecommunications network. It connects local exchanges and major hubs.

The local loop moves internet traffic from homes and offices via cabinets to local exchanges. Backhaul takes it from these local exchanges to central exchanges. From there, internet service providers take over with their own national networks and international connections.

While backhaul also connects cellular towers to the wider internet for mobile traffic, that doesn’t appear to be part of the investigation.

Fit for purpose

Telecommunications commissioner Stephen Gale says a new inquiry and discussion paper explores whether the current regulatory regime is fit for purpose.

He says: “Backhaul services are a key component of the telecommunications market and critical for ensuring New Zealanders can benefit from access to quality broadband services”.

The Commerce Commission wants responses to its discussion paper by 23 September.

New Zealand backhaul providers include Kordia, Voyager, Vibe and other smaller players.

Last year Chorus has announced plans for a new backhaul service connecting points of interconnect for the Ultrafast Broadband network. In effect, the new Chorus service will connect ISPs operating in regional areas to the main hubs when they don’t have their own circuits.

Critics

Existing industry players criticise these moves saying the new service will undermine their backhaul investment. They argue Crown Fibre Holdings encouraged them to invest in backhaul. Crown Fibre Holdings is the government agency overseeing the UFB network roll out.

Now they see Chorus muscling in on the business. The implication is that they would never have invested in backhaul if they knew Chorus would enter the market.

There is little question Chorus’ entry will change the nature of the market. While a big new player is most likely to increase competition in the short-term, there are long-term implications.

DTS CEO Brandon Ritchie explains the issue from an ISP perspective in Chorus to increase revenue/influence in market shake up.

Chorus backhaul

Ritchie says Chorus is entering the backhaul market because it will allow the network wholesaler to increase the revenue it earns from ISPs. This will help small ISPs, reducing their costs and simplifying relationships. From the Chorus and small ISP point of view, it’s a good move.

Yet, Ritchie points out many ISPs invested in providing their own backhaul services as a way of gaining competitive advantage. Now Chorus plans to offer an alternative, that investment could be wasted.

Of course all of this should have been foreseen when the telecommunications regulations for the UFB era were first established. But that’s easy to say in hindsight.

The UFB deal and regulation backed Chorus into a corner. It can’t be blamed for seeking legitimate ways of expanding its footprint and earning extra revenue. The company has an obligation to shareholders. Meanwhile, the ISPs who invested in backhaul, possibly with CFH encouragement have every reason to feel cheated.

So what looks like an unnecessary investigation into an area where competition seems to be working, turns out to be important after all.