It’s time to consider whether New Zealand’s fibre network should be extended beyond the reach of UFB and UFB2. There is a sound business case for doing so. Yet considerations need to go beyond the balance sheet.
New Zealand’s fibre network has more than proved its worth since the nation went into lockdown. It helps hundreds of thousand to work or study from home. It keeps people entertained when other forms of fun are restricted.
There’s more than enough network capacity to cope with increased demand.
While there is still a rural-urban digital divide that needs to be addressed, the UFB has made fibre affordable for most people. Unlimited data plans with gigabit speeds start at around $80 a month. That’s all the broadband an everyday user could wish for at a knock-down price.
UFB1 and UFB2
The first phase of the UFB programme finished late last year. It gave three quarters or 75 per cent of the country the opportunity to install a fibre connection. The second phase, UFB2, scheduled to complete at the end of 2022 extends that footprint to reach 85 per cent of the country.
This leaves 15 per cent of New Zealand having to rely on either fixed wireless broadband, copper networks, or, in more remote cases, satellite broadband.
All these technologies have improved in recent years, but they can’t match fibre in terms of price performance.
All the way?
There are people who argue fibre can go all the way. After all, the copper network reaches around 99 per cent of the nation. We built that at a time when there was less money than today. It was seen as a nation building exercise. There was also an element of investing in infrastructure to create jobs.
We could go down that path. There is a case. It would be expensive and take a long time.
Yet it isn’t necessary. Wireless technologies are better suited than fibre when it comes to connecting more remote homes and businesses. And for the most remote places, satellite will remain the smartest choice.
Let’s agree now that the last one per cent is only going to have satellite as an option. This includes places like the Chatham Islands. Building fibre to the remote windswept farmhouses there would be economic madness.
Cut off point
This leaves us with the question of the best cut off point between fibre and fixed wireless.
We can leave it at the 85 per cent mark. That is where it will be at the end of 2022.
There’s a strong case for connecting those people who live just beyond the fringe of that network, and there will be again if we extend it further.
On the other hand, pushing to 99 per cent doesn’t make sense.
The cut-off point is more about economics than technology. There’s nothing technical to stop us building more and more fibre.
The barrier here is economic. By the time we get to the 85 per cent network level in 2022, government and private investors will have tipped something like $6 billion into fibre.
An 80:20 rule comes into play with real world network building1. In round numbers, if it cost $X billion to connect the first 20 per cent or so of premises, it would cost 2 x $X billion to connect the next 20 per cent and 4 x $X billion to connect the next 20 per cent. The UFB2 programme kicked in with the next 10 per cent at a network cost of around $400 million. That’s on top of the $1500 to $1700 cost of each additional connection.
Or, to put this another way, adding easy to connect homes in dense inner city areas costs a few hundred dollars per connection. Adding the last home that would bring the connection level up to 99 per cent would cost many millions.
Which means there is a pay-off curve.
At this point the discussion gets more complex.
When the UFB was originally planned, the politicians and experts hoped take up would reach 20 pe rcent. Connecting 75 per cent of the population when the expected uptake was 20 per cent made economic sense.
Uptake better than plan
As UFB developed and uptake rates outpaced the original expectation, it made sense to increase the footprint.
The economic viability of the more marginal connections changes when the uptake rate is 40 per cent compared with a 20 per cent uptake rate. That was when the decision was made to build UFB2.
Today’s uptake rate is a little higher than 50 per cent. By all accounts there is a huge backlog of UFB connection orders. I expect to see overall uptake reach at least 60 per cent within a year.
At an informed guess, the uptake will carry on climbing from today’s level, albeit at a slower pace than in the past. Over time it will definitely reach 70 per cent without any external intervention.
We’ll come back to that in a moment.
So, if uptake is 70 per cent, it makes economic sense to connect more of the homes in the last 15 per cent of the nation. That is, the people who won’t be on the network at the end of UFB 2.
This applies even though the per-connection cost of extending the network is higher than for the first 85 per cent of the country.
The copper question
All this talk of uptake rates assumes people can choose to keep copper broadband connections in areas where fibre has been installed.
We need to challenge that assumption.
Apart from anything else, it costs money to run two networks. Fibre is easier, less expensive to maintain than copper. So, over time, the cost of maintaining a single copper telecommunications line will be higher than its economic worth.
It makes sense to mandate a move to fibre and rip out copper before we get to this point. No-one can claim this would be anticompetitive. After all, those fixed wireless broadband towers aren’t going anywhere. And soon satellite will be a more competitive proposition2.
When the copper network is pulled, we can expect fibre uptake rates of 90 per cent or higher. This makes connecting those otherwise more marginal premises in the last 15 per cent an even better economic proposition.
The existing rules allow network company Chorus to withdraw copper lines from fibre areas. As things stand, there isn’t much incentive to do this.
Not only economic
Most of this discussion has been about the economics of extending fibre. That’s to underscore that the idea has a sound commercial basis. Yet, as it says at the top of this post, there are reasons to extend fibre beyond the mere economic.
To use an old fashioned cliche, more fibre would be a nation-building exercise. Those people who now live in areas beyond the planned fibre footprints won’t feel like second class citizens3.
These are people who need remote working, they can’t easily catch a bus to their nearest co-working space. Likewise school age children might not always be able to reach classrooms in poor weather. Communications like video-conferencing is more important when you can’t catch over coffee on Ponsonby Road.
When the government first announced its plan for a fibre network, Conor English, then at Federated Farmers, pointed out that rural businesses drive the New Zealand economy, yet were left out of the best telecommunications options.
Fibre to the bush, taking UFB2 further
Which brings us back to the cut-off point. Just how far should we extend UFB into the bush? Can we go beyond UFB2 with a UFB3?
Weighing up all the economic arguments, it seems there’s a case for going well past 85 per cent. The last five per cent doesn’t make economic sense, at least not if customers pay the same prices as other UFB users. We can talk about subsiding their connections, that’s another debate, maybe another blog post.
The slider runs from 85 per cent to 95 per cent. You can move it up and down, the higher it goes, the more costly things are. Keep it at 85 and there is no more expense, just a lot of people the wrong side of a digital divide.
We should move the slider closer to 95 per cent than 85 per cent and, as a nation, we absorb the cost. We’ll get all that money back in the long term.
In the past this would have been a nice-to-have, a luxury. Suddenly there is a lot less money in the economy. But in our new world, the idea of extending fibre is far from a luxury, it’s a necessity. We need to find creative ways to make it pay, but that’s something we’ve always been good at.
Let’s extend the fibre network beyond UFB1 and UFB2.
- Or at least it does in New Zealand. Extending the network in, say, Singapore, would be a snap by comparison ↩︎
- One of these days I’ll get around to explaining this in a separate post ↩︎
- This was particularly acute during the Rugby World Cup where fans in the rugby heartlands had second rate coverage. ↩︎