Vodafone and Sky need Commerce Commission approval for their merger. From a telecommunications point of view, there’s no reason to halt the deal.
Five years ago government tore New Zealand’s telecommunications sector apart. Then remade in the name of competition.
The government pumped $1.5 billion of public money into building a new fibre network for people in towns. Today this goes by the name UFB (Ultrafast Broadband).
A separate RBI (rural broadband initiative) project aimed to improve services for people living in the country.
Taxpayer funds come with strings attached
By law, companies taking taxpayer money to build local fibre networks can not sell direct to consumers or business.
The law draws a line between retail service providers  and wholesale fibre companies.
Fixed wireless broadband blurs those lines. Fixed wireless broadband services from Spark, Skinny and Vodafone are not regulated . They bypass wholesalers: Chorus, Northpower, UFF and Enable Networks.
At the time of the industry restructure, legislators and regulators anticipated deals like the Vodafone-Sky merger. What they failed to anticipate was the speed of fixed wireless broadband maturing as a rival to wired technologies.
Triple play, quad play
The key to understanding Vodafone-Sky is what industry insiders call the triple play. Triple play is where a telco offers customers phone, internet and TV. Consumers pay for everything in a single bill.
The NBR went one further mentioning a quad play which adds mobile phones.
Triple play is common overseas. And it is a regulatory concern. That’s because most overseas telcos offering a triple play have vertically integrated  networks. That is, they control every step of the journey from the customer’s home to the phone switches, internet and media servers.
Fixed line vertical integration can’t happen in New Zealand. We have structurally separated fibre and copper networks. The connections between homes and RSP-operated networks are owned by wholesale network companies.
To get to that point the government insisted Telecom NZ demerge its Chorus business before it could win any fibre contracts.
Today Chorus has monopoly control of the copper phone network. This is the old telephone network that runs from exchanges and roadside cabinets to our homes.
Chorus is regulated by the Commerce Commission to ensure it doesn’t abuse that monopoly.
The government’s long term plan is for a fibre network to replace the copper network. The UFB or Ultra-fast Broadband fibre network is more than half way through a roll-out in urban New Zealand.
Chorus is the UFB fibre provider for much of the country. Northpower, UFF and Enable Networks also have regional fibre monopolies.
Someone else’s network
To sell triple play packages to fibre, ADSL or VDSL customers, Vodafone-Sky’s traffic has to pass through a wholesale network. That leaves no room for vertical integration.
New Zealand’s structural separation means, by law, every retail telco gets the same access at the same prices to the same fibre and copper services.
Chorus can’t play favourites. It can’t cut sweetheart deals. Vodafone-Sky can’t get a better Chorus network than say, Spark or Callplus.
Reining-in the power
Among other things, this makes it easier for connected customers to switch service providers. At least in theory. Structural separation is a deliberate move to stop RSPs from wielding too much power over customers.
However, structural separation doesn’t reach every New Zealand broadband network.
Vodafone runs a US-style HFC (hybrid-fibre coaxial) network in parts of Wellington and Christchurch. It passes around 150,000 homes.
In these areas, Vodafone broadband services are vertically integrated.
Big, not too big
When the first stage of UFB completes in 2019, it will connect about 1.4 million users. Users and homes passed are not the same thing, but we can say in round numbers the HFC network will reach about one-tenth as many homes as the completed UFB network.
UFB competes directly with Vodafone’s HFC network. Most users already regard UFB as technically better. Over time the performance gap will grow.
Like fixed wireless broadband, some customers find Vodafone’s HFC network is all the internet they need.
Not a threat
On its own Vodafone’s HFC network isn’t a serious threat to the UFB. Its coverage area is too small. Not does it threaten regulation. It doesn’t keep Chorus executives awake a night.
There’s little scope for Vodafone-Sky to build an aggressive vertically-integrated business even in the HFC network areas. And anyway, there’s no monopoly.
The threat could change if Vodafone-Sky decided owning its own network is such a great idea that it extended the HFC footprint. Most observers think that’s never going to happen.
You have to be careful with words like never in the telecommunications business. Remember UFB architects also thought fixed wireless broadband would never challenge fibre. And yet it does.
However, the argument against extending HFC is strong. First, UFB has better technology. Second, building networks is hard, expensive and complex. Third, an extended HFC would compete with a network that is, in effect, government subsidised.
And let’s face it, you don’t want to go head to head with the people who get to write the rules of the game.
Fixed wireless broadband
If the old TelstraClear HFC network was the only non-UFB network, Vodafone-Sky would find it tough building a vertically-integrated operation. But it owns another more extensive network. The Vodafone cellular network.
Cellular networks can deliver fixed wireless broadband. They do this without anything touching the regulated Chorus or local fibre company-operated networks.
At present wireless broadband networks are beyond the reach of broadband regulation. Although there are plenty of mobile phone regulations for carriers to worry about.
Vodafone, Spark and Spark’s Skinny all offer fixed wireless broadband services. When it uses 4G cellular technology, fixed wireless broadband networks can deliver close to fibre-like performance.
Like rural broadband, only in towns
This is what Vodafone offers RBI customers in rural New Zealand.
Sure, performance is not always that good. And yes fibre has potential to go faster still. But as we’ve already mentioned, 4G speeds are more than enough for many day-to-day broadband users.
The only mainstream application that demands more bandwidth is high-quality streaming video. And you need to have more than one person in a house watching HD video to use all the bandwidth available from a broadband connection.
As things stand in New Zealand at present, fixed wireless broadband presents Vodafone-Sky with a potential second vertically integrated broadband network.
Fixed wireless limitations
Fixed wireless is not without challenges. The bandwidth is limited and shared. On the other hand Vodafone has plenty of suitable spectrum to play with and those resources will stretch further as 4.5G and 5G technologies arrive.
There’s a finite limit to how many fixed wireless broadband customers Vodafone’s existing network can support in urban areas. Fibre is often a better way to reach a dense population.
Things are different outside the towns and cities with the RBI towers.
A Vodafone insider told me, for now, the potential urban fixed wireless broadband network market is measured in tens of thousands, not hundreds of thousands.
Wireless not head-on challenge to UFB
Although the Vodafone cellular network may ‘pass’ a million or more homes, it can’t service them all simultaneously with fixed wireless broadband. At least not today.
Faster wireless technologies are on their way. They’ll make better use of available spectrum, but there’s still a limit. As they say, you cannae break the laws of physics.
To get around the physical limits. Vodafone could build more towers. Doing so is far from trivial. There’s a financial cost – that might be justified. There are also social costs. People might want wireless services, they often don’t want more cellphone towers in their neighbourhood. Nimbys are everywhere.
With a little help from my friends
At best, with help from the network equipment makers, fresh investment in towers and smart planning Vodafone may stretch to supporting say 100,000 urban fixed wireless broadband customers.
If every house passed by HFC chose Vodafone-Sky, if Vodafone-Sky could maximise the 4G network fixed wireless capacity, it might, just, reach 250,000 customers. This compares with the 1.5 million reached by UFB.
Most customers on Vodafone-Sky’s vertically integrated networks would have viable alternatives to choose from. If anything customer choice is increasing, not reducing.
The issue here is not that Vodafone-Sky is hell bent on working around telecommunications regulation at any cost. It’s more that lucrative opportunities are emerging for Vodafone-Sky and, for that matter, Spark, to bypass regulations.
- Jargon alert. We used to call them ISPs which meant internet service provider. They now sell other services so they become RSP or retail service providers. ↩
- Wireless broadband’s potential was understood when the UFB contracts were drafted. Chorus noted the risk in the documents it gave investors. ↩
- More jargon — sorry. Economists say companies are vertically integrated when they own different stages of production. For example oil companies once owned wells, tankers and petrol stations. Vertical integration is often a barrier to competition. When Telecom NZ was vertically integrated, competitors struggled to get a market foothold. In 2008 Chorus became a separate business unit. That was organisational separation. In 2011 the companies emerged, move known as structural separation. ↩