Skinny Broadband challenges New Zealand’s UFB model

Skinny Broadband is a solid, affordable low-end alternative to a copper or fibre internet connection. It suits many customers’ broadband needs.

It is competitively priced. Even after the $200 upfront payment for a suitable fixed wireless modem, Skinny Broadband is New Zealand’s cheapest mainstream broadband plan.

We’ve been conditioned to think wireless data is expensive. So you might think it odd that Skinny can deliver wireless broadband for less than any terrestrial broadband plan.

Skinny bypasses the copper tax

The reason is simple. Skinny doesn’t pay Chorus or any other network provider a regulated $42 (or thereabouts) each month for copper or fibre network access.

Don’t underestimate the effect this is going to have on the broadband market.

Some have described the access fee charged by Chorus as a copper tax. I’m told by industry insiders and advocacy groups that the government threatens retribution if they use that term again.

Flaw in UFB project

Forget what the Commerce Commission says. Government needed a high copper tax to placate Chorus shareholders. That’s because the government nailed fibre network builders to the floor when negotiating contract prices. Without the copper tax income, Chorus shareholders would get an unfair investment return.

In effect, the UFB deal the government first offered Chorus was financially unsustainable. The company had no choice at the time but to accept a poor deal and hope it could negotiate or lobby for concessions later. Concessions like, say, the Commerce Commission settling on a high copper tax.

Before winning a higher copper tax through the lengthy Commerce Commission process, that earlier,  strong-armed fibre deal represented  a threat to Chorus and to the company’s shareholders.

It also threatens the government’s UFB fibre broadband project.

A bigger picture

The threat goes further. If word got around that doing big NZ government infrastructure projects was financially risky, the government would struggle to get roads, railways, airports or hospitals built. Shareholders wouldn’t let managers bid for future NZ government projects.

Experts, analysts and industry lobbyists argued the toss over the right copper tax level for months. In the end, the Commerce Commission settled on a regulated access price that pleased the government and Chorus shareholders while disappointing everyone else.

Now that high price has become a different problem. It makes fixed broadband vulnerable to wireless competition.

Copper tax headroom

If the Commerce Commission had settled the access price at the lower level the industry had previously anticipated, there wouldn’t be much headroom for an alternative like Skinny Broadband to muscle in.

Who knows what market share Skinny will pick up? It will win some business for sure. The price is keen enough to pull customers from existing plans.

Assuming Skinny Broadband grabs more than a handful of customers, it will mean a slice of the potential market is lost to copper, to UFB, to Chorus and to the other fibre companies. That will, in turn, change the economics of those businesses.  Costs will spread over few customers.

The UFB business model only works if a large number of potential customers sign up.  It may even mean the Commerce Commission will need to return and strike a higher copper tax to keep Chorus and the UFB on track.

There’s more to this than Skinny

If this was just about Skinny Broadband, Chorus and government would have little to fear. They could shrug it off as a small competitor.

However, Vodafone is sitting on a lot of suitable wireless bandwidth. 2degrees has some. Spark may enter the market it its own right. As New Zealand’s largest ISP that would cause headaches for UFB.

There are other slices of spectrum. In theory all, or at least most, of it can be used to bypass UFB fibre with similar wireless broadband products.

New Zealand has a small population and relatively uncrowded airwaves. There may be enough spectrum to meet all the market demand for broadband.

Vodafone threat

Vodafone also has a neglected, but still viable, HFC cable in Wellington and Christchurch which bypasses Chorus and Enable Networks. So far it has remained on the sidelines, but if the vultures circle UFB, this could come into play.

Should all these broadband alternative chickens come home to roost at once, they could put a serious dent in fibre demand.

Forewarned about wireless

Wireless has been a known threat to fibre since the UFB was first announced. Wireless was listed as a possible risk before the UFB contracts were awarded. The technology has improved since then.

Now it is maturing as a viable alternative, not for everyone, but for some users. Maybe enough users to upset market assumptions. Fibre may have advantages, it may be a better technology. History shows us that merely being a better technology has never been enough to ensure success.

While this is enough of a challenge for terrestrial broadband planners to be getting on with, it is only the start. Work is already underway on 5G mobile, that promises to deliver fibre-like speeds with greater efficiency.

No-one in government is going to heed the words of a journalist like me, but if it wants to avoid future problems with UFB, now would be a good time to revisit those original contracts and offer Chorus and the other fibre builders better, more sustainable terms.

Then revisit the so-called copper tax.