Spark, Vodafone, Chorus and the battle for fibre

Spark pushes fixed wireless. Vodafone boosted and rebooted its HFC network. The Hybrid fibre co-axial network is rebranded as FibreX^[1].

Where possible, New Zealand’s two biggest retail telecommunications companies bypass copper and fibre. Most of the time that means not buying services from Chorus.

It also means not buying regulated services. On copper and fibre networks they have to buy broadband from wholesalers at prices determined the Commerce Commission.

Aggressive sales

There’s anecdotal evidences Spark and Vodafone use aggressive sales and marketing to move customers off regulated services.

While the local fibre companies; NorthPower, UFF and Enable are also in the telcos’ sights, when it comes to Chorus, the moves are a deliberate shot across the bows.

Spark and Vodafone seem determined to chip away at Chorus and regulated broadband.

Robust competition

On one level this is all good. Telecommunications is a competitive industry. That’s how it should be.

Increased competition was the intention from the moment, the then communications minister, Steven Joyce first revelaed plans for the UFB fibre network.

That plan was to set in stone a layer of separation. It meant no telecommunications company could own a vertically-integrated monopoly. Any fixed lines between homes or offices and local exchanges or roadside cabinets had to be owned by a different company to the ones selling phone services.

When Spark and Chorus were family

Telecom NZ and Chorus demerged. This meant the latter could bid for fibre contracts.

Separation means Chorus is unable to sell services direct to customers. It can only act as a wholesaler.

The changes have been a resounding success. Parts of the market are crowded and, at times, margins are wafer thin. That’s market forces in action. You can see it as proof the market is competitive. More to the point customers are well served by companies keen to win their business.

Better broadband

When the UFB was still just a idea in the minister’s in-tray, broadband speeds in New Zealand were under 10 Mbps. In its latest quarterly review, Chorus says customers on its networks now connect at an average of 33 Mbps. That average speed is only going to get faster as more fibre is built and more customers move to the new networks.

From last month, anyone living in a fibre area can buy a 1 Gbps connection at a relatively modest price. Over time this will see average speeds sky-rocket.

It’s not just about speed. In 2009 unlimited data plans were, in effect, unknown in New Zealand. Almost everyone had data caps — most were in the region of few dozen megabytes per month. Today more than half of all residential broadband users have unlimited data.

Spark Upgrade New Zealand

Last week Spark opened a new front in its marketing campaign. In the Upgrade New Zealand press release Spark Home, Mobile and Business CEO Jason Paris says: “During winter, we apologized to customers for the poor experience they had on the Chorus copper network.”

Elsewhere the release says: “Chorus copper lines are a legacy technology; they are getting older and are increasingly prone to faults.”

There’s something in this. After all, an ageing copper network is one reason why the government tipped $1.5 billion of tax-payer money into replacing it with fibre.

Yet for Spark to highlight this is curious. It isn’t that long since Spark predecessor Telecom NZ sung the praises of the same legacy technology.

Copper bottomed

You can view Upgrade New Zealand as a move to push customers off Chorus copper lines. If there are fewer active lines, the copper network is worth less.

This matters because the post-2020 regulatory regime now under discussion is likely to use the so-called building block model. This model will see Chorus earn a regulated return through connections charges that, in effect, are based on the value of network assets. If the assets have a lower book value, then Spark and all the other telcos get to pay less for access.

In other words Spark shareholders do better, Chorus shareholders will be worse off.

Of course this will benefit all retail telcos. But as the largest retail telco with about half the broadband market Spark stands to gain the most. It has every incentive to push down the value of the copper network.

Wireless marches on

Technology never stands still. At the time the UFB contracts were awarded, mobile data was yet to blossom. We all knew wireless speeds and capacity would increase over time, that’s one reason fixed wireless was chosen to connect remote users in the Rural Broadband Initiative.

Yet, if anything, the progress has been faster than was expected at that time.

Today’s fixed wireless networks can trump the best copper speeds for many users. More spectrum and new technologies hold the promise of ever greater performance to come.

Fixed wireless will never be the best connection option for all users. Apart from anything else wireless bandwidth is shared. This means speeds can drop at times of high demand. There’s also a limit to the number of fixed wireless customers a carrier can support on the existing network.

Yet with investments and improvements, it can be  a viable alternative to fibre for some customer types. This is the promise of 5G and 4.5G cellular. Although, you might want to take some of the 5G hype with a pinch of salt. Technology companies have been known to oversell the future.

Regulation

There’s another aspect of wireless broadband that makes it interesting to carriers. It is not regulated. If Spark, Vodafone or 2degrees sell fixed wireless broadband to their customers, they don’t have to pay a charge to the wholesale network company. They get to keep all the money.

A lot of money is involved. The wholesale price of a copper or fibre line is around $41 a month. So when Spark sells a fixed wireless broadband connection, it has $41 more to play with. Of course that money has to pay for towers, spectrum licenses, back-haul, support and so on. But $41 per customer per month, every month soon adds up.

Likewise when Vodafone sells a connection to a customer on its FibreX network there is no ticket clipping.

Spark fixed wireless and Vodafone FibreX are vertically integrated. That is, whether you buy a Spark fixed wireless or Vodafone FibreX service, the connection goes through one company’s network all the way to the internet node.

Broadband numbers

Chorus has a total of about 1.2 million fixed line broadband connections.

Vodafone is coy about the numbers on its FibreX network. At one point during the press conference called to announce the service, Vodafone CTO Tony Baird said the network passes 200,000 homes. Vodafone later said this number was wrong. Yet whether right or wrong it seems in the right ball park.

Many of the Vodafone connections will be in Christchurch where Enable provides the fixed-line connections. If anything, the threat to Enable is greater than the threat to Chorus.

For the sake of argument let’s say Vodafone could service as many as 100,000 FiberX accounts that might otherwise be on the Chorus network. In round numbers, that means close to 10 percent of Chorus’ business has a direct competitive threat. Should that number rise much higher, we can stop talking in terms of Chorus having a monopoly.

Spark numbers

Spark has previously said it aims to get around 50,000 to 60,000 users onto its fixed wireless network. Most informed observers suggest 60,000 is about the practical capacity of the existing technology and tower density. Of course the number could go higher if Spark built more towers or if it found more spectrum to devote to fixed wireless.

Last year’s numbers suggest Spark has around 500,000 broadband customers across New Zealand. It will be interesting to see if fixed wireless means Spark will expand its share of the total market or if it will mainly convert copper broadband customers to fixed wireless. Taking into account the other fibre wholesale companies, Spark fixed wireless could, at most, take two or three percent of those 1.2 million broadband lines from Chorus.

Vodafone has yet to officially announce its own fixed wireless in urban areas although anecdotally the company does have some connections.

If 2degrees is doing similar, it is keeping very quiet and there is no noise from its customers. There are other fixed wireless operators, but they mainly play in rural areas beyond the reach of the UFB fibre network.

Spark has more of the 700 MHz spectrum that Vodafone and twice as much as 2degrees. Neither of the other two mobile companies have made a concerted push to sell fixed wireless in urban areas so far. Even if they did, their joint potential market would only be much the same as Spark’s. So at most, today’s fixed wireless technology could pull five percent of  connections away from Chorus.

All this means 15 percent of the Chorus copper and fibre footprint is vulnerable to Vodafone FibreX and Spark fixed wireless.

Disclosure: Both Chorus and Spark have paid for my writing services in the past year.

1. Let’s be clear here, Vodafone’s FibreX is not a fibre network. ↩