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Infrastructure Commission wants digital strategy

Earlier this month Te Waihanga, New Zealand’s infrastructure commission, tabled its first Infrastructure Strategy: Rautaki Hanganga o Aotearoa.

Te Waihanga describes its document as a road map for a thriving New Zealand.

The document pins down the most pressing issues facing the nation and looks at what is needed to fix them.

Risks to infrastructure

Among other items it warns there is existing infrastructure at risk from rising sea levels and a need to increase electricity generation to meet net zero carbon goals.

Te Waihanga notes that technology can do much to improve the nations infrastructure. It says; “We need to accelerate the adoption and diffusion of technological and digital change.”

It helps that most of the technology needed to transform infrastructure is in place. The strategy document says there is little need for high-risk, cutting edge technology. There would be huge benefits from speeding up the adoption of existing technology.

The strategy says: “New Zealand is well-placed to leverage many of the advances in digital technology that have occurred in the past decade.”

High quality broadband network

“We’ve built a high-quality broadband network and have coverage that, while not universal, is widespread.

“Strong market competition in sectors such as energy and telecommunications has proven important in incentivising pockets of technological excellence.

“New Zealand is small and agile with a rich history of adopting new digital technologies with speed, dating back as far as 1985, when New Zealand was one of the first countries to adopt a national system of electronic fund transfers (known as Eftpos)”

Consultation

Te Waihanga consulted the public and interest groups before publishing its strategy.

The feedback on the role of technology suggests that the infrastructure industry has invested less than it might have done in digital technology because there was little pressure from its customers. The industry’s main customer is government.

Submitters told Te Waihanga there is a need for a national digital strategy and more leadership in this area from central government. The government is working on a strategy.

Incentives

The issue is not the lack of technology, but the speed of technology adoption. Te Waihanga wants to see this move faster and suggests there should be incentives for industry to adopt new technologies.

A key part of this is developing people’s skills and moving to an open system of infrastructure data. Standardisation and common data frameworks can also help.

Te Waihanga wants procurement to move from chasing the lowest cost towards seeking the highest value. It also wants government procurement to motivate more technology take-up.

There are legal and regulatory questions, especially in areas like privacy. And a focus on security is essential.

Selling broadband and energy as a bundle

Connections between telecommunications and the energy sector are not new. They could soon become more important.

When the New Zealand government first planned its fibre network three groups bid for contracts.

Chorus wanted the entire project. At the time it was part of Telecom. Axia Netmedia, a Canadian business, was the second bidder.

The third bidder was a consortium of power distribution companies. Each bid to build fibre in one or more of the 30-odd regions.

Northpower, Enable Networks and a group of power companies in the central North Island all won contracts.

These businesses are wholesale fibre companies and electricity distributors.

Power retailers selling broadband

In recent years power retailers have entered the broadband market. Both Trustpower and Contact Energy have sizable retail telecommunications businesses.

They come from power and now play in telecommunications.

Orcon comes from telecommunications and now plays in power.

In 2016, Vocus acquired Switch, an energy utility. It used this to offer power to customers at CallPlus, Slingshot and other brands.

It became Vocus Energy. You can find that brand today, but it is more common to see it as Orcon Power.

Orcon’s power potential

Power didn’t rate a mention in the 350 word press release announcing 2degrees merger with Orcon.

You have to read the attached Notes to editors, which is, in effect, a footnote to learn:”

“…Orcon Group, a fully-owned subsidiary of Vocus, is an integrated New Zealand telecommunications and energy business…”

Later, the press release expands on this in a ’key numbers section. Orcon has 40,000 energy customers.

This could prove to be far more important than that modest mention suggests.

Orcon has convinced almost one in five of its 200,000 plus customers to add power to their monthly broadband bill.

2degrees has around 1.5 million customers. If the merged company can convince these to move, it could mean 300,000 more power customers. That would make Orcon Power, or a rebranded version of the same, a giant in New Zealand electricity retail.

At the same time, it will make shareholders a lot of money.

Power and broadband networks

Up to a point, wholesale power and broadband are natural partners. They both operate physical distribution networks. You could string fibre from power networks. Before UFB, power companies built their own fibre networks to control their systems.

Places, like, say, cellphone towers, tend to need both a fibre connection and a power link. Combining the two makes sense.

The relationship between retail power companies and broadband is virtual more than physical.

Both businesses rely on sophisticated billing systems. It’s not that hard for savvy operators to combine power and broadband billing systems.

Years ago, service providers sent bills by physical mail. It was a significant cost each month. Printing both bills on one sheet of paper then stuffing and delivering a single envelope represented a major cost saving.

The savings are not on the same scale with electronic billing, but there are some benefits.

Would you like fries with that?

For power companies that sell broadband and telecoms companies who sell power, the main attraction is upsizing.

It costs a fast food outlet money to get a customer to walk in the door. There is marketing, a lot of marketing. And there is the cost of researching, buying and fitting out suitable real estate in places where there is a demand.

Once that customer arrives at the counter, there’s a small margin on the first thing they buy. If they can be upsold, the profit margin on the total transaction is higher.

Margins

A similar logic can apply to selling power and broadband together. It could increase the profit margin. Yet it doesn’t have to. Increasing the size of the sale means more profit even if both purchases carry the same margin.

After all, it’s not as if anyone has to do much more work to transact a power sale alongside a broadband sale. The extra revenue comes at almost no extra cost.

It would be worth doing if this were the only reason to sell power and broadband together.

There are two other points to consider. Both are important.

Harder to grasp

First, combined bills are more confusing to understand.

It’s easy to comparison shop for broadband. There are few variables. Line speed and download data are the main ones. Broadband providers offer a limited range of speeds and data options. Many customers pick a speed and choose unlimited data.

Comparing say, 2degrees broadband with Orcon broadband is simple.

You can’t say the same for electricity. Take a look at Consumer’s Powerswitch website. The combinations and options are confusing.

In some cases the power companies that bundle broadband are among the most expensive. You may get cheap broadband, but the combination can end up costing more than buying separate services.

It’s hard to tell. Sure you can spend an evening with a spreadsheet working things out. But there are many variables. It is difficult for an outsider to get a simple, clear picture.

Asymmetric information

None of this is to say the companies selling power and broadband combined are in any way unethical. The issue is asymmetric information, they know more about this than you do.

What is clear, is that selling power and broadband bundles is lucrative.

There is another huge advantage for companies that sell power and broadband together. It is much harder for customers to walk away when they have both.

The companies who sell bundles like to talk about ‘customer retention’.

It is simple for a broadband customer to switch from one provider to another if a better deal comes along. This happens all the time. In the business this is churn.

Reducing churn

The other business term you need to know at this point is the cost of customer acquisition.

Remember the fast food example? It costs McDonalds or KFC money to get a customer to walk in the door.

Likewise, broadband service providers spend money on advertising and other lures to win new business. This cost means the company may not break even with a new customer until they have been on the books for a few months. The longer they stay, the better the long term margin for that customer.

Getting customers to buy power with their broadband means they stay longer. That makes them more lucrative customers.

For consumers the benefit of having to pay a single monthly bill for two services is a small convenience. One less invoice to forget. It is a handful fewer mouse clicks or phone screen taps each month.

It may look like a cost saving, but you can often do better by buying separate services.

Before choosing a power and broadband bundle you need to check two things. First, get a better understanding of what you pay for electricity. The Powerswitch website can help.

Second, recognise that unravelling a bundle could be more difficult than it looks. Give thought to how you might do this if it is necessary.

Extending New Zealand fibre beyond UFB2

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 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 percent 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 percent of the country.

This leaves 15 percent 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 percent 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 percent 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 percent 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 percent 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 percent 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 percent or so of premises, it would cost 2 x $X billion to connect the next 20 percent and 4 x $X billion to connect the next 20 percent. The UFB2 programme kicked in with the next 10 percent at a network cost of around $400 million. That’s on top of the $1500 to $1700 cost of each additional connection.

Costs

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 percent 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 percent. Connecting 75 percent of the population when the expected uptake was 20 percent 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 percent compared with a 20 percent uptake rate. That was when the decision was made to build UFB2.

Today’s uptake rate is a little higher than 50 percent. By all accounts there is a huge backlog of UFB connection orders. I expect to see overall uptake reach at least 60 percent 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 percent without any external intervention.

We’ll come back to that in a moment.

So, if uptake is 70 percent, it makes economic sense to connect more of the homes in the last 15 percent 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 percent 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 percent or higher. This makes connecting those otherwise more marginal premises in the last 15 percent 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 percent. The last five percent 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 percent to 95 percent. 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 percent than 85 percent 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.


  1. Or at least it does in New Zealand. Extending the network in, say, Singapore, would be a snap by comparison ↩︎
  2. One of these days I’ll get around to explaining this in a separate post ↩︎
  3. This was particularly acute during the Rugby World Cup where fans in the rugby heartlands had second rate coverage. ↩︎

NZ fixed broadband speed fall behind pace

According to the latest Akamai State of the Internet report New Zealand ranks number seven in the world for average peak mobile broadband speed.

In the fourth quarter of 2015, Akamai clocked NZ mobile broadband at a respectable 75.4 Mbps. That’s a long way behind Australia, which takes the top slot with its blistering153.3 Mbps average peak speed.

New Zealand’s average mobile broadband speed is 7.4 Mbps. That’s better than average but behind Australia which gets an average 8 Mbps.

While New Zealand is among the front-runners for mobile broadband speeds, it is falling behind the pace in fixed line broadband.

This is despite the billions of dollars being invested in new networks and the improved uptake of fibre services. The only consolation is that we are pulling further ahead of Australia which is now something of a fixed-line broadband laggard.

Akamai summary q4 2015

Akamai says New Zealand moved up one slot over the last quarter in the global table for average connection speeds. We now rank at 41 in the world with an average connection speed of 9.3 Mbps.

Our year-on-year average connection speed increase of 27 percent means we are doing a little better than keeping pace with the rest of the world. The global average connection speed climbed 23 percent in the last year to 5.6 Mbps.

Australia now ranks 48 with an average connection speed of 8.2 Mbps. The gulf between mobile and fixed line performance in Australia is bigger than anywhere else.

Average peak connection speeds in New Zealand are up 25 percent on a year ago to 42.8 Mbps, but that only gets us to 53rd place in the global table. In the previous quarter we were at 45.

The global average peak connection speed climbed 21 percent to 32.5 Mbps. Singapore tops the list with 135.7 Mbps.