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In the UK, the Labour Party plans to nationalise part of the telecommunications network if it wins this year’s election.

To cover costs, a Labour government will tax multinational tech giants including Google and Facebook.

Let’s put aside the idea of nationalisation1. Instead, let us focus on the idea of making tech giants contribute towards the cost of telecommunications networks.

Not ridiculous

The idea isn’t ridiculous. Google and Facebook made their fortunes on the back of telecom networks. In effect they had a free ride.

People who invested in building Spark, Vodafone, Chorus and the rest of New Zealand’s telecommunications networks have, up to a point, subsidised the tech giants.

A decade ago there was talk in telecom circles about recapturing some of the value taken by over-the-top companies.

That battle was lost before it started.

It could be impractical and difficult for a small nation like New Zealand to force tech giants to pay all the costs of our telecommunication network.

That would remove price signals. These are important. They help the industry squeeze value from the assets. They tell planners where to invest.

Jangling the gold

There is one area where we can hold Facebook, Google and maybe other tech giants upside down and jangle the coins out of their pockets.

We could get them to contribute to our Telecommunications Development Levy.

This is the money collected by the government to help subsidise rural telecommunications. It also pays for things like the services that help blind and deaf people use phones.

At the moment the TDL is $50 million a year. It’s called a levy, but it’s really a tax on telecommunications companies. They each pay a share roughly based on how much they earn from sales.

As things stand today, Spark, Vodafone and Chorus pay the lion’s share.

How it might work

Suppose, for one minute, we decide to treat income the digital giants earn from New Zealand on the same basis as local telco revenue.

We’ll forget the smaller firms for now and focus on only two tech giants: Google and Facebook.

It’s hard to know exactly how much these companies make in New Zealand. The Commerce Commission would be have a job extracting this data, but it is doable.

This NZ Herald story estimates Google made around $600 million here in 2017. The number for Facebook is hard to estimate. For the sake of argument, let’s say it is much the same.

The total qualified revenue for New Zealand’s telcos is $4.1 billion. If we add in the tech giant revenue that gives us $5.3 billion.

In round numbers that puts Google and Facebook’s share at 20 percent of the total.

This means we could reasonably ask the two giants to stump up $10 million towards the TDL.

If we add in the other large companies who earn revenue on the back of New Zealand having a decent digital network that could take the total contribution from over the top money earners up to around a third of the TDL total.

Fair dealings?

It would be hard for anyone to argue such an approach is unfair. The amounts are, in comparison, tiny. A $10 million charge on $1.2 billion is less than one-tenth of one percent. It wouldn’t even feature as a budget line item.

Tech giants make huge margins on their revenues. The charge need not have any effect on prices.

In comparison the profit margins for New Zealand’s telecommunications companies are slender. Putting $15 million or so2 back into their hands wouldn’t make a huge difference. It would ease their burden.

So there you have it. The company’s that benefit most from investment in telecommunications can return a tiny trickle from their rivers of gold so that more New Zealanders can access their products and services. Is that so unreasonable?


  1. Maybe until another time. Maybe not. ↩︎
  2. This presumes an expanded programme where more than just two tech giants contribute ↩︎

July 29 (BusinessDesk) – The $3.4 billion Sky-Vodafone New Zealand transaction the Commerce Commission rejected in 2017 was the most difficult of the vertical mergers former chair Mark Berry had to consider.

Source: Sky-Vodafone merger decision challenging – Berry | Scoop News

Would the Commerce Commission make the same decision today?

It could go either way.

One of the reasons the deal was turned down was Sky’s iron grip on sporting rights. Since 2017 Spark has entered the market with Spark Sport, yet aside from this year’s Rugby World Cup, it doesn’t have rights to any of the major NZ sporting codes.

Sky has gone from owning 100 percent of the sport market to something less than that. Yet it’s market presence remains substantial. It would be hard to argue things have changed enough to alter the merger decision. This could change if Spark Sport achieves lift-off.

Spark, you may recall, was one of the main objectors to the Sky-Vodafone merger. Its lobbying paid off.

2degrees featured prominently in Mark Berry’s deliberations:

“There was particularly a concern about what the future of that market would look like if we let this merger go ahead, and if that kind of effect happened – with customers being taken away from 2 Degrees such that it would no longer have the incentive or the ability to invest and compete.”

Former Commerce Commission chair Mark Berry

It’s worth reminding yourself that in some ways 2degrees is a talisman for mobile telecommunications market competitiveness. While 2degrees is a force, the market can be seen to be working. The company’s position is no strong today.

One other change since 2017 is that Vodafone now looks to be in a stronger position since its part-acquisition by Infratil. This would play into any Sky merger decision in a subtle way.

Infratil also owns a substantial share in Trustpower, the fourth largest internet service provider. It has told the Commerce Commission that Trustpower and Vodafone would remain separate.

There has to be some concern about this. Since the acquisition Trustpower has joined with Vodafone and Vocus’s unbundled fibre campaign. That could be a coincidence.

Yet given Trustpower’s strength in building bundles of services around broadband, the possibility that company might have preferred access to Sky content would set off all kinds of alarms at the Commerce Commission.

It’s remarkable that Vodafone ever thought it could get away with calling its HFC cable network FibreX. It always look like the exercise would end in tears.

This was a law suit waiting to happen. And boy did it happen.

At the New Zealand Herald Chris Keall writes Vodafone pleads guilty to some FibreX charges, will contest others

Vodafone has pleaded guilty to nine charges brought by the Commerce Commission over its “FibreX” service, but will contest a further 18 related to allegedly misleading marketing.

That’s total of 27 charges. In other words this is a big deal.

A rose by any other name

Most, but not all, the problems stem from the name.

I questioned the name when FibreX launched. A Vodafone executive explained with a smile that the name comes from the full version of HFC: hybrid FIBRE coaXial. He knew it was pushing things a bit.

HFC uses both fibre and copper cables. The network was first built almost twenty years ago. There are networks in Kapiti as well as parts of Wellington and Christchurch.

Vodafone inherited the network when it acquired TelstraClear in 2012.

Performance woes

Readers with long memories may remember that the cable network had appalling performance at that time. Yet it was capable of delivering television signals along with broadband data connections at a time the copper network would often struggle with video.

From outside it looked as if TelstraClear had under invested in the technology and even neglected the network.

The TelstraClear acquisition was a mixed bag for Vodafone. It accelerated the company away from being a mobile phone carrier into enterprise and fixed line markets.

It didn’t do much to grow Vodafone’s market share. The company’s overall market share in 2018 is the same as it was in 2009, despite swallowing a sizeable rival.

Potential millstone

In some respects the HFC network became a millstone around Vodafone’s neck. It was a support nightmare and hurt the company’s reputation.

In order to recover some of its value, Vodafone beefed up the technology moving to a new, far faster version of Docsis. While this could put it on a performance par with UFB fibre in theory, the practice proved somewhat different. HFC networks can suffer from congestion in ways the UFB network does not.

Nevertheless, it looked like a plausible alternation to UFB fibre.

FibreX vertically integrated

There is something else. Vodafone’s FibreX network is vertically integrated. The company doesn’t need to pay anything to a wholesale network provider. Vodafone gets to keep all the monthly subscription.

Vodafone launched FibreX launched a the peak of the nationwide UFB fibre build. It priced it at much the same level and its marketing went out of its way to present FibreX as a like-for-like replacement. It’s not.

The fibre networks being built by Chorus, Northpower, UFF and Enable send photons along a length of glass fibre. There are fast, reliable and modern. Some FibreX users report UFB-like performance. Others don’t. What’s clear is that it is not as consistent as fibre.

Dodgy tactics

There are stories of customers calling Vodafone asking for fibre connections being told FibreX is the same thing. There are stories of customers asking for fibre being told the only upgrade available to them is FibreX.

A lot of the Commerce Commission charges are to do with the way Vodafone sold FibreX.

Vodafone is no stranger to the Commerce Commission. Over the years the company has consistently pushed at the boundaries of ethical, legal marketing of its services.

The senior executives responsible for many of those incidents have now left the company. A new team has been left the task of cleaning things up. That’s going to take time. A good place to start would be coming clean about FibreX.

The Telecommunications Bill going through Parliament sets the tone for New Zealand’s fibre era.

By 2022 around 87 percent of New Zealand’s population will have access to fibre.

Many homeowners and businesses have already chosen to connect to fibre. This month Statistics New Zealand reported one in three broadband connections are now fibre. That’s up from one in eight connections two years ago.

According to the most recent Broadband Deployment Update from the Ministry of Business, Innovation and Employment, uptake is now 44.1 percent. In some regions uptake is already higher than 50 percent.

The numbers continue to climb.

Fibre is only likely to get more popular with Spark buying up sports broadcast rights. Early next year the company will launch an app so viewers can watch Rugby, Football and Formula One racing online in high-definition. Other sport will follow.

Fibre everywhere

I’m not sticking my head out here by saying I expect half of all New Zealanders to have fibre connections by 2022. The number could be higher.

By then Spark will have a 5G mobile network, other mobile carriers could also offer fast mobile broadband and fixed wireless services with fibre-like speeds.

Many of those left with copper networks should see better experience thanks to VDSL and other fast copper technologies.

We will be in a new communications era.

New rules

Last year the National government introduced the Telecommunications Amendment Bill. It aims to set out the rules for fixed line telecommunications in the fibre era.

Most insiders expect the Bill to have its third and final reading between now and Christmas. After then it will be law.

This week the government tabled a supplementary order paper for the Bill. Among other things it sets a new cap for the wholesale price of a fibre connection.

The government has decided that a 100/20 mbps connection will be the benchmark. It calls this the anchor service. Some in the industry have argued that by 2022, 100/20 mbps will be bordering on obsolete. Never mind, the key point is that the price cap will $46.

Telecommunications Bill brings certainty

This is important as it gives everyone in the industry something to work with as they plan strategies for the coming era.

The figure means wholesale broadband companies make a profit. They have enough incentive to expand fibre networks beyond the reach of 87 percent of the population. No doubt this will happen over time.

Likewise retail service providers know what they need to charge consumers to make their broadband services pay. Everyone in the industry likes certainty.

Elsewhere the Bill will make telecommunications regulations more like those in other utilities. It will remove unnecessary rules that are a hang-over from the copper era.

Watching service quality

The Bill also aims to get the Commerce Commission to take more notice of retail service quality. The Commerce Commission will also get to check that emergency services are available even in the event of a power failure, which would knock out fibre services.

The Commerce Commission will be allowed to conduct inquiries into any matter relating to the industry or for the long-term benefit of consumers.

Telecommunications Minister Kris Faafoi says the new regulated price: “…represents a fairer deal for everyone: a good price for New Zealand broadband consumers and a reasonable price for Chorus”.

Chorus CEO Kate McKenzie says the supplementary order paper provides some clarification. She says: “We welcome this step towards a new regulatory framework for New Zealand’s key communications infrastructure. We look forward to the passage of the bill and to starting work on implementation”.

One thing that hasn’t been said in public, but is discussed by the industry in private is that the certainty brought by the Bill when it becomes law should calm things down between the various players.

The last year or so has seen retail and wholesale companies jockey for position ahead of the Bill. Relations between players have been tense. Most of the time this has been behind the scenes, but every so often something emerges in a speech or a media interview.

Once the Bill becomes an Act, everyone can get back to the more important business of finding innovative ways to make money from telecommunications services. That means giving customers what they want and seeking out new things that we are going to want in future.

Silverdale 4.5G cell siteFor 5G to deliver its promise, carriers need to use higher frequencies than today’s mobile networks.

Higher frequencies means more bandwidth. This can deliver faster data and more connections per square kilometre.

As a rule, higher frequency radio signals travel over shorter distances. Higher frequency sites will be useful in areas of high population density. In some cases they may be only a few dozen metres apart.

Cover every street

When cell sites are a few dozen metres apart, you need a lot of them. They will, in effect, need to go down every street in the country. The antennae don’t need to be as high as today’s cell towers. You can install high frequency cell sites on telephone and power poles or the sides of buildings.

Compared with today’s cell sites each one will cost a lot less to build. The hardware is smaller and less of an eyesore so the planning requirements will be simpler. And there will be some incremental upgrades.

Yet there will be so many new sites that the total cost of a 5G network could be as much as the earlier mobile. It all depends on how far New Zealand carriers intend to push the technology. It’s possible we won’t get the same 5G service as customers in say, Shanghai, Paris or New York.

Fibre is the 5G backhaul answer

Connecting lots of cell sites is tricky. Today’s cell sites often connect back to hubs using fibre connections. This is the best technology.

When Telecom, now Spark, built its XT mobile network it made a big deal of its towers using fibre backhaul. That’s the name engineers give to the practice of getting signals back to major centres.

Fibre backhaul gave the XT network a clear performance edge over Telecom’s rival. At least it did once Telecom ironed out the initial teething troubles.

Wireless option

Carriers don’t have to use fibre for 5G backhaul. In my NZ Herald interview Alex Wang said self-backhaul would be a feature of 5G. That is the towers link to each other in a wireless mesh network to get traffic back to a central hub.

Wireless backhaul is possible, but it limits overall network performance. You need a lot of bandwidth to backhaul thousands of 10 or 20 Gbps data streams.

It needs to be line-of-sight and it often uses higher power signals. Cue the protests and renewed fear of microwave signals causing health problems.

In practice fibre is a better way to handle 5G backhaul. It’s the most practical way to deliver the promised performance.

Overbuild

And that’s where the New Zealand mobile telecommunications industry hits a potential problem. There is already a nationwide fibre network for UFB.

Fibre companies already have fibre running down every urban street. It cost more than $5 billion to build that network.

That’s how much carriers must spend if they want a viable nationwide 5G network and compete with each other.

You could argue that building three more nationwide fibre networks would waste resources.

It would also add a lot to the cost of using a 5G network. Add in the cost of new antennae, site fees and network controllers. It could add up to more investment than carriers spent on earlier mobile generations.

Shared network

In practice there’s little chance of carriers building three more nationwide fibre networks. In theory the carriers could build a shared network.

There are arguments why this should not happen. For a start it could shut out any new competitors. There’s also a fear that three carriers owning shared mobile infrastructure could become a cartel. That’s also bad for competition and terrible for customers.

You can assume the Commerce Commission wouldn’t sign-off on shared infrastructure unless it is open access and otherwise regulated. The alternative is anti-competitive and would stifle innovation.

One third of a lot of money is still a lot of money

Even if carriers build a shared fibre 5G backhaul network, the cost per carrier would still be one-third of a big sum. It is more money than Vodafone or 2degrees appear to have today. This is before they need to spend on towers, antennae and the other kit needed to run a 5G mobile network.

Spark could raise the money for its share. The company has little debt. But even its investors might baulk at the cost of a nationwide fibre 5G backhaul network.

As we’ve already mentioned, a 5G network may need many more towers than the 4G networks that are in place today. Each site is likely to cost a lot less than the cost of a 4G site. The number of 5G sites needed to blanket cities and towns means the capital expenditure is going to, at least, be on a par with the investment in 4G. In reality it is likely to cost more.

A billion here, a billion there

Carriers don’t like to talk about the cost of building their networks. In round numbers each has spent in the region of NZ$1 billion on mobile network infrastructure.

Sure, that’s a back-of-an-envelope calculation. The exact numbers aren’t important. They have also invested many millions in buying spectrum.

The three carriers’ total capital spend on 4G to date is on a par with the amount needed to build the UFB network. They will also need to find the thick end of billion or so to build the extra sites needed for 5G.

This would be fine if there was a chance of getting customers to pay a premium for 5G mobile. That’s not going to happen. We’ll look closer at the business case for 5G in another post.

The open access model

New Zealand already has a tried and tested model for a separate wholesale layer. It’s called UFB.

The big telcos don’t like that model because by law wholesalers treat them the same as small ISPs. Spark can’t go to, say, Northpower and ask for a special deal “because we’re your most important customer”. That grates with the big carriers.

They also resent the wholesale charges. Remember the copper tax debate? It annoys telcos that the wholesaler gets 40 percent of each customer’s subscription.

Never mind that sum means the wholesalers gets a fair return on their investment. The regulator decides what’s fair.

The Chorus proposal

Which explains why the four big telcos scorned Chorus CEO Kate McKenzie’s proposal. She suggested that Chorus could provide the fibre 5G backhaul. They fear loss of control and they fear having their tickets clipped. The cost per mobile connection for such a service would be tiny. It would be far less than the cost of building a new network.

In reality one or more of the mobile carriers may end up using some Chorus fibre to backhaul. They may also use NorthPower, UFF or Enable resources. What they don’t want is another wholesale network muscling in on their turf.

Yet, it looks like they will end up with either Chorus or a regulated Chorus-like wholesale organisation. Only Spark could go it alone. But it has better capital expenditure options on than overbuilding a fibre network.

Disclaimer: Chorus pays me to edit the Download magazine and a weekly newsletter. It didn’t pay me to write about 5G backhaul. Indeed, this post doesn’t reflect anyone’s opinion other than my own. No one vetted or otherwise approved this. Any mistakes are down to me. Your corrections or alternative opinions are welcome.