Categories
telecommunications

Unbundling fibre: Be careful what you wish for

Vocus and Vodafone want cheaper fibre unbundling. If we take their words at face value, they want fibre wholesalers to sell at a loss.

That would be a disaster.

It would kill the fibre companies. They would go broke.

Unbundling on terms that would keep Vocus and Vodafone happy would unravel the telecommunications industry restructure that took place a decade ago as well as mess with the intent of the recent Telecommunications Amendment Act.

In the process, unbundling fibre in the way Vocus and Vodafone want would wipe out the small service providers. That may well be one of their goals. It threatens to undermine the entire broadband sector.

Unbundling means more expensive broadband

If all that sounds remote to readers who don’t work or invest in telecommunications, try this: if Vocus and Vodafone get their way, unbundling means most customers will pay more for broadband.

You could pay a lot more. We’ll come back to this later.

What looks like a simple squabble over price is the tip of a complex iceberg.

In June Vocus and Vodafone issued a press release (published in full at the bottom of this page) saying: “Chorus is torpedoing broadband innovation with predatory pricing”.

Predatory?

There is a curious thing about that sentence1. Vocus and Vodafone single out Chorus as the problem. No other fibre company is named.

Yet Chorus is only one of four New Zealand four fibre wholesale companies. Chorus’ unbundled fibre offer is the cheapest of the four. It is the most generous of the four. Some of the others want even more money.

To single out the cheapest, most amenable unbundled wholesaler, for special criticism is odd.

Presumably, it is because Chorus has the highest profile. Everyone has heard of Chorus. This tells us the Vocus and Vodafone press release is more about politics than informing the public or making a case. It is only there to mess with your head.

This is political. It always was. Unbundling was a political bolt-on to the fibre project. By law, All four fibre companies have to offer unbundled fibre from January 2020.

The law doesn’t say anything about the price or the unbundling process. These are not regulated at this stage.

Ideally, the politicians, regulators and government officials would prefer the industry to sort out fibre unbundling terms through commercial negotiations. If that doesn’t work, then the regulator steps in.

Going by the language in the press release, we’re already at that point or close to it.

Background

Unbundling fibre sounds simple. It isn’t.

First, there’s the question of the integrity of the fibre network. Fibre companies worry that letting outsiders cut their glass strands could be chaotic.

As things stand that’s not going to happen. Yet it was an early bone of contention.

A harder problem is how to price unbundled fibre so that networks cover their costs and earn a fair return for their investors. It looks as if this can’t be done in a way that would satisfy Vocus and Vodafone.

Layers

Today, New Zealand’s fibre companies offer what is known as bitstream or layer 2 services. You don’t need to worry about all the layers. Unbundled fibre is layer 1.

Layer 1 is an active fibre link between two points and layer 2 is where there are electronics at both ends to handle the traffic.

Regulations mean wholesale fibre companies cannot sell directly to end-users. They sell to retail service providers or RSPs like Vocus, Vodafone and Spark. At the moment wholesalers only sell layer 2 services.

Regulations

The price of a basic wholesale fibre service is fixed and regulated at $42 a month.

The regulated price of fibre is based on an estimate of the cost to the wholesaler of providing the service.

That cost includes the investment a fibre company made building the network and then providing continuing services. The biggest cost component is civil engineering.

There’s a formula that looks at what the regulator describes as allowable input costs’.

This is quite different from the way regulated costs were determined for the copper network. That was based on benchmarking against costs for similar networks overseas.

The new method gives fibre companies more certainty and makes it easier for them to judge the worth of further network investments. If we didn’t use this method or something like it, then there would have been few takers to build the networks.

Not much price difference

Fibre wholesalers can and do offer faster speeds at unregulated prices. As you’d imagine, these unregulated prices are higher. A gigabit line costs around $60.

There is not much cost difference between providing a basic fibre broadband plan and delivering the fastest speeds available.

Almost all of the cost of providing a fibre connection is in the engineering, digging trenches and running cables from poles. A fibre company needs to dig the same trenches and roll out the same cable regardless of the line speed or who owns the hardware at each end.

The only significant input cost difference between a bundled and unbundled line is the equipment at each end of the fibre.

Unbundled service providers buy their own hardware. Fibre wholesalers wrap the cost of this hardware into their layer 2 prices. A little extra money may be needed to cover the costs of dealing with more data passing through the network, but that’s near negligible.

At most, the total extra input cost of providing a fast connection is a couple of dollars. Likewise, the only saving the wholesaler makes with an unbundled line is not buying this equipment. In other words, for a wholesaler, the cost difference between delivering layer 1 and layer 2 is marginal.

Cost-based pricing

At most, the practical cost to a wholesaler of providing an unbundled fibre line is a dollar or two less than the cost of providing a bundled line. This explains why the fibre companies have come up with the unbundled prices you see today.

Vocus and Vodafone don’t like these prices, but they have been arrived at using the same logic as the regulated layer 2 prices.

To argue against these unbundled prices is to argue against the regulated model established by the government. If Vocus and Vodafone have an argument, it is with the Commerce Commission, Crown Infrastructure Holdings and maybe the government itself.

That’s where any anger should be directed. Given the success of the UFB project, they are unlikely to get anywhere attacking the government organisations, but they need a target for publicity purposes.

If the big service providers unpick the unbundled fibre price, they unpick the entire regulatory structure. This means upsetting a regime that works.

It also swipes the financial legs from under the fibre companies.

Margins

Wholesale fibre companies make better margins from selling faster, connections where the prices are not regulated. Overall fibre company margins are good enough to keep investors interested.

As we’ve seen, wholesaler input costs are much the same whatever a customer’s connection speed. But the value delivered to a customer rises as the speed rises. Hence people willingly pay more for faster broadband.

In New Zealand, the price difference between a basic fibre service and the fastest service is less than in most overseas markets.

That’s important because you could argue customers who buy faster broadband plans, 100 Mbps or 1Gbps services, subsidise people on basic plans.

Using today’s technology fibre lines can typically work at up to 10Gbps. The cost of 10Gbps circuit hardware is not 300 times the cost of 30mbps hardware but it will run at 300 times the speed.

10Gbps unbundling demonstration 

At a press function, Vocus and Vodafone used a 10Gbps connection to demonstrate the potential of unbundling.

When they buy an unbundled line, they are, in effect already buying a 10Gbps connection for less than the regulated cost of a 30mbps connection. They know the cost of providing 10Gbps is only fractionally higher than a 30mbps connection.

This is a form of arbitrage, they can buy something cheap, spend next to nothing turning it into something expensive.

Unbundling connections, then bumping the speed to 10Gbps, makes it hard for fibre companies to operate a price structure where the low margin lines that make up the bulk of their business are offset by a small number of more lucrative options.

Making that unbundled connection price cheaper still would undermine layer 2 services. It would remove all the cream from fibre company revenues.

Basic fibre service margins are thin.

If enough customers buy connections from unbundled service providers, fibre company revenue will fall.

Regulatory goals

Let’s go back and look at the points made at the top of the story.

Should it intervene, the Commerce Commission is unlikely to set the regulated price of an unbundled connection at a level where fibre companies lose money.

If they did, they’d have to raise the price of regulated layer 2 services to a level where the fibre companies still make enough money to keep everything ticking over. That means higher broadband prices for everyone.

Media release

21 June 2019

Vocus, Vodafone welcome Commerce Commission scrutiny on unbundled broadband pricing

Telecommunications operators Vocus Group and Vodafone have made clear their belief that Chorus is torpedoing broadband innovation with predatory pricing, and labelled a proposed Chorus price drop of 15c a month ‘pathetic’.

The companies have welcomed action from the Commerce Commission announced last week which will clarify legal interpretations of Chorus’ obligations to provide commercially viable unbundled access to the Ultra-Fast Broadband network.

Vocus and Vodafone demonstrated an unbundled UFB connection in February and then sought commercial pricing from Chorus in preparation for a launch in 2020.

After multiple delays, and despite a deadline of December 2018, Chorus announced wholesale pricing for unbundled connections in April of this year. Vocus and Vodafone protested the pricing as ‘cynical and protectionist’, noting that it exceeded that of bundled connections.

The companies approached the Commerce Commission with their views, backed by an independent assessment by Network Strategies which demonstrated the cost to third parties should have been less than 50 percent of that proposed by Chorus.

Yesterday Chorus released a new proposed pricing model that was just 15cents a month lower than its original pricing.

This month, the Commerce Commission noted[1] that it has the authority to assess whether offers (pricing) made by Chorus and the LFCs comply with their respective obligations under the Telecommunications Act of 2001. It has advised Vocus and Vodafone that ‘If we consider that a breach of the Fibre Deeds is likely to occur or has occurred, we will decide whether to bring enforcement action’.

“This is a step in the right direction, and we welcome the attention that the Commerce Commission is giving to the issue,” says Vocus Group Chief Executive Mark Callander.

“We have to remember that Chorus benefited from a billion-dollar interest free loan from the government. That means every New Zealander should get the best possible benefit from the UFB network, and unbundling is the key to unlocking innovation that drives those benefits.

“Today Chorus proposed a new price that was merely 15 cents a month lower. That’s outrageous, pathetic and quite frankly insulting.”

‘Unbundling’ allows third parties like Vocus and Vodafone to use their own equipment at the end of a Chorus or LFC owned fibre line. Innovation including the creation of new and faster services is possible, rather than a ‘one size fits all’ approach to market.

“The problem right now is simple. Pricing makes or breaks the business case for unbundled access,” says Vodafone Chief Executive Jason Paris. “The proposed numbers make unbundling impossible. And that restricts innovation, denying New Zealanders their right to the best value from the investment of their tax dollars in the UFB network.”

The Commerce Commission has committed to look into the matter in the coming months.

Callander has welcomed the Commission’s work, but notes that the Vocus and Vodafone have made clear their intention of introducing an unbundled service by January 2020, and that a suitable price needs to be determined quickly. “Right now, the country’s investment in UFB is stranded in the hands of the Chorus monopoly.

We’re confident that the Commerce Commission will find that Chorus is expected to act in the best interests of customers – and pricing is something we’re all sensitive to.”


  1. Make that two curious things. How can you innovate with broadband? Almost all your ‘innovation’ options involve impeding the speed. ↩︎
Categories
computing telecommunications

Gartner: Enterprise switches to open internet

Research company Gartner predicts that by the end of 2021, 70 percent of large enterprises will rely solely on the internet for their wide area network connectivity for small and remote branch offices. This is twice the number of enterprises who connected this way in 2017.

A report, How to Use the Internet for Cloud Connectivity Without Performance Disasters, by Australian-based analysts Bjarne Munch and Padraig Byrne says: “We are now seeing enterprises introducing an internet-first strategy for their WANs. This will also incorporate consumer-grade internet services, where possible.”

In other words, where they can companies are dropping expensive WAN products and jumping on to services like New Zealand’s UFB.

In some cases they use the same consumer services as residential users, in other cases, they use slightly more expensive business-class fibre services. The main difference between the two is the lack of contention on business services, although this isn’t a problem for users in New Zealand.

Business-class fibre services also usually come with better support.

As the name of the Gartner report suggests, the focus here is using the internet to connect to cloud services.

There are many nuances for businesses wanting to get the best performance from an internet service provider. For New Zealand companies one potential problem is the lack of alternative routes to cloud services. Another issue to consider is whether the service offers direct peering to the cloud services you require.

One interesting point made by the Gartner analysts is that many companies now want to include wireless broadband in their connectivity mix. Or as Munch and Byrne put it:

“Mobile broadband is increasingly included for truly diverse access designs.”

It’s a great option when companies have employees on the move, but it shouldn’t be a first choice for cloud connectivity. As the report says: “These are generally asymmetric and have unpredictable overbooking.”

Categories
telecommunications

Vocus Group back in play with private equity bid

EQT Infrastructure’s A$3.3 billion takeover bid for Vocus Communications could see a new owner for the New Zealand business.

Vocus Group New Zealand includes the Orcon, Slingshot and CallPlus brands along with other assets. It is the third largest telco behind Spark and Vodafone.

The potential buyer, EQT Infrastructure, is a Swedish private equity investor.

Vocus commands good price

EQT’s bid, which became public on Monday, put a 35 percent premium on Vocus Communications’ trading price at the time.

Insiders say the bid is likely to succeed. Although there are other potential bidders waiting in the wings should EQT’s offer fall through. Either way, Vocus is likely to find a new owner soon.

The EQT bid comes only days after Infratil and Brookfield’s successful bid for Vodafone New Zealand. It suggests other telco sector mergers and acquisitions could be on the way.

This is not the first time investors have attempted to buy Vocus Communications. In 2017, private equity firms Kohlberg Kravis Roberts and Affinity Equity Partners, made a bid for the company. That was later withdrawn.

According to the Australian Financial Review, the key to renewed interest in the business is Vocus’s fibre assets.

Fibre infrastructure

Infrastructure is an increasingly popular investment class. The returns are relatively high and, in many cases, it faces little direct competition. Fibre assets of particular interest to infrastructure investors at present, they feel that its owners don’t always maximise its value.

The Australian Financial Review goes on to report it’s likely the buy will sell Vocus Communications’s retail business.

Presumably, this would also include Vocus’s New Zealand retail brands.

Vocus has New Zealand local fibre assets. It picked them up from the former FX Networks business now wrapped into the Vocus Group.

One interesting angle is that after 2022 regulated UFB wholesale prices will be based on network asset values. If fibre becomes a sought after asset for investors, that could put pressure on the regulated price.

Categories
telecommunications

Telecommunications still most complained about industry

Once again telecommunications is New Zealand’s most complained about industry. It’s a story we’ve heard over and over. The latest report is MBIE’s New Zealand Consumer Survey 2018.

Almost one in three people buying a home service experienced a problem. That’s according to According to the Ministry of Business, Innovation & Employment.

The most common problem, almost half, is that the product or service didn’t work as expected.

home based telecommunications problems

Fixed line, mobile complaints

It’s not only fixed line home services. One in five consumers buying a mobile service had a problem in 2018.

Even allowing for overlap between the two categories, this is a lot of people. The odds are close to even that you, the reader, are among them. The chance that you know a person who had trouble is close to certainty.

Part of the problem is that telecommunications touches everyone.
MBIE says almost two-thirds, 62 percent, of consumers bought a home service in the last two years.

Even so, the category is a long way ahead of building repairs, the next most complained about sector.

Over a quarter of people surveyed say their most recent consumer problem was with telecommunications.

That’s bad. It’s diabolical. But it gets worse. MBIE goes on to say the poorest New Zealanders get a worse deal from the industry’s bad customer service. These are often the people least equipped to deal with poor service.

It adds up to another digital divide. This one looks harder to fix than lack of access. Sorting this out could do much to improve poor New Zealanders’s telecoms experience.

Telecommunications Forum CEO Geoff Thorn defends the industry. He says the sector has been working hard to improve customer satisfaction.

“We know that New Zealand consumers have access to world-class telecommunications services when measured by coverage, speed and price. However, we recognise there are areas where the telecommunications industry can improve”, Thorn says.

That’s fair enough. Although it’s unlikely outsourcing customer support to an Indian company will improve matters. Vodafone already always ranks last in surveys comparing telco performance.

New service quality regime coming

Meanwhile the TCF is working with the Commerce Commission on a new service quality regime. The two plan to develop this in the next few months.

Thorn has a point when he says the poor showing in the report: “…is not surprising given the number of connections and associated transactions people have, and that, in the case of fibre, it is new infrastructure that is being rolled out across the country.”

One area the TCF could investigate is how New Zealand compares with other countries. A quick, unscientific online search shows telecoms where there are comparable statistics.

It’s possible companies don’t set realistic customer expectations. Consumer magazine runs frequent comparisons of local company support. It’s no accident that the firms that do best are those who promise next to no support.

Categories
telecommunications

New Zealand’s fibre unbundling feedback howl

On Thursday Chorus released its proposed unbundled fibre pricing for industry feedback. Would-be unbundlers responded with a noise resembling what you might hear when placing an electric guitar in front of an amplifier: a loud howl.

This was always going to happen.

New Zealand’s telecommunications regulations mean that the fibre networks must, by law, be open for unbundling from the start of 2020.

Unregulated, for now

For now, the unbundling process and the prices wholesale fibre companies can charge is not regulated. The idea is that the industry can hold commercial negotiations. If that doesn’t work, then the regulator will step in.

Unbundling worked well for some ISPs when Telecom was forced to unbundle the copper network over a decade ago. ISPs installed their own hardware at an exchange and paid Telecom a monthly access fee.

This worked well for a number of reasons. First, the service providers could cherry pick the most lucrative neighbourhoods. Second, there weren’t many exchanges and each exchange served a large number of customers. Third, the monthly access fee was regulated.

Bitstream then and now

It turned out that the price was considerably lower than the fee Telecom charged for bitstream access. Bitstream access was, to a degree, similar to the service ISPs now buy from New Zealand fibre companies.

The gap between these prices left ISPs with enough room to offer competitive prices to their customers or take the difference as increased margin.

Unbundling fibre is different. Instead of hundreds of exchanges each serving thousands of customers, there are thousands of fibre nodes each serving a handful of customers.

The other big difference is the way we price fibre services. Today’s layer 2 prices are regulated. Prices depend on the level of service, but typically they run from around $40 to around $65 for a gigabit service. The Commerce Commission based its pricing structure on a fibre company’s costs.

Difficulties

Now, this is where things get difficult for would-be unbundlers. The input cost difference for a wholesaler between operating a layer 2 service and an unbundled layer 1 service is pennies, not dollars. That $40 monthly access fee might drop to $38 or thereabouts if it was regulated along the same lines as a bundled line.

This doesn’t leave an unbundler with enough margin to play with.

Despite the unattractive underlying economics two telcos, Vocus and Vodafone, joined forces to push an unbundling programme.

Since late last year they’ve been showing a demonstration of what the technology might look like. They’ve also been dropping unsubtle hints suggesting that: ‘unbundled fibre had better be cheap’.

Like copper only different

Scratch the surface and its clear their thinking is the difference between bundled and unbundled fibre should be in line with things in the copper world.

Chorus’s proposal is that unbundling service providers pay a monthly access charge of $28.70 per line. This covers the fibre line from the customer to the nearest node, Chorus calls these nodes ‘splitters’. Usually 16 customers connect to each splitter.

On top of that, Chorus wants to charge $200 a month for the connection from the splitter to a central point where the service providers can connect the unbundled service to their own networks.

Unbundling at scale

You don’t need to be good with arithmetic to realise that this only works for a service provider if a lot of customers at any splitter want to buy their connection. A would-be unbundler would need to have more than a dozen connections at each node for prices to drop below the basic regulated bitstream monthly fee.

Although keep in mind here that an unbundled fibre line might operate at a blistering 10Gbps. That’s a service that could command a premium retail price.

To no-one’s surprise Vodafone and Vocus made it clear they don’t like the proposed price. A press release from the pair has the headline: “Chorus machinations could put competitive UFB on ice”.

Maths

In it, a clearly angry Vocus CEO Mark Callendar says the maths just doesn’t stack up. He is right. But the legislation was designed that way. There isn’t enough margin between layer 1 and layer 2 to make an ISP happy.

An access price that would please Callendar, at a previous media function he told me it should be under $20, would leave the fibre wholesale companies under water. They’d be bankrupt in no time and that would put critical national infrastructure at risk.

Back to the release where Callendar says: “…the Commerce Commission will now need to intervene, it’s as simple as that. The UFB network was designed to be unbundled and ultimately is an asset that the government has helped fund.”

The Commerce Commission was destined to be dragged into this row from the moment Vocus and Vodafone first announced an intention to unbundle.

Intervention

If it does intervene and assuming it follows a similar cost-based model, the would-be unbundlers are going to be as disappointed then as they are now. The economics of fibre unbundling mean it is a path that’s not worth the trouble, at least as far as residential customers are concerned.

Now, it’s quite possible that the spat you see on the surface is all there is. Yet there’s something else at play. Since the fibre network started, most of New Zealand’s service providers have raced to the bottom on price. It’s about the only point of difference they feel able to compete on.

As Vodafone CEO Jason Paris has said to me in a previous interview, they have competed away all the profits in the broadband business.

Thin margins

Margins are razor thin. Unbundling had potential to fix that. It’s also an opportunity for two high profile telcos to position themselves publicly as against New Zealand’s telecommunications regime without actually saying they are against the regime. Make no mistake, that’s the real object of their ire. 

In the public statements so far, they’ve poked the finger at Chorus.

There’s something in that. But Chorus is a creation of a telecommunications regime that the previous National government set up. The Labour government continued the same regime. There’s a broad political consensus that our telecommunications market is working as designed.

You could see Chorus as the government’s proxy in these matters. A useful punching bag if you don’t like the rules. 

Equivalence

One part of the disliked regime is something called equivalence. The idea is that Spark, Vodafone and Vocus get exactly the same prices, products and services from fibre companies as a five-person regional ISP working in rural Taranaki.

The big firms hate that. They like to use their clout and economies of scale to negotiate better terms from suppliers. Regulation stops them.

Consciously or unconsciously, Vodafone and Vocus hope the government is listening. That’s why so much of their rhetoric about unbundling uses politician-pleasing words like ‘innovation’ and ‘competition’.

Competition

Unbundling is clearly a competitive1 move, but it’s not really innovation in the sense we normally use the word. Assuming it is doing everything right at the back-end, the only practical option an ISP has to innovate with unbundled fibre services is to remove some of its capability from certain customers.

Remember this as the war of words heats up in coming months and the various parties troop into the Commerce Commission. They’d like to get a lower price for unbundled fibre.2 Who wouldn’t? But what they really want is to take back a little control and restore profit margins.

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


  1. Spark has options with its fixed wireless broadband. These should ramp up when 5G arrives. Vodafone ought to be able to do the same, but the local firm isn’t getting the investment it needs from Vodafone Group. Unbundling is a cheaper option. ↩︎
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  3. I’d expect the Commerce Commission to insist wholesale fibre companies propose a single per-line price in place of the more complex line and splitter tariff. ↩︎