Chorus fibre broadband buildingChorus says it now has 500,000 Ultra-Fast Broadband connections on its network. The wholesale network company also announced plans to cut wholesale prices for the fastest connection speed.

Fibre demand has accelerated in recent months. It took Chorus five years to connect the first 100,000 fibre customers. The most recent 100,000 joined in six months.

In September, Crown Infrastructure Partners released numbers showing there were 605,000 connections nationwide for all Chorus, Northpower, UFF and Enable. That total would be higher today.

Connection speeds rising too

Customer connections are rising fast, so are their connection speeds. Chorus says customers are moving from entry-level plans to higher speeds. In order to speed the move up-market, Chorus will cut the wholesale price of gigabit fibre broadband connections for home users.

From the middle of 2019 the wholesale price for a home gigabit connection will fall from $65 to $60. Chorus promises a  futher drop to $56 in the middle of 2020. This will reduce the price gap between a standard 100mbps plan and a gigabit plan, making the latter a more attractive proposition for many customers.

While dropping the wholesale price sounds like good news for consumers, it is up to retail service providers to decide whether they pass some or all of the savings onto customers. Some may do this, others may use the cut to fatten their margins.

Strange times at Spark

Writing at Stuff Tom Pullar-Strecker reports that Spark described the price cut as a step in the right direction. The company went on to say something quite strange;

…the wholesale price of fibre-optic broadband remained “far too high” and the retail prices Spark charged didn’t “allow for anything like an acceptable margin”.

This is bizarre as Spark is free to decide on its margin. If it thinks margins are not acceptable, it is free to raise prices. Any constraint on pricing comes from market competition, not the wholesaler.

The unvoiced subtext here is that Spark is annoyed that the Commerce Commission regulates fibre pricing. This means they have no leverage to demand a sharper wholesale price than other service providers. By law Chorus and the other fibre companies must offer the same wholesale price to everyone.

Unwelcome competition

Given that Spark accounts for getting on for half the retail broadband market it might normally expect to get a lower wholesale price than smaller competitors. In effect, you can interpret Spark’s complaint as it doesn’t like facing its competition on a level playing field.

This is all the more odd, because some parts of Spark are hurtling towards the fibre era with gusto.

In the company’s media statement, Chorus CEO Kate McKenzie says fibre broadband demand has been rapidly increasing. She says: “…even more so now as more content moves online and New Zealanders prepare to live stream the Rugby World Cup and other sporting events in 2019. The irony here is that Spark is starting to dominate streaming sport. Presumably the margins on Spark are ‘acceptable’ for the company. But they wouldn’t be achievable without ubiquitous fibre.

Chorus hits half million fibre connection milestone was first posted at billbennett.co.nz.

Bill Bennett edits The Download magazine for Chorus. He also writes a weekly telecommunications newsletter. That doesn’t mean he wrote this post On Chorus’ behalf, nor does it necessarily reflects the company’s option, although it might. It’s all my own work, blame him if you don’t like it. 

It’s no coincidence Sky TV reported a $240 million loss days after Spark won the Premier League Football rights. A thread connects the two news stories.

Spark is New Zealand’s rising media power. Sky is still number one, but fading.

You can’t blame Sky’s problems on Spark’s football win. The traditional pay-TV company hasn’t owned Premier League rights for five years now. Yet the move underscores the shift from old school television technology to streaming media.

Football key to sport portfolio

The English Premier League joins Spark’s growing TV portfolio.

The telco, yes Spark is still mainly a telco, also has the local rights to Manchester United TV. On the team’s current form that may not be much to write home about. Even so it’s a sound investment. United is the best know and most followed English club outside of the UK.

Spark says it plans to wrap the two football deals into a new standalone sports media business. Spark already has the rights to next year’s Rugby World Cup.

The company has hinted there is still more to come. Sky TV doesn’t have the clout, or the money, it once had. So Spark has an opportunity to prise other popular sports away from the incumbent. If nothing else, New Zealand Netball and Cricket must be possible candidates. And perhaps various motor sports.

Sky FanPass

This is not great news for Sky. But there are chinks of light among the dark. The pay TV broadcaster cut a deal allowing Spark to resell its FanPass service.

Fanpass is now another small, but nicely done plank in Spark’s sports media portfolio. It also means Sky gets to tap a market that it has previously struggled to reach.

Let’s not forget LightBox. Spark’s streaming TV operation may be a pale imitation of Netflix, but it’s a useful value-add for Spark’s broadband business.

Another useful add-on for Spark is that it offers cut-price Netflix to customers signing for long broadband contracts.

Sticky TV

All-in-all Spark already has enough media properties to keep viewers glued to its broadband services. And that’s a critical part of the company’s TV-over-internet strategy: customers who buy a bundle of services are less likely to decamp to a rival broadband service.

Premier League football isn’t New Zealand’s most popular sporting code by a long shot. However, it has particular value for Spark. First, it tends to be watched by relatively well-heeled fans who are willing to pay a couple of hundred dollars or so for a year’s worth of games.

Second, Premier League fans are well used to watching games using streaming. It was the first major sporting property to be picked up by a digital organisation. That was Coliseum Sports Media which had the rights from 2013 to 2016. Spark works in a partnership with Coliseum before BeIn Sport won the rights.

Overseas moves

In a media statement Spark managing director Simon Moutter say his company developed its plan after looking at overseas sports content media moves.

He says: “We’ve carefully considered the different models and will be looking to replicate the good things other businesses have done and learn from the challenges they’ve had — all the while thinking carefully about how sports media fits in a New Zealand context”.

Spark says it will launch its own sport ‘platform’ early in 2019 and will annouce pricing and package deals closer to the launch.

Latch

Spark Sport head Spark hired Jeff Latch to head the Spark Sport operation. He will oversee buying more content rights and will take charge of the ‘platform’. Latch was previously director of content at TVNZ. In that role he was in charge of buying content, including sport. Spark is partnering with TVNZ for the Rugby World Cup project.

Latch says Spark will work with a specialist sports-streaming company. He says the platform used will be different from the one used by Spark’s Lightbox service.

He also said Spark intends its sports media operation to work as a standalone business and not be used merely as a way to woo broadband or mobile customers. To a degree this is what Spark has done with Lightbox.

Netflix close to two million NZ viewers

Had Sky merged with Vodafone it may have fought off the challenge from Spark, although that’s far from certain. Yet nothing could protect Sky from its other threat: Netflix.

Roy Morgan research says Netflix now has nearly two million viewers in New Zealand. The service saw subscription numbers grow 35 percent in the last year to reach 1.9 million viewers. The research company goes on to report:

“Now over three million New Zealanders have access to some form of Pay or Subscription TV, up 13.9 percent on a year ago. The growth in Pay and Subscription TV is being driven by the likes of Netflix along with a suite of rival streaming services including Lightbox, Sky TV’s Neon and Amazon Prime Video.”

Viewer numbers are growing slower for Sky TV’s Neon service. It was up 1.7 percent in the year to reach a total of 1.6 million viewers. Lightbox is the second most popular video on demand servide with 830,000 users. That’s up 43 percent on last year, growing faster than Netflix. Vodafone TV has 295,000.

cellular tower

Network makers promise next-generation mobile phones will download data faster than fibre.

The original goal for 5G cellular was 10 Gbps downloads. Now engineers say 20 Gbps.

Without getting deep into electromagnetic physics and radio engineering, this was an ambitious goal. Ambitious, but as the evidence so far shows, realistic.

Yet there are challenges.

Carriers can’t push wireless data through the air at 20 Gbps using the existing mobile radio spectrum.

More spectrum please

Which means carriers need to find new spectrum to deliver the promised 5G performance.

Or, to be more accurate, governments need to reorganise spectrum allocations. They get to decide who can use which parts of the spectrum.

Spectrum is an important resource. It isn’t only used by mobile phone companies. So governments must weigh up the needs of mobile phone companies against other spectrum users.

In part it does this is by putting a price on spectrum. Chunks of ratio frequencies are sold to the highest bidder. Usually, but not always, this involves an auction.

New Zealand’s Radio Spectrum Management, part of the Ministry of Business, Innovation and Employment, is already working on plans to put frequencies aside for 5G cellular.

Meanwhile, the Commerce Commission is working on regulatory aspects of the move to 5G.

Telecommunications Commissioner Dr Stephen Gale says:

“We believe the power to regulate remains an important competition safeguard, especially with 5G networks and potential new entrants on the horizon”.

Money go round

In the past government spectrum auctions work by dividing available frequencies into blocks. Bigger blocks give carriers more bandwidth to play with. In simple terms more bandwidth can mean faster data speeds.

Spectrum auctions can make a lot of money for governments. Past auctions have poured gold into the public sector. The recent UK 5G spectrum raised £1.3 billion, around NZ$2.5 billion.

It may look like a windfall. Governments often treat the money that way. But it is more about moving money from one place to another. When telcos pay a lot for spectrum the cost is passed onto customers.

Risks

If they overpay, they may spend money that would otherwise be used to build towers and extend the network’s reach. Overpaying often means a network roll-out is slower.

Given the value of cellular communications to the wider economy, squeezing out the maximum amount of cash in a spectrum auction can be counterproductive in the long term.

New Zealand’s last spectrum auction took a more sensible approach.

The government realised the economy could be better served in the long term by a good mobile network than by a windfall. So carriers were offered a fixed price well below what it might have made in a competitive auction.

Not everything sold so one remaining block of spectrum was then auctioned off.

In the past different cellular services have run in different frequency bands.

This can still happen. Yet one of the features of 5G is that carriers are able to mash together greater amounts of bandwidth from different bands. Or to use an engineer’s language: they can aggregate spectrum.

While this already happens a little with 4G, Spectrum aggregation is central to 5G. How that works in practice will be interesting. It will be a challenge for phone makers.

Higher frequency

Most people in the telecoms business expect 5G to use higher frequencies than today’s mobile phones. Depending on who you talk to, the options go all the way up to 95GHz.

This brings us to another challenge carriers face. Radio waves have different properties in different bands.

Low frequencies are useful for communicating with submarines or in mines. Shortwave radio is good for broadcasting over long distances. And so on.

Dealing with this is an engineering problem. There are also political challenges. In some cases existing spectrum users may have to give up their rights or move services to different frequencies. It can be disruptive.

Compared with some other countries, New Zealand is well placed to deal with these challenges.

UHF – ultra-high frequency

Almost all of today’s mobile telephone traffic takes place in what is known as the ultra high-frequency band or UHF. This is the spectrum from 300 MHz to 3GHz.

Some of the spectrum that will be used for 5G is in the next band up: super high frequency or SHF. That runs from 3 to 30 GHz.

UHF and SHF frequencies are microwaves. Which means the band is used by microwave ovens. It’s also used by Wi-Fi and other home wireless devices, satellite communications, radar and radio astronomy.

As you move into higher spectrum bands radio signals run into a different set of physical problems. At 5GHz and above signals get absorbed by solid objects.

The signals don’t propagate so well. So antennae cover shorter distances. In other words, you need to build more towers to give carpet coverage.

Bluetooth

Bluetooth devices operate in part of this frequency band.

The devices have low signal power levels compared with cellular phones. They are only designed to work over a short distance.

Even so, you a taste of what to expect from a 5G cell site operating at this frequency by thinking about Bluetooth’s limitations around your house. The signals may pass through wooden walls, masonry can block them. So can metal frames.

When outdoors, microwave signals don’t tend to pass through mountains or hills. In effect, they only work in line-of-sight. A cell site operating at higher microwave frequencies that works for a customer in winter might struggle in summer when there are leaves on the trees.

Rain fade

Go beyond 30GHz and radio signals are affected by water molecules. That means rain — satellite TV users will already know about rain fade. From about 60GHz oxygen molecules get in the way.

Some engineers overseas want to use frequencies as high as 95 GHz for their 5G networks. There’s a military weapon that works at this frequency.

This tells you something about the risks, although the power used for cellular phones would be many times lower than any weapon.

Payoff

To keep things simple, let’s leave it at this: higher frequency radio waves are harder to use. On the other hand, they offer much more bandwidth and that means higher potential data speeds.

As a rough rule of thumb, higher frequencies mean faster data, but over shorter distances. Typically higher frequency sites will be in densely populated areas and will be only a few dozen metres apart.

When cell sites are a few dozen metres apart, you need a lot of them. They don’t need to be big. You could put them on existing telephone or power poles.

In New Zealand

For now, talk of higher frequencies and the problems using them is largely academic. Most of the planned 5G action here in New Zealand is in or around frequency bands already used by mobile phones.

When Spark managing director Simon Moutter outlined his companies plans he called for more spectrum below 1 GHz.

He says it will be needed to provide 5G services in rural areas. This will almost certainly mean the 600 MHz band, which is already in the government’s sights. Signals in this frequency band can travel over long distances.

Moutter also identified the “two most likely spectrum bands”. Spark wants the mid-frequency C-band and high-frequency mmWave band to be ready as soon as possible so it can put its 5G network in place in time for the 2020-21 America’s Cup in Auckland.

This shouldn’t be difficult in principle.

Is there enough for 5G?

There should be enough usable spectrum in the 600 MHz band and the C-band to give New Zealand’s three big mobile carriers all they need to build viable 5G networks.

Yet they are not the only possible bidders for 5G spectrum. Wisps — wireless internet service providers — do a fine job filling in the gaps in regional broadband coverage.

Wisps could also make good use of more spectrum. And the spectrum of most use to them happens to be the spectrum the carriers are keenest to buy.

Small regional service providers lack the financial clout of the mobile carriers, but they can argue the service they offer is as deserving. Maybe more, after all, wisps service New Zealand’s exporters.

Elsewhere, Callplus founder Malcolm Dick’s Blue Reach project is likely to show interest in 5G spectrum. Blue Reach plans what it calls a 5G wholesale service. Presumably, the wisps would be among Blue Reach’s customers.

Economic logic says a competitive auction is a way of ensuring spectrum goes to the bidder who stands to gain the most. This, the argument goes, means the most economically efficient use is made of each block of spectrum.

In practice, some bidders sit on unused spectrum. The last NZ auction made that unlikely as it included a use-it-or-lose-it clause.

Some less well-heeled organisations find it hard to buy the spectrum they need. How these issues will be addressed will become clearer when the auction terms are formally announced.

Christchurch skylineSpark says it is on track to begin rolling out a 5G mobile network in 2020.

The company says services will go live later that year.

This confirms the date the company has already said it would begin its next generation network build. It depends on the spectrum becoming available, then an auction or other form of allocation taking place in the next 18 months or so.

The confirmation comes after the company conducted trials earlier this year. Spark says the Wellington outdoor trial was a success with customers getting download speeds of up to 9 Gbps. An indoor trial in Auckland saw speeds as high as 18.2 Gbps.

While some telcos overseas are building new networks from scratch, Spark says it will start by adding 5G services to its existing 4G and 4.5G networks.

Spark says it will extend this when there is enough demand.

With existing cell sites there’s a smooth upgrade path. At least there is if a carrier sticks with the same equipment supplier.

Spark managing director Simon Moutter says the company is working on mapping expected cell site densities to learn where there is a need for new cell sites.

He says: “We have already begun a build program to increase the number of cell sites in our existing mobile network – which will enable us to meet near-term capacity demand as well as lay the groundwork for network densification required for 5G.”

No extra CapEx

The company says it is expects to fund its network through its existing capital expenditure programme. This does not include buying any extra spectrum needed for 5G.

Spark spends around 11 to 12 percent of its revenue on capital expenditure. Spark’s 5G briefing paper says:

As Spark responds to demand we will be investing just ahead of it. Cost efficiency that will deliver ever-greater output with the same investment inputs is the primary driver of early 5G deployment.

By 2020, we expect our wireless-network specific capex to be between 25-35 percent of Spark’s overall capex envelope. This implies intended annual wireless network investment of approximately $100m to $140m, compared with an average of just over $100m for the past five years.

This excludes spectrum purchases and any material move towards widespread rollout of new cell sites using mmWave band spectrum. During this period, we expect our total capex (excluding spectrum) will remain in line with our desired range of 11 to 12 percent of revenues.

This is something of a surprise.

5G network equipment tends to be less expensive than 4G hardware. But to deliver the next generation network’s full promise, a carrier needs more spectrum and at higher frequencies it will need more small towers.

Many of these towers will be smaller than existing 4G towers – in some cases they can fit on lamp posts or telegraph poles, but even so, Spark’s comment about capital expenditure suggests one of two possibilities.

It won’t happen overnight

The first possibility is that Spark’s network roll out will be incremental and relatively slow. This follows the pattern of the company’s roll-out of 4.5G.

It is two years since Spark first installed a 4.5G tower in the centre of Christchurch. There are more today, but coverage is far from nationwide.

It looks likely the 5G roll out will begin before Spark has upgraded every worthwhile cell site to 4.5G. Presumably many sites will go straight from 4G to 5G.

The second possibility is that Spark isn’t aiming for the same high density network being planned for large urban centres elsewhere in the world. At least not at first.

Neither of these are important in the short-term.

Indeed, today’s mobile phone users can’t tell the difference between using a 4.5G tower and a 4G tower. There’s no pressing need to upgrade the network on their behalf.

And places like Eden Park in a test match aside, New Zealand doesn’t have the density of people you might find in Hong Kong or New York.

Spark may want to push forward on plans to offer 5G-driven fixed wireless broadband as an alternative to fibre. It already does this with 4G. This is a strategic business decision. If there’s enough demand for more fixed wireless then the internal business case for increased capital expenditure is easy to make.

5G innovation lab

Spark plans to open a 5G Innovation Lab later this year in Auckland’s Wynyard Quarter. This will let companies test their applications on a private 5G network before the full roll-out.

The company says:

“Providing early access to a pre-commercial 5G network through our global relationships with leading equipment vendors like Huawei, Cisco and Nokia will give our local partners a competitive boost, fast-tracking these businesses’ 5G developments.”

Significantly Spark has not named the network equipment provider it will work with on the programme.

The company used Huawei to build the 4G network and has previously worked on 4.5G and its test site  with the Chinese equipment maker. Huawei has to be in consideration for the contract despite the political problems the company faces getting business in the US and Australia.

Yet Spark deliberately named Nokia and, surprisingly, Cisco. The latter is not known as a technology provider for cellular networks. This could be a way of putting pressure on Huawei in order to get a better deal.

Spectrum is a potential concern.

In a briefing paper Spark called on the government to make more spectrum available. All the carriers are pushing hard. They have a case.

This is already in motion, but the company wants this done in time for the new network to be running ready for the 2021 America’s Cup in Auckland. Hence the earlier comment about the need to get this wrapped up in the next 18 months or so.

Spark says it needs large blocks off spectrum in the C-Band, that’s 3400 to 4200 MHz. It says it needs at least 80 MHz blocks and preferably 100 MHz blocks to build networks with 5G performance. It also calls for even larger blocks at higher frequencies.

Silverdale 4.5G cell site

For over a year Spark has pushed fixed wireless broadband as an alternative to fixed-line internet.

Spark sells fixed wireless products using its own label and its cut-price Skinny brand.

From a customer point of view the two services are the same.

Skinny is cheaper. The cheapest plan is NZ$40 a month. At NZ$85 Spark’s own-brand fixed wireless product is more expensive. It even costs more than low-end unlimited fibre plans. In contrast, Spark’s Skinny brand has a $68 unlimited fibre plan.

Customers choosing Spark fixed wireless broadband over a fibre plan get inducements including a free streaming TV service but they won’t save money.

You can be forgiven for thinking wireless broadband is a new idea. It isn’t. The technology is over a decade old. However, things have changed since it first appeared.

Today’s 4G mobile technology has matured to the point where a carrier can offer an attractive enough product to compete with fixed-line broadband in some circumstances.

Extra spectrum makes fixed wireless broadband work

Spark picked up extra spectrum in the 2016 700 MHz auction. This gives the company enough capacity to make its fixed wireless practical and attractive to customers.

When Spark started selling fixed wireless services to rural customers, they could see speeds around 80 Mbps. That is comparable with fibre. Indeed, it is faster than the basic UFB fibre products on offer.

Few of today’s customers will see speeds like those enjoyed by the first to climb on board Spark’s RBI service. While wireless has many admirable qualities — more about them later — it has a big weakness. Wireless spectrum is shared by all the users.

In practice this means wireless networks can get congested. As more customers in an area served by an antennae sign for fixed wireless services, the average speed per user drops. This can happen at any moment, but is more noticeable at busy times.

This speed drop can, and often is, managed by network operators like Spark.

Dealing with congestion

One way they can get around congestion is to limit the number of customers connected to any particular cell site.

Spark and Skinny are already not accepting new fixed wireless connections in some busy areas. Even so, congestion woes always lurk in the background.

Another way carriers manage congestion is by limiting the amount of data each user can download. Fixed wireless broadband plans usually come with data caps. That is, the amount of data you can use is rationed. At the time of writing Skinny offers 40Gb and 100GB plans.

Data caps are not a problem for many users. 40GB is a lot of data if you just do mail, surf the web and watch a few cat videos.

It is not enough data to watch a lot of high quality streaming television.

Depending on picture quality you might go through a gigabyte in an hour watching Netflix. If you have a handful of family members each watching their own streaming TV and using other online services you will bust your cap.

With fibre you can use all the services you like without keeping one eye on the meter. Many regard removing that worry as well worth paying for.

Next wireless broadband generation

Over time wireless speeds and capacity will improve as carriers like Spark invest in new wireless network technologies. Spark already has many sites described as 4.5G. It adds more every month.

This mobile technology generation can be improved a few more times. We can, in theory, go all the way to 4.9G, although carriers don’t use that term when talking to the public.

In two to three years from now the next generation of mobile technology, 5G, will arrive in New Zealand in earnest. You can expect speeds to be faster again and individual cell sites should be able to handle more data.

The move from 4G to 5G is neither cheap or straightforward. Expect disruption.

Spark pushes fixed wireless broadband harder than the other two mobile network companies. In part that’s because it wants to get the most from its investment in spectrum.

There’s another reason. Every service provider, including Spark, has to pay a fibre company around $40 each month for a wholesale fibre connection. Most fibre subscriptions sell for between around $70 and $100 a month. The wholesale cost doesn’t leave much room for margin.

When Spark sells a fixed wireless subscription, it gets to keep the entire $85. There are costs, but the gross margin is far better.

Spark told shareholders its margins have improved since it moved around 100,000 customers onto fixed wireless.

At the same time, Spark gets to retain control. It manages fixed wireless connections all the way from a customer’s desk to the big internet hubs. Having this control, known in the industry as vertical integration, means it stays in control. Phone companies like vertical integration as it helps them maintain margins.

More customers, more towers

There’s a limit on the number of fixed wireless broadband customers Spark can support with today’s technology and the existing tower network. That will change over time, but it’s unlikely Spark could add 100,000 wireless customers in the next 12 months without building new towers. Estimates vary on where it can go at this stage.

If Spark pushes too hard its mobile phone customers will notice a degraded service. Still there is some room for growth on the network.

Meanwhile Spark has accelerated its network upgrade plans. It is confident the investment in 4.5G and later upgrades will pay dividends. One challenge will be meeting customer demands for higher data caps as they consumer ever more services.

Spark sees wireless technology, both fixed and mobile, as the way of the future. It’s arguably the right strategy for a large telco with a mobile network, deep pockets and substantial spectrum holdings. But wireless isn’t the only path to the future.

For now, the wireless first strategy is working for Spark. Its shareholders like the higher margins. They may be less delighted with the strategy when they see the cost of rolling out a 5G network and buying more spectrum.