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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. ↩︎

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.”

You may be right if you think you’re not ready for or don’t need 10Gbps residential broadband. For now, it’s a niche product for a niche market.

Yet it won’t be long before it is mainstream.

Next month, New Zealanders will be able to test the world’s fastest residential broadband. From mid-March, 30 volunteers will get early access to 10Gbps on the Chorus fibre network.

It’s not the world’s first residential 10Gbps service. Singapore already has 10Gbps. Yet Chorus is early to the technology.

Now is the time for 10Gbps

There are good reasons to start testing now.

First, New Zealand’s UFB fibre infrastructure is ready for faster services. That was the plan from the outset. Moving to 10Gbps means new equipment at either end of the fibre. It’s an upgrade.

Second, it’s good to be ahead of the demand curve. When UFB was first dreamed up, planners expected one in five people who could get fibre to take it up by 2020.

Today, roughly half the people who can connect to fibre do. That number is set to increase as we get closer to the Rugby World Cup.

There are reasons why uptake is greater than expected. Netflix and Lightbox are the usual suspects. But that’s immaterial. The point is fibre growth has been well ahead of predicted demand curves. The same could be true for 10Gbps.

Prestige

Another, less tangible, reason to get cracking with 10Gbps is prestige.
New Zealand would be among only a handful of countries to offer the service. It’s a testament to our network and planners that we get there early.

On a more practical level, Chorus managed to announce its service ahead of competitors. It faces a form of competition from ISPs who want to unbundle fibre. Offering a faster 10Gbps service was one way an unbundler might have differentiated. That’s no longer an option.

Likewise, 10Gbps puts clear blue water between UFB fibre and fixed wireless broadband. When 5G arrives, it, in theory, could offer wireless data speeds that match today’s best UFB speeds.

On paper the 5G specification could see 10Gbps fixed wireless services. That is years off. Apart from anything else, it needs more spectrum than is available to cellular companies either now or after the next round of auctions.

Get ready for 10Gbps

A more subtle point is that having 10Gbps now encourages customers to prepare for faster broadband.

As things stand few homes can make full use of the speed. Devices operating at 10Gbps are scarce. The line speed is much faster than home wi-fi networks. You can buy network storage devices that run at 10Gbps, but slower speeds are more common.

Even among the homes that have wired networks, many can’t handle 10Gbps at the moment. The most popular residential Ethernet routers offer 1Gbps.

That’s why Chorus is being picky about who can take part in its test run.
Chorus is looking for 30 volunteers. Candidates need to already have a 1Gbps plan with one of the partner RSPs.

Chorus is a wholesale broadband provider. That means it can only serve 10Gbps broadband through one of its retail partners. Kordia, 2degrees, Trustpower and Stuff Fibre are among the first to sign up. Others will follow.

Test pilots have to live in one of three Chorus exchange areas. That’s Johnsonville in Wellington, Avondale and Birkenhead in Auckland.
Another must-have is a device with a 10Gbps port. Trialists will need to agree to provide feedback on the service.

Big (home) data

The trial is most suitable for people who work with large data files, say movies or high-quality audio. It may also be useful for homes with some high-end gamers or use other demanding applications.

The Chorus 10Gbps trial is a collaborative project. It will use Nokia’s XGS-PON (passive optical network) fibre technology.

Chorus chief customer officer, Ed Hyde says 10Gbps underpins New Zealand’s digital future. He says it will “continue our decade long commitment to innovation and keeping New Zealand’s broadband infrastructure at the cutting edge.”

If the trial is a success, Chorus aims to roll out the service nationwide. You can take that as read. It may not be everywhere this year, but it’s coming.

While Bill Bennett edits The Download magazine and a weekly newsletter for Chorus, this post is an independent opinion.

“Just seven percent of Australian broadband users subscribed to 100Mbps services, compared to 29 percent of New Zealanders.”

A report in today’s Commsday quotes S&P Kagan’s research on Asia Pacific 100Mbps broadband usage.

However, it isn’t clear if S&P is only counting users on 100Mbps or those on 100Mbps and higher speeds. The company hadn’t responded to a request for more information at the time of writing. 

This compares with figures from Chorus which says that 71 percent of mass market customers on the company’s network have connection speeds of 100Mbps or higher. Mass market in this context means consumer and small business accounts. 

The S&P Kagan number for New Zealand stacks up with local figures. In round numbers, about half the people with fibre access choose fibre plans. We know the numbers for other fibre areas are roughly in line with Chorus. We also know that fibre reaches at two thirds of the country at the moment. So give or take a point or two, 29 percent seems right.

 

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.