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Some telcos are waging a public relations war on Ultrafast Broadband.

Reading between the lines of their public statements, they don’t like the market model.

This was set-up over a decade ago by John Key’s first government. The government restructured telecommunications. It tilted the playing field in favour of customers. New Zealand businesses and consumers got a great deal.

Regulated separation

Regulation separated the market into two parts. Fibre companies would build, own and operate the UFB network. They are regional monopolies. They can only sell wholesale services.

Retail service providers can sell broadband without geographic boundaries. RSPs all buy wholesale services on exactly the same terms.

This model promotes competition. No single player can dominate in the way companies could before the restructure.

Chorus, Northpower, Enable and UFF are the fibre companies. There are 90 or so retail service providers. The biggest and best known are Spark, Vodafone, Vocus, Trustpower and 2degrees.

Consumers are happy with how the market operates. At least those in areas that can get fibre are. The fact that people in areas without fibre are grumpy about it speaks volumes about the model’s success.

World class

Thanks to UFB New Zealand has one of the best and most affordable broadband networks in the world.

It is great for consumers. It is often less wonderful for some of the RSPs. The bigger ones are not happy.

There are two main reasons they don’t like the UFB model.

First, from their point of view, separation does too good a job of promoting competition. RSPs fail to compete on anything other than price. They discount broadband to the point where, as Vodafone CEO Jason Paris says; “They compete away all the margins”.

Thin margins

Retail broadband margins are wafer thin.

A consumer might pay $80 to $100 or so each month for a fibre broadband account. Roughly half of that goes to the wholesale fibre company. RSPs have overheads and costs. The margin is often less than 10 percent of the monthly fee. It can be lower, some only make five percent.

They get that money 12 times a year. Yet UFB is not as lucrative as the old ways of selling telecommunications.

This explains why Spark and Vodafone are so keen on fixed wireless broadband. It’s an inferior product, but they get to keep a larger slice of the cake.

The second reason the bigger telcos don’t like the UFB model is they are not in control of their own destiny. This bothers them. They have few options, little room to manoeuvre.

Equivalence

Another, less obvious grievance is the UFB idea known as equivalence.

A supermarket chain like Countdown usually pays less for products than the wholesale price paid by a corner dairy. They get economies of scale. Countdown buys tins of baked beans from a wholesaler at a lower price than dairies pay.

Equivalence means the largest telco pays the same as the smallest RSP for a customer hook-up.

There are economies of scale when it comes to support, back-end services and marketing. Yet the aristocratic telcos resent paying the same price as the peasant RSPs.

Phoney war

All these aspects of the UFB model come into play as some telcos wage a phoney war. It is a war that is being fought on a few fronts.

Last month there was fuss from big telcos about something known as the wall of bad debt. This sounds like something from the Pilgrim’s Progress.

Spark, Vodafone and 2degrees have been the most vocal. They say a recession is coming and they face large unpaid broadband bills.

They want Chorus, it’s always Chorus 1, to foot some of the bill.

This is an unusual argument on two counts. Wholesalers don’t shoulder the risks of their retailers in other sectors.

What’s more, the debt risk facing the large RSPs is largely of their own making. When lockdown began the telcos said they would not cut off customers for non-payment.

Decent

It was a good and decent thing to do. Or at least it is a good and decent thing to do with your own money.

It’s not such a good and decent thing to be generous, then turn around and ask the fibre companies to pay half. It would be fine if they had gone to the fibre companies first and agreed something along these lines. But they didn’t.

This doesn’t mean their argument is unjustified. They have a case. It is not as clear cut as they argue.

Also, it is not as if fibre companies don’t face their own post-lockdown financial risks.

First they had to keep contractors ticking over when there wasn’t much work. What’s more, they face their own potential wall of bad debt if RSPs go bust in the looming recession. Having an RSP fail to pay would be far more serious than an individual consumer missing a payment.

Moral hazard

There is a moral hazard aspect to the wall of bad debt. If telcos get wholesalers to carry half of the risk, they have an incentive to take more risks.

Companies have a tendency to be reckless when protected from consequences. Among other things, they might not chase bad debts as hard if they know they only face half the loss. They might be less fussy about who they give credit to and so on.

It doesn’t help Chorus’ case that it is now enjoying the financial light at the end of the UFB-build tunnel.

That said, Chorus agreed to pay $2 million towards the bad debts. In round numbers that’s about half the cost if 7000 New Zealanders fail to pay for six months of broadband. Around one million New Zealanders connect to the UFB. So if seven percent default on payment, Chorus pays RSPs half the cost.

Some telcos don’t think that’s enough. Remember here that Chorus has no legal obligation to pay anything.

Minor regulatory risk

There is a small danger here to the idea of separation. If the fortunes of wholesale fibre companies depend on RSP performance, they could play favourites. A bigger danger comes from another battle: fibre unbundling.

To understand how fibre unbundling threatens UFB, let’s go back to the original plan. The government decided fibre companies would sell layer 2 services. It left open an option for layer 1 services at a later date.

In this context layer 1 is an unbundled service.

That later date is now. Or, to be more precise, it was January this year.

Layers

You don’t need to know the technical nuance about layer 1 and layer 2 to understand what is at stake. Here’s the simple version.

In effect layer 2 means fibre companies sell RSPs a complete service from a home or office to a network node. This includes the network connection hardware at each end of the link. Fibre companies wrap all the parts needed to do this into a bundle and sell it as a whole.

If they sold layer one, RSPs would get a fibre connecting the home to the node. They pay for the hardware on the ends of the line. Hence unbundled.

The problem with unbundled fibre is that all the costs in a network are in the civil engineering. Stringing fibre around the country is expensive. The hardware on the ends of the fibre cost peanuts in comparison.

Wholesale UFB prices are regulated. The price depends on the cost of building and supporting the network. The bundled hardware turning layer 1 into layer 2 is only a small percent of the total. So the input cost difference between bundled and unbundled fibre is tiny.

In other words, in the UFB model unbundled fibre doesn’t make economic sense.

Economics

Big telcos know how the cost structure works, but don’t accept the economics. They continue to argue and lobby for lower unbundled prices. If they get their way, fibre companies would sell connections at below cost.

The entire UFB model would collapse. And future governments would struggle to raise private capital for infrastructure projects.

This connects to another way telcos are waging war on UFB. Last week, a Vocus press release said the latest round of Chorus fibre price rises is: “cynical, money grabbing and unwarranted”.

It’s an opinion. UFB regulations say fibre companies can raise prices in line with inflation. That’s not quite the same as “cynical, money grabbing and unwarranted”.

Inflation is tiny, around one percent, so the rise is small. It reflects the increased costs fibre companies pay for things like maintenance. Without it, a fibre company’s margins would ratchet down each year.

Futureproof

Government choose this price rise at part of the UFB model when it feared investors would not want to fund fibre. It needed this clause to attract investors. It still needs this clause to attract private investors for future infrastructure projects.

Vocus, like the other telcos can choose to pass this cost on to customers. As we’ve already seen, competition is tight, if a telco raises prices customers may move elsewhere. But that’s how market economies work.

And that’s the real story here. Price increases, unbundling and, to a lesser degree, the coming wall of debt are all hardwired into the UFB. Government designed market regulations that way for a reason.

Regulated competition

UFB has been a success, in part, because there is a competitive market. Unpick the regulations and the whole UFB fabric unravels.

The real challenge facing telcos is that the market is too competitive. As Paris says, they have competed away their profits. Corporations might pay lip service to free markets, but they don’t like them.

Mobile means Spark, Vodafone and 2degrees have alternative paths to profit. Enterprise services, adding value through content deals or power billing are other paths. Being better at what you do is always an option. Market consolidation might help.

Attempting to repair margins by chipping away at the foundations of UFB is not a wise strategy. There was a time when Telecom thought it could defy government policy and regulation. Look how that ended.

Disclosure: I do some freelance writing and editing for Chorus, but the company doesn’t tell me what to write. 


  1. Telcos have figured out it is easier to bash the biggest fibre company. Criticising Chorus gets more media attention and more sympathy, than disrespecting “fibre companies”. Yet almost every accusation made against Chorus applies to the other fibre companies. If, say, Northpower was the target of anger, that would look like bullying. ↩︎

UFB progress q1 2020

Crown Infrastructure Partners reports a total of 966,773 homes and businesses were connected to the UFB fibre network at the end of March.

A further 17,038 connections were added in the first three months of 2020.

Across the country UFB uptake is now at 58 percent. Rolleston remains the most connected town with a 76 percent uptake.

The extended UFB build, that’s the first and second phases, has reached 91 percent and is running slightly ahead of schedule.

Faster and faster UFB

There is a clear move to the fastest UFB plans. CIP CEO Graham Mitchell says just under 22,000 homes and businesses moved to gigabit connections in the first quarter.

Around 82 percent of New Zealanders can now connect to the fibre network. It operated 169 cities and towns across the country.

Outside of urban areas the Rural Broadband Initiative increased its footprint by 3,078 homes and businesses in the first quarter of 2020. The network also connected 52 marae — if you are an overseas reader that’s a Māori meeting house.

A total of 27 new rural cellular towers began operating in the quarter. There are now 86 new rural towers nationwide serving around 46,000 connections.

How are we doing?

The big picture is positive. The fibre network proved its worth before the Covid–19 lockdown, but that only went to amplify its importance.

Fibre reaches a little over four-fifths of New Zealanders. Things are a little less clearcut when it comes to the remainder of the country.

Those rural users who live in sight of an RBI tower and are not waiting for a spare connection have a good fixed wireless experience. Performance can slow a little at times, but for most purposes RBI fixed wireless delivers.

Likewise people with the good fortune to be serviced by one of the Wisps — wireless internet service providers — are likely to get the broadband they need.

The problem comes for everyone else. That’s, perhaps as much as 10 percent of the population, probably more like six or seven percent. These are people who don’t have fibre, a capable Wisp or line of sight to a cellular tower.

Given the small number and the importance of decent broadband, it should be possible over time to fill in more and more of these gaps. The cost per connection might be high and it may be unrealistic to expect these people to pay the same as city folk. That is a decision for telcos and government policymakers.

Ultrafast Fibre’s owners have agreed to sell their shares in the business to First State Investments, an Australian asset management company.

The business was owned by electricity distributors, who bid and won the UFB contracts over a decade ago. WEL Networks Limited owned 85 percent and Waipa Networks Limited controlled the other 15 percent.

UFF runs fibre networks in parts of the Central North Island including Hamilton, Tauranga, Whanganui and New Plymouth. The network runs past around 237,000 premises.

First State paid $854 million for the business.

OIO approval needed

The deal is subject to approval from the Overseas Investment Office.

This is where the story could get interesting.

An overseas organisation needs OIO approval to buy a sensitive New Zealand asset. In most cases sensitive means either land or a business that is worth more than $100 million. There’s usually an exception for Australian buyers.

However, a fibre network isn’t only sensitive. It is also a strategic asset of national importance.

Different rules for different fibre companies

Chorus, the largest fibre company is subject to a 10 percent Kiwi Share restriction which limits foreign investment in the business.

In 2012 the government had to decide to waive the restriction when AMP Capital moved to take a larger stake in the business.

There was something of political fuss when this happened, yet the amount of Chorus under discussion was less than the amount of UFF that’s now up for sale.

While UFF is much smaller than Chorus, it is New Zealand’s second largest fibre company. It has a wholesale monopoly in its area and covers roughly 12 percent of the homes able to connect to UFB.

So, if roughly five percent of Chorus triggered political alarm bells, 100 percent of UFF could come under scrutiny.

Exquisite timing

First State Investments is lucky that most politicians are focused elsewhere at the moment. Either that, or it timed its acquisition knowing it could slip under the radar.

If UFF was anything other than a technology company you could expect, at least, New Zealand First to take an interest in this sale.

Of course this wouldn’t be the first time overseas interests have owned strategic New Zealand telecommunications assets. Yet it seems odd that Chorus ran into problems selling a few percent to AMP while UFF can be sold in its entirety.

New Zealand’s broadband has performed well during the Covid–19 lockdown.

Our networks have been pushed well beyond expectation. For the most part, they have not been found wanting.

That’s the good news. The bad news is that too many New Zealanders are still on the wrong side of the digital divide.

Digital divides

Make that digital divides. There is more than one.

Not every household can manage the cost of a fast broadband connection or afford the devices needed to make it sing and dance.

That problem is structural, social and economic. It is beyond the remit of our telcos.

No-one can sensibly argue that New Zealand’s broadband is overpriced. It’s cheap by international standards. More so when you consider the size and distribution of our population.

Competitive

Broadband competition is so tight that telcos only make the flimsiest of margins each month. Some argue, with justification that the market is too competitive. There’s little room for them to sharpen the pencil.

One obvious fix for this is to ensure people have more money to spend on necessities like broadband. That’s not going to happen overnight the way things are now.

The other approach is to subside services for less well off customers. That’s largely down to politics.

Some great initiatives are in place to do this. We need to make sure they are taken up and, if they are not enough to meet needs, then ensure there is more money invested here.

Investment

Yes, invested is the right word. Homes with broadband have better access to education, but they also can access government services.

It is cheaper for government organisations to communicate digitally than to do so in person or by moving little packets of paper around the country.

Other households are on the wrong side of the digital divide simply because happen to be in the wrong place.

A link too far

They may be beyond the reach of fibre. If they have copper they could be too far from a cabinet for VDSL.

They may be in a RBI fixed wireless area but the local tower is full. They may be some distance from an RBI tower where performance is woeful.

We need to fix this and fix it fast. The clock is ticking. Children can’t leave their education for years. Working from home will remain important. Fast broadband is not a luxury, it is the digital equivalent of daily bread.

Fibre further

The fibre network needs to reach further into the bush.

Yes, it is expensive to connect remote homes to the network, the alternative is to accept second class citizens in our own country.

The only way to fix this is with government money. We paid for the original UFB network with a soft loan. To extend the network requires cash. It would take too long for a loan to pay back at current prices.1

Return on investment

The good news is that state investment in broadband pays a decent return.

If the idea of state control bothers you2, we don’t have to go down the Soviet route. There are plenty of opportunities to work hand in hand with local telecommunications entrepreneurs. This seems to be the preferred approach of New Zealand’s two main political parties.

There’s a point where the big telcos lose interest in extending broadband networks. That’s understandable. They are money-making businesses, not charities.

Wisps (wireless internet service providers) do a great job and they understand local needs and conditions. There should be more soft loans and subsidies to help them push broadband further up the remote valleys.

Good work

Hats off to all the service providers, not just the Wisps. They are a credit to the industry and to the nation. Spark, Chorus, Vodafone, Enable, Northpower and UFF have all reported on their performance. The smaller players may make less noise but their efforts are also appreciated.

In some cases the performance has been astounding.

On Friday Chorus reported the average fibre customer now gets through almost 500GB of data a month. The actual figure is 495GB. That’s up 30 percent of pre-lockdown consumption in February.

When you add in the customers on the copper network, the nationwide average drops to 406GB, an increase of 36 percent on pre-lockdown use. Clearly the old copper network is enjoying a new lease of life, even if in the long term it is on the way out.

It says the average speed on its network is also up to 150Mbps. That’s because more people have switched to higher speed fibre plans. Gigabit broadband is especially popular today and hyper fibre is on the way.

Fibre is king

At the time of writing around 80 percent of the country can connect to the fibre network. That will rise to 85 percent by the end of 2022.

The fibre uptake level before lockdown began was somewhere between 50 and 60 percent. So in very round numbers, almost half of New Zealand now has fibre.

All fibre companies report an increase in demand and there is a post lockdown level 4 backlog of orders to work through.

That’s huge vote of confidence for the decade-old UFB programme. It was originally started with around $1.5 billion of government money in the form of a soft loan3.

Late last year I interviewed Sir John Key and Steven Joyce who were the two ministers responsible for the original plan. Both said then that, in hindsight, the UFB was one of the best investments a government has made in recent times. That was before the pandemic. Today, that investment looks even better.


  1. Either that, or we accept that more remote fibre customers pay a premium to cover the higher cost of getting a service. This goes against the grain of the one-price-for-everyone approach of UFB, but it would speed things up. ↩︎
  2. There are people who would prefer a return to state-owned and operated telecommunications. That would require a political earthquake. If the Covid–19 pandemic doesn’t change this, there’s little prospect of it happening. ↩︎
  3. A small fraction was set aside for schools broadband, leaving about $1.35 billion for fibre. ↩︎

It’s time to consider whether New Zealand’s fibre network should be extended beyond the reach of UFB and UFB2. There is a sound business case for doing so. Yet considerations need to go beyond the balance sheet.

New Zealand’s fibre network has more than proved its worth since the nation went into lockdown. It helps hundreds of thousand to work or study from home. It keeps people entertained when other forms of fun are restricted.

There’s more than enough network capacity to cope with increased demand.

While there is still a digital divide that needs to be addressed, the UFB has made fibre affordable for most people. Unlimited data plans with gigabit speeds start at around $80 a month. That’s all the broadband an everyday user could wish for at a knock-down price.

UFB1 and UFB2

The first phase of the UFB programme finished late last year. It gave three quarters or 75 percent of the country the opportunity to install a fibre connection. The second phase, UFB2, scheduled to complete at the end of 2022 extends that footprint to reach 85 percent of the country.

This leaves 15 percent of New Zealand having to rely on either fixed wireless broadband, copper networks, or, in more remote cases, satellite broadband.

All these technologies have improved in recent years, but they can’t match fibre in terms of price performance.

All the way?

There are people who argue fibre can go all the way. After all, the copper network reaches around 99 percent of the nation. We built that at a time when there was less money than today. It was seen as a nation building exercise. There was also an element of investing in infrastructure to create jobs.

We could go down that path. There is a case. It would be expensive and take a long time.

Yet it isn’t necessary. Wireless technologies are better suited than fibre when it comes to connecting more remote homes and businesses. And for the most remote places, satellite will remain the smartest choice.

Let’s agree now that the last one percent is only going to have satellite as an option. This includes places like the Chatham Islands. Building fibre to the remote-windswept-farmhouse there would be economic madness.

Cut off point

This leaves us with the question of the best cut off point between fibre and fixed wireless.

We can leave it at the 85 percent mark, which is where it will be at the end of 2022. But there’s a strong case for connecting those people who live just beyond the fringe of that network, and there will be again if we extend it further.

On the other hand, pushing to 99 percent doesn’t make sense.

The actual cut-off point is more about economics than technology. There’s nothing technical to stop us building more and more fibre.

The barrier here is economic. By the time we get to the 85 percent network level in 2022, government and private investors will have tipped something like $6 billion into fibre.

Something like the 80:20 rule comes into play with real world network building1. In very round numbers, if it cost $X billion to connect the first 20 percent or so of premises, it would cost 2 x $X billion to connect the next 20 percent and 4 x $X billion to connect the next 20 percent. The UFB2 programme kicked in with the next 10 percent at a network cost of around $400 million. That’s on top of the $1500 to $1700 cost of each additional connection.

Costs

Or, to put this another way, adding easy to connect homes in dense inner city areas costs a few hundred dollars per connection. Adding the last home that would bring the connection level up to 99 percent would cost many millions.

Which all means there is a pay-off curve.

At this point the discussion gets a little more complex.

When the UFB was originally planned, the politicians and experts hoped take up would reach 20 percent. Connecting 75 percent of the population when the expected uptake was 20 percent made a kind of economic sense.

Uptake better than plan

As UFB developed and uptake rates outpaced the original expectation, it made economic sense to increase the footprint. The economic viability of the more marginal connections changes when the uptake rate is 40 percent compared with a 20 percent uptake rate. That was when the decision was made to build UFB2.

Today’s uptake rate is a little higher than 50 percent. By all accounts there is a huge backlog of UFB connection orders. I expect to see overall uptake reach at least 60 percent within a year.

At an informed guess, the uptake will carry on climbing from today’s level, albeit at a slower pace than in the past. Over time it will definitely reach 70 percent without any external intervention.

We’ll come back to that in a moment.

So, if uptake is 70 percent, it makes economic sense to connect more of the homes in the last 15 percent of the nation. That is the people who won’t be on the network at the end of UFB 2.

This applies even though the per-connection cost of extending the network is higher than for the first 85 percent of the country.

The copper question

All this talk of uptake rates assumes people can choose to keep copper broadband connections in areas where fibre has been installed.

We need to challenge that assumption. Apart from anything else, it costs money to run two networks. Fibre is easier, less expensive to maintain than copper. So, over time, the cost of maintaining a single copper telecommunications line will be higher than its economic worth.

It makes sense to mandate a move to fibre and rip out copper before we get to this point. No-one can claim this would be anticompetitive. After all, those fixed wireless broadband towers aren’t going anywhere. And soon satellite will be a more competitive proposition2.

When the copper network is pulled, we can expect fibre uptake rates of 90 percent or higher. This makes connecting those otherwise more marginal premises in the last 15 percent an even better economic proposition.

The existing rules allow network company Chorus to withdraw copper lines from fibre areas. As things stand, there isn’t much incentive to do this.

Not only economic

Most of this discussion has been about the economics of extending fibre. That’s to underscore that the idea has a sound commercial basis. Yet, as it says at the top of this post, there are reasons to extend fibre beyond the mere economic.

To use an old fashioned cliche, more fibre would be a nation-building exercise. Those people who now live in areas beyond the planned fibre footprints won’t feel like second class citizens3.

These are people who need remote working, they can’t easily catch a bus to their nearest co-working space. Likewise school age children might not always be able to reach classrooms in poor weather. Communications like video-conferencing is more important when you can’t catch over coffee on Ponsonby Road.

When the government first announced its plan for a fibre network, Conor English, then at Federated Farmers, pointed out that rural businesses drive the New Zealand economy, yet were left out of the best telecommunications options.

Fibre to the bush, taking UFB2 further

Which brings us back to the cut-off point. Just how far should we extend UFB into the bush? Can we go beyond UFB2 with a UFB3?

Weighing up all the economic arguments, it seems there’s a case for going well past 85 percent. The last five percent doesn’t make economic sense, at least not if customers pay the same prices as other UFB users. We can talk about subsiding their connections, that’s another debate, maybe another blog post.

The slider runs from 85 percent to 95 percent. You can move it up and down, the higher it goes, the more costly things are. Keep it at 85 and there is no more expense, just a lot of people the wrong side of a digital divide.

We should move the slider closer to 95 percent than 85 percent and, as a nation, we absorb the cost. We’ll get all that money back in the long term.

In the past this would have been a nice-to-have, a luxury. Suddenly there is a lot less money in the economy. But in our new world, the idea of extending fibre is far from a luxury, it’s a necessity. We need to find creative ways to make it pay, but that’s something we’ve always been good at.

Let’s extend the fibre network beyond UFB1 and UFB2.


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