UFB fibre unbundling fades into background

The Commerce Commission’s final guidance, published this week, may put the UFB fibre unbundling question to bed.

Unbundling is the idea that internet service providers can buy a raw physical connection from a wholesale fibre company, attach their own electronics and sell services on to customers.

At present New Zealand’s ISPs have to buy the physical connection bundled with the electronics at each end to send and receive data.

Fibre unbundling deals on the table

Since the start of the year, fibre wholesalers have offered unbundled fibre to retail service providers.

Chorus, Enable, UFF and Northpower have all published their proposed offers. Few service providers have shown any interest. But two, Vodafone and Vocus, formed a partnership to work on unbundling fibre. That project hasn’t got far for reasons that will be obvious when you read on.

I’m simplifying here. There’s a technical rabbit hole you can go down that discusses matters like Layer 1 and Layer 2. You can find an easy to read summary of unbundling on this site.

You don’t need to understand the details to grasp the basic economics.

The Commerce Commission regulates basic fibre prices. Fibre companies can sell wholesale at a price determined by the Commerce Commission. This price takes into account the cost of building the network. It is set so that fibre companies get a return on their investment.

Fibre expensive to build

As you’d expect, building fibre networks is expensive. The bulk of the costs pay for civil engineering and the physical part of the network. This is Layer 1.

Fibre companies turn Layer 1 into Layer 2 by installing electronic hardware at each end of a line. This moves the data through the fibre.

Installing electronics is a small fraction of the cost of building a fibre network. A few percent at most.

Given fibre companies charge a cost-based fee, the price difference between bundled and unbundled is tiny.

Which means there’s no value in UFB unbundling to a service provider.

While the Commerce Commission regulates UFB wholesale prices, it opted not to regulate unbundled fibre prices. It left that to commercial negotiation and said it may step in later if necessary.

As with other fibre regulation there are two key ideas in last week’s Commerce Commission guidance. These are: Equivalence and non-discrimination.

Equivalence means the terms a fibre company offers must be the same as it offers its own business operations. Non-discrimination means they can’t play favourites with retail service providers.

The big telcos don’t like non-discrimination. It means they can’t use their clout to get better prices than small ISPs.

Room to move

This week’s guidance might not be the last we hear of UFB unbundling, but it doesn’t leave ISPs with much room to move.

It’s worth pointing out that consumers won’t benefit from unbundling. If there are cost savings, the ISPs will want them to rebuild margins. There’s nothing an unbundler can add to a fibre connection, almost all their options include taking things away.

Now the Commerce Commission is investigating whether the non-price terms attached to unbundled fibre offers meet regulatory requirements. This can be trickier. Take the fibre companies reluctance to let external engineers cut and splice their fibre lines. On one level it sounds reasonable, but the regulator may yet decide otherwise.

In its guidance the Commission explains how it will monitor and enforce obligations.

Telecommunications Commissioner Tristan Gilbertson says: “We strongly encourage fibre providers to review their product offerings against the guidance we have issued and to make any changes necessary to bring them into compliance as quickly as possible. We also encourage retailers to raise issues with the LFCs where they believe the product offerings are not meeting the required obligations.”

Which is a way of saying: “As long as no-one is unreasonable, we’re going to leave this with the market for now.”