Fibre to the Home Report
December 16th, 2008 at 7:00 am by David FarrarInternetNZ released today the first ever comprehensive costing of options for achieiving ultra high speed broadband to at least 75% of New Zealanders. This was defined as a minimum 100 Mb/s for residences and 1 Gb/s for businesses.
The report is 150 pages of detailed models and costings. It was done by Network Strategies, who are an independent leading firm of telecommunication economists.
There are lots of technical details on whether one should build just layer zero or layer one infrastructure, whether it should be GPON or Ethernet or even peer to peer. The techos will find that part interesting.
But the real “big news” in the report is that it may be billions of dollars cheaper to build a fibre network through existing utility (electricity lines) companies, than through expanding current telco networks.
The major cost of fibre deployment is the cost of placing it. And lines companies already have networks of ducts plus overhead cables, and very importantly resource consents. If 50% of fibre deployment can be done using existing utility infrastructure (and some estimate as much as 70% could be done this way), then the total cost is projected to reduce from $5 billion to $3 billion and the cost to the Government from almost $4 billion to under $2 billion.
Now this is only one report, but hopefully a useful contributor to the debate over how to best achieve the Government’s goal of ultra high-speed broadband to 75% of NZ. But one reason I am quite enthusiatic about the path it suggests, is because it makes vertically integrated monopolies far less likely. You see none of the electricity lines companies offer telco services (such as Internet access, TV, phone). They would operate any fibre network on open access principles to all telco providers at a standard wholesale cost (estimated to be around $40/month). In one sense very similar to how Citylink have operated – they just provide the fibre, and let ISPs offer the services over it.
This actually has the potential to reverse much of the regulation in the telco sector. If there is infrastructure competition or separation, then you probably don’t need Telecom (for example) to be giving competitors access to its networks. Regulation is what I call a necessary evil. If one can get the infrastructure setup in a way so there is less regulation, that is a good thing.
There are literally dozens of big questions facing the industry and the Government, in working out a way foward. This report does not seek to answer them – it is a first step. Issues such as national vs regional, ownership, existing investment plans, the role of Chorus, RMA issues, funding, are all very significant ones.
It is going to be a very exciting time over the next few months, as the Government’s plans get finalised. Some people are sceptics, but I think there will be significant economic and environmental benefits to NZ if we get a fibre network in place ahead of most other countries.
Related posts:
- Australian Govt matches NZ with fibre to home commitment
- Barton on Fibre plans
- Fibre to the Home proposal finalised
- Leading technologist calls for fibre network
December 16th, 2008 at 8:25 am
Interesting. Although I was surprised to see the assertion that resources consent would be needed for the network (and hence the favouring of delivery through existing networks). My quick check of the district plans in Auckland and Wellington suggested that utility networks (which includes telecommunications networks) constructed under roads are permitted activities (which therefore do not need resource consents). I’m not sure if there are other plans which are not so accomodating but they would be unusual. Network utilities constructed above ground over roads are, I understand, more complex – with the rules varying somewhat more.
Vote:December 16th, 2008 at 8:31 am
That whole “Rebuilding Telecom’s monopoly” line was only ever uninformed scaremongering. It’s interesting to have the numbers to illustrate this, but the real proof will be the success of the PON that Northpower have put in to Whangarei in partnership with TelstraClear.
What I don’t see in this report is what the impact and cost implications are for the core network(s). A step up to 40G SDH will require a lot of work
Vote:December 16th, 2008 at 8:55 am
What no mention of putting Fibre up the domestic services outward pipe ? I would have thought that was the obvious choice of ducting for NZ’s shitty internet.
Vote:December 16th, 2008 at 8:57 am
Dean – the resource issue does refer to mainly above ground use, where utility companies do already have permission.
Vote:December 16th, 2008 at 9:31 am
Interesting David, maybe they will not forget we good looking types in the rural areas if they go to fibre on existing power poles.
Vote:Fibre then a wireless link to properties.
December 16th, 2008 at 10:00 am
Great – more fucking cables dangling around our street.
Vote:December 16th, 2008 at 10:00 am
The main cost is international pipe. I buy wholesale, 1mbit of international pipe for $500 a month. International pipe is sold in bandwidth, not data.
You can now see why data restrictions are on our plans.
If this problem was solved, new zealands internet would be a lot better. We already have WIX and APX, citylinks and the like. I’d be pushing for faster international speeds.
Vote:December 16th, 2008 at 10:36 am
Interesting to see if the utility companies want to play ball. It’s not their core business, but it could add value, particularly with fat government contracts.
I’m not so sure I personally want a solution in which my ISP and the utility company try to play hot potato with any service queries. That was my experience of getting DSL from other ISPs than XTRA – there was endless buck passing. If 90% of the time I had to call XTRA’s shitty helpdesk anyway, I figured I might as well be their customer.
Vote:December 16th, 2008 at 11:05 am
“Great – more fucking cables dangling around our street.”
That will depend upon where you are. Each District Plan is different. In Wellington for example the number of cables allowed by the District Plan as a permitted activity was pretty much exhausted by TelstraClear (Saturn at the time). I don’t think the Plan has changed, so they will require a resource consent, or have to be underground at ten times the cost.
Vote:December 16th, 2008 at 11:39 am
In Canberra the local (govt owned) utility company did exactly this. Govt lost a lot of money, the underlying infrastructure is reasonably good though. The service they offer is appalling – turns out that utility companies have next to no idea how to offer a help desk. But since the infrastructure is pretty solid, very little cause to call that help desk.
The ISPs offer service on top – so you pay for your line to the network company, then pay for your data, e-mails etc to your ISP. In theory a good setup, in reality confuses people. And in a pricing sense not all that competitive – partly because they have limited access to the thing to a few ISPs, and the utility company decided to set up their own ISP in competition with the rest, to try and grab some more of the revenue.
So, nice idea, but has some warts. Ideally I’d like to see these providers be awarded regional contracts, with competition between the providers in the regions, and the ability to delicense or desubsidise providers who are doing a poor job relative to the rest of the industry. Otherwise you are granting a local monopoly to a company that really (if you look at NZ’s utilities) hasn’t demonstrated a great ability to plan for the future. In theory a local monopoly is OK if the right company has that monopoly – I just don’t see it here though. And I don’t really see a way to do this that doesn’t create a monopoly – other than breaking the monopoly over time (i.e. govt owns the network, you get a 5 year contract to run it, with specified maintenance requirements, at the end of those 5 years you give it back in running order and we retender, with service offered and maintenance offered being key criteria in that tender). Still really only the illusion of competition. Maybe set up regional trusts to own it – so that it is basically non-profit?
Vote:December 16th, 2008 at 1:17 pm
PaulL, completely agree with your comments on the service issues with electricity lines companies, and the potential it creates for confusion between ISP and networkco, and the inevitable balkanisation as different lines companies adopt different approaches at differing degrees of effectiveness around the country.
Personally, I think the best model may involve aspects of the FibreCo model touted by the NZ Institute. I’d recommend the Govt establish “FibreCo” as a new SOE, with FibreCo having a similar focus as Chorus does within Telecom. FibreCo can negotiate with each lines company and local authority as appropriate to get into ducts etc. FibreCo can also negotiate with each ISP/telco who wants/needs access to the fibre network.
That said, the NZ Institute economic modelling of FibreCo seems awry. I have issues with the costings they’ve developed, which understate the likely costs.
And it’d need more development into how FibreCo could effectively blend private sector investment in alongside it’s $1.5bn. Or, alternatively, you let FibreCo use the $1.5bn as equity and raise another, say, $3bn as debt funding in order to fully own its own network.
Of course, the devils advocate model is that the Govt could just buy Chorus from Telecom. You’d definitely need a fair bit more than $1.5b to both buy it and accelerate fibre deployments. But it’d be the cleanest solution.
Vote:December 16th, 2008 at 1:39 pm
Without wanting to be seen as negative on this, a few comments on using line company & local authority ducts …
First, space in those ducts is finite and line companies should be expected to prioritise it for the electricity network. Fibre cables, even 128 core ones, are relatively small. But their entry & exit points soak up quite a bit of the free space in the duct and make it difficult to blow more services down the duct in the future.
Second, while the ducts may be useful for the feeder cables out to cabinets, they’re probably a lot less useful for the distribution cable out to each building/home. To be honest the problem with the FTTH network will be the leg from the cabinet to the property boundary to the building, rather than the legs from the PoP to the cabinet.
Third, I wonder if the best solution for NZ as a country isn’t to look at how any new Govt-funded “FibreCo” can co-exist with Chorus. The economics of FTTH are really challenging just on their own. The economics to us as a country of having two competing local access networks running to each building/house are beyond challenging and well out into “complete waste of money” territory.
I really do wonder if the best option isn’t to either (i) buy Chorus outright from Telecom, or (ii) enter into a FibreCo:Chorus JV of some kind. It wouldn’t be impossible to do a deal where Chorus was spun out of Telecom and then the Govt invested $1.5bn into it in return for, say, a 50% shareholding. (don’t hold me to the 50% figure, without doing a real valuation of Chorus it’s just indicative). As an investment banker though I can see the negotiating approach of saying to Telecom “Either you’re with us in this, or we’re going to nuke the value of Chorus by entering the market as FibreCo … your choice”
Vote:December 16th, 2008 at 2:51 pm
Without wanting to point out the obvious; at least one lines company already does this:
http://www.vectorfibre.co.nz/
And on this one David you seem to be wrong – Vector do run the ISP on this (although they also wholesale it).
Vote:December 16th, 2008 at 3:00 pm
iiq374 … yes Vector have a bit of a FTTx network in place. They have goodish coverage in the Auckland CBD (where the ducts are fat), and they have patchy-but-improving coverage in the suburbs.
They’re mainly aiming their network at the business community rather than homes. I suspect that although they have fibre running down a number of residential streets there’s very very few houses actually connected to it. As I alluded to above, the big $$$ are incurred in going from the local cabinet to the property boundary to the house (including the CPE). I suspect that those costs aren’t competitive compared to xDSL offerings from Telecom and others.
Vote:December 16th, 2008 at 3:00 pm
I’m with the last point. If the govt go ahead without Chorus, then it basically has no market value – it is competing against a government subsidised service. From a purely govt position, then clearly it is easy to say “give us Chorus, we’ll cut you some sort of deal to make it worth your while, otherwise it’ll just go broke when we go around you.”
Flip side is that, if I was a Telecom shareholder (and a lot of NZers still are), I’d be pretty unhappy with my tax dollars being used to destroy one of my shareholdings. And the upshot of it all being that I’d get a govt subsidised version of what Telecom already said Chorus were going to do (albeit a bit faster).
I’m not sure how the Govt would go about picking a fair price, but surely Key could do better than Cullen managed with Transrail – which was basically the same deal, except without any competent advice, with 19th century assets and operating models, and without any compelling reason that the govt should be involved in owning rolling stock (v’s owning the network). So, actually, not the same deal at all.
Vote:December 16th, 2008 at 4:05 pm
@Ben Wilson – Xtra and Chorus are no closer than any other ISP and Chorus, since separation. Having a wholesale provider isn’t going to be any different from what we have today.
@virtualmark – Chorus isn’t going to give you any benefits for FTTH because they will still have to roll out fibre down every street. The only advantage is they already have fibre to a few thousand cabinets – nothing compared to what still has to be done. Sure they have a lot of expertise but power companies like Vector aren’t short of a few clues either. If you’re going to enter into a JV then go with the companies that can offer you something – like poles down most streets so you can avoid the digging. Don’t buy all that copper in Chorus if you’re not going to use it.
I’m sure Chorus is still going to be there competing, providing wholesale telephone and DSL services.
Vote:December 16th, 2008 at 4:18 pm
Paul, picking up on your last comment … the Government’s lack of an over-riding commercial imperative is both a blessing and a curse when it comes to these sort of transactions.
With the rail stuff … I think you’ll find that Cullen did get very competent advice, and that advice was at a much lower price than what was eventually paid. But given Cullen’s clear political goals both (i) Toll saw him coming a mile off and backed him into a corner and (ii) the price he paid was secondary to the political value, so the taxpayer got stitched up.
Moral of the story: If your counter-party knows you have little choice but to do the deal then you can expect to get bent over on the pricing.
With Chorus … the Nat’s FTTx initiative has the clear potential to drastically reduce the value of Chorus. The 75% of homes target means it will compete with basically all the profitable parts of Chorus, presumably stranding Chorus with servicing the 25% of uneconomic homes in places like Tolaga Bay. Telecom shareholders are already facing value erosion, although to what extent it’s already factored into Telecom’s share price is debatable.
But with any negotiation with Telecom the Govt’s lack of commercial imperative is good for the Govt. The Govt can go into a negotiation basically saying “We have to do this, it’s a clear policy commitment, so we’re coming whether you’re ready or not. You can either be with us or agin us”. What’s the Telecom board to do? How can they maximise shareholder value? In that situation arguably the highest value outcome for Telecom shareholders is to do a deal like I proposed … spin off Chorus and let the Govt buy $1.5b of new shares in it.
Moral of the story: If you act like the wild man in the room with nothing to lose then your counter-party has to come to the table.
And yes, I agree that the Nats should be more considerate of the thousands of Kiwis who are Telecom shareholders than Cunliffe did. If I were them I’d offer a few inducements to Telecom to do the Chorus-spinout-and-recapitalise deal. Wiping out many of the TSO obligations would be a good start (seeing those are mainly related to Chorus).
Vote:December 16th, 2008 at 10:43 pm
Arnold … I think you’ll find that Chorus offers a lot more than the lines companies do. Chorus is already running feeder cables to cabinets. And it’s got ducts & other infrastructure it can use from the cabinets to the houses. And most of that infrastructure is already undergrounded. Added to which it would be easier to deal with one Chorus than about 20 lines companies and 40 or so local authorities.
But more than anything else, for NZ Inc it seems uneconomic to pay for & maintain two competing local access networks. Our $$$ would go a lot further if we were just backing one horse instead of two.
But I’m not advocating keeping Chorus within Telecom. If there were to be a tie-in with Chorus it would involve it being structurally separated away from Telecom.
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