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The $1.5 billion question

01 Apr 2010

The government has pledged $1.5 billion to build an Ultra Fast Broadband network designed to pass 75% of New Zealand’s homes, hospitals, schools and workplaces in 10 years. Sarah Putt looks at this ambitious infrastructure project, which is backed by the taxpayer and intended to provide Us wiTH all the speed WE need.Why is the government committing $1.5 billion to a broadband network? isn’t that the job of the telcos?A nationwide fibre broadband network was a National Party election promise made by Prime Minister John Key on the campaign trail. It came at a time when there was widespread dissatisfaction with broadband speeds being offered by the current telecommunications providers.Will $1.5 billion be enough?This is the taxpayer’s contribution, but it’s expected to be matched by the private sector. Also the government intends to get a return on its investment over time.Why will it only reach 75% of New Zealanders? what about people living in rural areas?The Ultra Fast Broadband network is for metropolitan areas. There is another plan designed to address rural communities being developed; it has funding of around $300 million (much of this will come from subsidies that telcos provide under their Kiwishare obligation).Isn’t there already a nationwide broadband network?Yes, there is a nationwide copper network and it’s owned by Telecom. It’s what most of us use when we surf the Internet or make a phone call from a fixed line. But copper lines were only intended to be used for phone calls, and so while they can carry a broadband service, the speeds are much slower when compared to fibre optic networks. You can put electronic boxes called DSLAMs on the end of a copper line to increase broadband speeds (up to 24Mbps currently), but the problem is the faster the speed, the shorter the distance it travels. That’s an issue in New Zealand because the copper lines are generally very long (over 5km in some areas) and if you don’t live within 2.5km of an exchange you won’t get high speeds.But isn’t Telecom investing millions of dollars in a fibre network already?Yes, Telecom has committed to building a Fibre to the Node network to towns and cities with more than 500 lines by the end of this year. The rollout is sometimes referred to as cabinetisation because specially designed roadside cabinets are being installed in suburbs around New Zealand (Telecom will have installed 1864 by June 2010). A cabinet is located about 2.5km from an exchange, which it’s connected to by a fibre optic cable. Inside it has a DSLAM and it functions as a mini-exchange for those houses that are too far away to get high speeds from an exchange.Back up the truck; what’s the exchange connected to?Fibre optic cable that runs up and down the country (it’s called national backhaul) and this cable is connected to an international cable called the Southern Cross, which transports New Zealand’s Internet traffic to Australia and America and onto the rest of the world.So would the fibre optic technology that connects us to the world be the same fibre optic cable that the government wants to roll out by the roadside?Sure is; it’s magic stuff really. Depending on what electronic boxes you put on the end of it you could have speeds of 100Mbps to 1Gbps; even more as the technology develops.What would I do with such fast speeds? would it mean cheaper broadband?Well, the hope is that we could kiss goodbye to data caps, which constrain Internet usage, but whether a connection would be cheaper is not necessarily the primary reason for building a ubiquitous fibre network. It’s what it can enable you to do – which is a lot more than just receive television over the Internet. It can make it easier for people to work from home because they can access the work server and download large files via a secure network. Health services can be delivered via a high-speed network – for example a person could monitor their health under the supervision of a nurse or doctor via video conference and not have to travel into the hospital. Indeed, the uses of a fast fibre network haven’t even been thought of yet, and it’s likely to change the way we live. The analogy is often drawn between a 21st century fibre network and the 19th century railway network. When the latter was built, everyone knew it would mean they could travel large distances with ease, but no one predicted the advent of suburbs.Alright, I can see the point, but isn’t Telecom already doing it? Couldn’t they just extend their Fibre to the Node network - after all they own the exchanges, a large part of the national fibre backhaul and have a majority share in the Southern Cross Cable?Welcome to the government’s great dilemma! Yes, Telecom could extend its fibre to the node network to a fibre to the home network. It’s already commissioned a prototype mini-cabinet that would enable it to do just that – although this is a relatively untested assertion. It also has the advantage that almost every single New Zealand home and workplace is served by copper lines, thereby bypassing the most expensive bit of building a network – digging the holes and laying the cable. But Telecom is a public company whose first duty is to its shareholders. It’s a vertically integrated telco, which means that not only does it own the infrastructure and charge a rental to all the other ISPs that want to use it; it also provides voice and data services itself, and there is a concern that it would use its monopoly position to get the biggest return it can for itself and not open up its infrastructure to other competitors at the same price.Can’t the government just bring in a law that says TELECOM HAS to share it with everyone else at the same price?Yes, that’s called regulation, which is generally determined by the Telecommunications Commissioner. The previous Labour government introduced legislation that forced Telecom to open up its copper network to competition (known as local loop unbundling) and it also made Telecom operationally separate into three divisions: Chorus (which owns the physical infrastructure related to the exchanges, cabinets and copper wire – they’re the ones that come to your house when you want to connect to broadband), Telecom Wholesale (which offers the services that enable data and voice traffic on the copper wires) and Telecom Retail (which sells phone and broadband services). Under very strict separation rules, Telecom has had to ensure that its competitors such as Orcon and Vodafone can use Chorus and Telecom Wholesale services for the same price as Telecom Retail.So Vodafone and Orcon and the rest get to use the XT Network?No, only the copper lines are regulated, because it’s a legacy network – it was built over a 100-year period by the New Zealand government and sold off in the 1980s. Telecom’s mobile networks and its interest in the Southern Cross Cable are not subject to regulation.If the laws are in place to ensure competition and Telecom haS the infrastructure, then why doesn’t the government give it the $1.5 billion and say go to it, give us back the money with a little interest when you’re done?And that may be exactly what happens. The process to determine who will partner with the government has begun. A Crown-owned enterprise called Crown Fibre Holdings has been established, and it’s in charge of distributing the funding and is working with the Ministry of Economics and Treasury. Under the proposal the country has been divided into 33 areas – these are called Local Fibre Companies (LFCs). Each LFC will be funded half by the government and half by the private partner. But an LFC could look after one or five or even all 33 areas – so the government could partner with multiple companies or just one.And that one could be Telecom?Yes, Telecom has put in a national solution (it’s one of two national proposals; the other is from a Canadian company which is building a fibre network in Singapore). But...OK , what’s the But?The government has said you can’t be part of an LFC and offer retail services – in other words, that vertically integrated business model which has served Telecom so well in the past has got to go. They can either be part of the infrastructure or be part of the service layer. But they can’t do both.Oh dear, what will they do?In addition to a national solution, Telecom has put forward a regional bid. It’s only guesswork, but Telecom is probably lobbying the government very strongly to say that the operational separation it’s already undergoing is robust enough to ensure it can both own the infrastructure in partnership with the government, and sell its services at the same price to its retail arm and its competitors. The alternative would be to sell off Chorus, and it appears the Telecom board doesn’t have the stomach for that.All those XT Network outages wouldn’t have helped them then?Probably not, but a fixed line and a mobile network are completely different beasts. Telecom has a track record of providing reliable fixed-line services; it would be shortsighted to ignore that.OK so that’s Telecom’s case, what about the competition?At the time of writing, Crown Fibre Holdings was assessing 33 proposals from 18 respondents. According to their timetable the preliminary selection was to have been done by the end of March and all bids were confidential. But we know that Telecom’s biggest rival is an alliance of 19 lines companies and fibre network providers such as CityLink in Wellington and Enable Networks in Christchurch.How do you know that?They’ve hardly kept it a secret! Vector has launched a television and billboard campaign promoting fibre to the home and launched a Web site for feedback www.fibretothedoor. The lobbying is fierce.OK , so why should the lines companies build a broadband network?Lines companies are specialists in building infrastructure and they can use their assets – power poles and underground ducts to carry fibre optic cable. They are regionally based organisations, so they are in tune with their communities (many are owned by community trusts). Also the government is intending to recoup its investment and expects to be bought out over time, so a collection of regionally based, autonomous LFCs that would interconnect with each other would prevent another monopoly. In addition, lines companies are not interested in selling retail services, so would presumably offer the same services at the same price to every ISP.Do they have any experience in building fibre networks?Some lines companies have been involved in building local fibre networks; for example Vector partnered with the previous government and built a fibre loop connecting 45 schools on Auckland’s North Shore.So it’s a credible alternative. But what would Telecom do if it didn’t get its way?It’s by no means clear that it’s a choice of one or the other – there’s the very credible Axis bid that might trump everyone. There could be other players that haven’t declared their hand, or there could be a combination of lines companies, fibre providers and Telecom.As to whether Telecom would compete with a government network if it missed out; well that’s the $1.5 billion question. Although there are some fibre optic networks that aren’t owned by Telecom, the company has something that is enormously powerful – most of the customers that would buy services from the government network are already buying them from Telecom’s.So when are they planning to start laying fibre?Prime Minister John Key has promised that the physical works of putting fibre in the ground will begin by the end of the year.

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