Arm wrestle begins over structure of ultrafast broadband market

Thursday, 14 February 2019

Vodafone and Vocus hope to whittle back Chorus' ultrafast broadband network monopoly in much of the country after running a demonstration in Parnell – without Chorus' knowledge – of what an 'unbundled' Chorus home fibre connection could look like.

The two companies, which are the country's second and third-largest broadband providers, announced last year that they hoped to jointly invest 'tens of millions of dollars' installing their own electronics on the ultrafast broadband (UFB) networks operated by Chorus, Enable, Waikato Networks and Northpower.

Vodafone NZ chief executive Jason Paris said unbundling fibre-optic lines would lead to a wider variety of faster fibre-based services but acknowledged the viability of unbundling depended on how much of a discount Chorus and other fibre companies gave internet retailers for not using all of their electronics.

He expected to get pricing from Chorus 'in a couple of months' as the two firms aimed to break into a chunk of a wholesale market that could eventually be worth hundreds of millions of dollars a year.

**READ MORE:

* Spark says Chorus price cut 'step in right direction'

* Vodafone and Vocus to spend 'tens of millions' unbundling Chorus' fibre network 

* Vodafone NZ chief executive Russell Stanners accuses Chorus of 'bait and switch' 

* Consumers winning, but Vodafone warns of return to 'old Telecom'**

Vocus and Vodafone could offer services built on unbundled fibre lines from January next year that they would also wholesale to other internet providers 'but clearly it needs to make commercial sense for us', he said.

Vocus NZ chief executive Mark Callander believed they should be able to rent the stripped back fibre lines for about $23 per connection per month.

Paris said Vodafone expected about a one-third to 50 per cent discount from standard 'layer 2' UFB services, which are now priced between about $40 and $65 per connection.

Chorus is expected to make an offer later this year and Paris acknowledged a disagreement over pricing was likely. 'It is likely there is going to be a bit of negotiation backwards and forwards.'

Callander was more forthright, saying that in the absence of regulation, there was 'little to no motivation' for Chorus and other fibre companies to offer the pricing it wanted.

The technology demonstration involved Vodafone and Vocus showing an unbundled fibre line running at 10 gigabits per second, using their own network electronics, at a home on Balfour Road in Parnell.

Callander said the companies 'didn't need to work with Chorus from a technical standpoint' to carry out the trial.

Instead, they bought a 'dark fibre' line that Chorus markets as a service to businesses with more complex connectivity needs, and then installed their own electronics at the Chorus' exchange and in the home.

'Chorus aren't aware of what we have done. We will of course talk to them about this, but wanted to get it running and working first,' Callander said.

There was nothing cheeky about the trial, he said. 'We have unbundled a fibre connection and are preparing for a commercial launch.'

10Gbps speeds could be useful in future when consumers might be streaming 'virtual reality' applications, he said.

Chorus announced last week that it would run its own trials of a 10Gbps consumer UFB service in Auckland and Wellington next month in partnership with a variety of internet providers.

Paris believed Chorus had accelerated that trial because of Vodafone and Vocus' plans.

But Chorus spokesman Ian Bonnar said it had been planning its 10Gbps trials since the beginning of last year. It issued an invitation to internet providers to take part in June, though that didn't specify a date for the trial to begin.

The former National government originally envisaged that fibre companies including Chorus would be automatically forced to wholesale their raw fibre networks at prices set by regulators from 2020.

But it had a change of heart and decided prices for unbundled fibre should be commercially-negotiated until or unless the Commerce Commission saw a case for regulation.

The policy change, which was supported by the Telecommunications Users Association, was prompted by concerns that smaller internet providers that could not afford to invest in unbundling would otherwise no longer be on a level-playing field with the likes of Spark, Vodafone and Vocus.

Those smaller providers would face the choice of either continuing to buy the more integrated service from existing fibre companies including Chorus – despite that potentially having reduced economies of scale because of unbundling – or wholesaling from Vodafone or Vocus – which would be able to add in their own profit margin on top of Chorus' base product.

Paris indicated he did not see any trade-off. 'I don't see the argument that unbundling could lead to a worse outcome for the industry.'

But Callander agreed there were advantages and disadvantages to unbundling and that it was a 'judgement call' where competition in the market should best take place.

Vodafone and Vocus would serve as a 'strongly-motivated wholesaler that would be constantly striving for innovation and would not myopically look at its own retail base', he said.

He believed a second u-turn by politicians on fibre unbundling was realistic. 'Part of our goal is going to be to demonstrate why it is critical.'

In addition to allowing for UFB products that might be faster, unbundling could also result in services that could be better customised for activities such as gaming and streaming virtually reality, he said.

Bonnar said 'most people seem to think the market structure is working pretty at the moment'.

'Only the 'big guys' are going to be able to consume unbundling, so if you did come out with a price significantly lower, you risk upsetting the competitive balance in the market. You have got to weigh up a bunch of different factors.'