Welcome to a new era of telecommunications in New Zealand: the Telecom monopoly now broken by a structural separation into a network company and a retail business and "the UFB", the government's much trumpeted $1.35 billion ultrafast broadband infrastructure project, is underway. For good measure, to celebrate the new dawn, there's a new acronym: RSP - retail service provider.
Bartlett seems happy enough to be the poster boy for this new age, enthusiastically explaining that UFB is more than rolling out fibre. "We're trying to give ourselves a unique opportunity to get a leg up on our competitors, on our trading partners, and how we as New Zealanders are facing the rest of the world." But then he asks the key question: "What's the point of digging up every road in the country and spending all this money if no one connects to it?"
Indeed. At the end of April a mere 1012 premises had connected to UFB fibre. These are clearly early days, but given that some 60,000 premises were able to connect as at the end of June, the signs aren't encouraging. Most of those who have connected appear to be on the Northpower Fibre network in Whangarei. It began building its UFB in December 2010 and is hoping to complete a rollout to 19,000 premises six months ahead of schedule, by the end of 2013. At present, with some 6000 Whangarei premises able to connect, uptake is a healthier 10 per cent.
Woeful uptake isn't the only elephant in the room. The new environment has RSPs jockeying for position. Rumours abound. Vodafone is in talks to buy TelstraClear. The Aussie giant Telstra has the truncated Telecom in its sights. Then again, it might be going after upstart mobile operator 2degrees. There's even wild talk that Orcon - apparently with a price tag of $50 million - is up for sale too.
Bartlett has no time for such machinations. Businesses should connect to UFB because it's "a great opportunity" to reduce costs. Because they've been in the grip of a monopoly, until a few years ago, says Bartlett, businesses had little choice.
"In all seriousness DSL broadband has been crap until very recently, and it's still got a ways to go," he says, referring to Chorus' copper network and its digital subscriber line technology.
For businesses in areas where fibre has been available, the cost - beginning at $1000 a month - has been the limiting factor. "That is a lot of money, well outside the capability of most businesses," says Bartlett, pointing out that with UFB fibre those days are gone and businesses can now connect for $100-$200 a month.
If only. The prospect of businesses all over New Zealand slashing communication costs is immensely appealing. But for Cal Marsh, who works in Karangahape Rd, in the middle of Auckland's CBD, an area rich in fibre infrastructure, that prospect remains a distant pipedream.
For Marsh, co-founder of web development company Bocapa, it's particularly frustrating because his company, with a staff of eight, is growing rapidly. "There is no point employing more staff because we just can't use the internet. At times we've got stuff sitting there and it's not loading," he says of the company's copper broadband connection, which slows to a trickle during high usage periods.
What makes it even more frustrating is that Marsh has two unconnected fibre strands beside his communications server rack - a legacy of a previous tenant, ironically a Telecom call centre. Quotes to connect to the existing fibre started at $2000 a month. Worse still, he wasn't able to fix his communication costs because the pricing included a base price and a metered charge for international traffic at $2 per gigabyte.
Marsh's frustration is shared by adjacent tenant Allteams, which provides web-based software for sports teams' websites and management. "The reason we want fibre is we have doubled in size in the last six months," says chief executive Will Stamers-Smith, who has found his wireless connection to the Skytower insufficient and the fibre prices he's been quoted prohibitive.
At the Orcon breakfast Marsh puts a question to Bartlett and Young: "You have both talked about building the economy and how fibre will help this, yet we have been told it will be three years or more before we can connect to the UFB. Why is it such a long wait for Auckland's CBD?"
Fibre so near and yet so far. Young explains that the existing point-to-point fibre in the city is yet to be re-engineered into the gigabit passive optical-fibre network (GPON) employed for ultrafast broadband - so its lower priced services are not yet available. As part of its UFB agreement with the government, Chorus announced in August last year that it would reduce its existing wholesale price for fibre circuits to $380 per month. Despite Auckland's CBD being well served by fibre competitors including Vector, CityLink and TelstraClear, the high retail prices for the fibre on offer means that for businesses like Marsh's, fibre is out of reach. As for getting a leg up via UFB, Marsh and others in the CBD could be waiting until the middle of 2014.
But if Auckland businesses are waiting to realise the benefits of UFB, in Whangarei they're racing ahead. Kensington Hospital, a private surgical hospital with 80 staff running four operating theatres and 19 beds, plus a medical centre, switched to fibre about a year ago. "The company had become very dissatisfied with the provider we had for phones and internet," says finance manager Karen Duncan. "The service was really bad, the support wasn't there." As well as upgrading an ancient PABX to an internet protocol phone system, the hospital needed fast access to large medical files including x-rays and scans from the Northland District Health Board to its operating theatres. It opted for an entry level fibre service (30 megabits per second download, 10Mbps upload) from local RSP Ultracom for $119 a month with phone and a 100GB monthly datacap. Duncan says the service has exceeded expectations. "If something goes wrong we know we are going to get an answer." It has shaved 20 per cent off annual communication costs.
For graphic designer Matt Lewis, the biggest benefit since his own company, Different, switched to fibre 18 months ago is how quickly he can now transfer large - up to 100MB - print files. "Trying to transfer large print files on Telecom's ADSL was always a bit of a mission," he says. "A 100MB file would take 40-60 minutes. Then it might fail and you'd start again. It was painful." Today, on an entry level fibre service, the job is done in three to five minutes. "I enjoy watching files leave the building now." He says the much increased upload speed with fibre is crucial for his business and enables more collaboration through cloud storage services such as Google Drive.
It's a similar story from Dean Oliver, who runs Jeff Oliver Print, a graphic design and print business founded by his father. Until recently, sending pre-press files for proofing was often done by courier. Now it's all online and has enabled the business to seek work further afield, including Australia. "We're trying to get into new markets and its working for us," says Oliver. "We've employed a marketing manager and are pushing for business through our website. We are actually booming ahead now with record turnover this year."
For Northcom ICT, fibre has enabled the company to start a new business - offering cost-effective cloud services to its customers. "We host the whole lot here - their Microsoft Exchange, Windows Terminal server and Office server - and they have a link into it," says engineer David Tocker. Northcom ICT can now get dedicated fibre circuits through its RSP, Ubergroup. Such circuits would have once cost up to $2000 a month. Now they're available for as little as $100 a month. "Basically it's taken the control off Telecom which is just great, because we have had enough of it over the years. Everything you want to do with them costs a fortune. And you don't get any service with it."
Tocker is hoping that as word gets around about Whangarei's newfound high speed connectivity, more trained people will move north to help out with IT staff shortages. "Heaps of IT guys come up here because they like the beach. There is a really strange amount of surfy computer guys. They come up here for the lifestyle."
Sixty per cent of Northpower Fibre's network is made up of aerial cable strung between power poles, which makes for a faster and lower cost rollout than installing underground cable. But as Northpower chief executive Mark Gatland points out, the government investment has been crucial for managing uptake risk in the early stages. "For us to have gone out and put all that money into it from day one would have been challenging from a cashflow point of view," he says. "But at the end of the day, the full business has to be viable, because we end up paying back the original investment for the bits that get taken up."
Northpower is now in the middle of a more complex part of the network build - involving underground fibre in Whangarei's central business district and the installation of 150 manhole pits for jointing cable. "There is a lot of existing network in the ground that we can utilise," says Northpower CBD project manager Arnold Galbraith. Fibre cable is pulled through unused underground ducts. Where there are none, Northpower works through the night horizontally drilling new ducts. "We haven't always found what we wanted, but sometimes we find more than expected. Overall it balances out," says Galbraith.
Like many power lines companies throughout New Zealand, Northpower had begun installing its own fibre for communications and monitoring between its substations. Around 2007 it began developing a pilot fibre network in the suburb of Kensington for wider usage. "It was Northpower that showed you could build a good network at low cost," says Gatland. "People were saying it was far too expensive to build the last mile [to homes] in fibre. That was the incumbent's view and that's the mould we broke."
Gatland says that like any infrastructure business, Northpower Fibre runs at a loss initially and recovers its investment in later years. Profitability arrives when uptake reaches 40 per cent.
The funding for Northpower operates as a money-go-round. It's the same for Ultrafast Fibre, which is rolling out fibre to 163,000 premises across the central North Island from New Plymouth to Tauranga. Crown Fibre Holdings, the government arm of the partnership, pays Northpower and Ultrafast Fibre a set amount for each premise deemed ready to connect. When premises do connect, the local fibre companies cover the cost of connection, and pay back what the Crown has paid them. The repaid capital is then recycled - re-invested into the next stage of the network build.
Capital recycling isn't used in the contracts with Enable - which is building a network serving 180,000 premises in Christchurch, and Chorus - covering 830,900 premises across New Zealand. Those contracts feature a smaller Crown outlay, with the funds paid back at set times. In Chorus' case, the $929 million it receives is paid back in tranches, beginning in 2025 and finishing in 2036 - in effect, a huge interest-free loan over 14.5 years.
"We get more of that initial outlay than Chorus," says Gatland. "For every premises passed on average we are getting the full cost for that initial deployment." Crown Fibre Holdings says it is investing $360 million - some of which gets recycled - in Northpower, Ultrafast Fibre and Enable over the deployment period. If it reaches 60 per cent uptake, Northpower's fibre network will have cost an estimated $50 million. If everything goes according to plan, Gatland says Northpower will look at extending its fibre to other nearby centres. The key difference between Northpower and Chorus is that the network ends up being owned by a local consumer trust. "We mainly set out to do this for our consumers, because we felt they had been held to ransom a bit," says Gatland. "We went into this knowing, no matter what happened, the consumers would be better off."
Ultrafast Fibre chief executive Maxine Elliott agrees. In Ultrafast's case the trust-owned entity is made up of powerlines companies WEL Networks and Waipa Networks. "For the regions we are covering there is an advantage in that we are seen as locally-owned and trust-owned, so we're seen as doing something for the community." Ultrafast Fibre, which has five years to complete its network, has run fibre past 20,000 premises to date. About 10,000 of those in Hamilton and Tauranga are now ready to connect. "In the previous model most of the fibre networks were very niche and everybody had to make a very quick return on their investment," says Elliot. "The UFB is a long term infrastructure build so you're able to get your returns over a much longer period, which means the pricing is designed to be able to compete with copper."
Fibre in competition with copper: this is something of juggling act for Chorus. "We have still got 1.8 million connections on the old copper network," says Young at the Orcon breakfast. "And we promise to make sure it keeps on working until you get fibre. We have a bit of an argument about access costs at the moment, but I'm not going there."
You can understand why. He's talking about the Commerce Commission's proposal to reduce wholesale access prices to the copper network, which would inevitably lead to cheaper copper broadband services. Consumers would be happy, but Chorus isn't, fearing such a move will reduce its profitability and delay consumers switching over to fibre.
Not surprisingly Chorus, which is spending up to $284 million in the next financial year and up to $488 million the following year on its fibre rollout, doesn't want that to happen. Neither, obviously, does the government, which is keen to make sure its $1.35 billion UFB investment doesn't become a white elephant. Then again, the government can't be seen to interfere in the workings of the Telecommunications Act and the Commission's role in promoting competition "for the long-term benefits of end-users".
The problem for the government is that it has already set the wholesale rate card for the UFB and locked it in for the duration of the rollout. An entry level consumer service (30 Mbps down/10 Mbps up), for example, is capped at $37.50 a month wholesale, and a higher-speed service (100 Mbps down/50 Mbps up) at $55. With Ultracom in Whangarei, for example, that translates to retail prices of $99 a month and $249 a month respectively. Whether that's good enough to compete with falling copper broadband prices remains to be seen.
For Whangarei RSP Ubergroup, uptake has been slow until the past six months. "It's now escalating. We are taking three or four inquiries a day, primarily business users," says managing director Hayden Simon. "For businesses, it's quite a simple proposition. Fibre means you can send large files, if you're an architect, or whatever, a whole lot faster." For home users, it's not so clear cut. "We really need that killer app to make fibre worthwhile - something like Netflix." Ubergroup doesn't offer the entry level, 30Mbps download/10Mbps upload, service because it's too similar to what is already available over copper. Simon sees that considerable education will be needed for users as they migrate to fibre, which is why Ubergroup only offers a 50Mbps down/50Mbps up service. "That's purely to deal with the shock for people when they find they can't get 100Mbps," he says pointing to a variety of factors that can limit speed. That includes using old routers which can't handle high speed connections, using WiFi which limits connection speeds to around 30-40Mbps, not having high-speed CAT 6 cabling, or simply having an older, slower computer running an operating system that doesn't adjust for high-latency offshore connections. The last issue is particularly relevant for users who test their new fibre connection using online speed tests and find the results show international speeds of 5-10Mbps rather than the 100Mbps they were expecting. More often than not, it will be because the speed test doesn't properly measure the actual speed when using the net. Sometimes, however, it will be because the internet bandwidth supplied is "over-shared" - contended for by too many users.
Upgrading and properly configuring equipment to take advantage of fibre is an added cost for business that is yet to be fully recognised. The issue was noted in a June Commerce Commission report which looked at what factors might limit uptake. A Telecom estimate puts equipment replacement costs for 1.6-1.7 million users at $811 million - an average of $500 per user.
The Commission's study also highlighted potential problems about who pays for "non-standard connections" - the cost of installing cable from the street to the customer's premises, if they are a long way from the street.
"For the vast majority of small businesses it will be between free and $100," says Bartlett at the Orcon breakfast. "For some business it will be a couple of thousand dollars."
Crown Fibre Holdings contracts require the fibre companies to cover these costs, but there is a significant difference between the contracts - with Chorus required to pay half what the other fibre companies pay.
Asked why Chorus had a more favourable deal, a Crown Fibre Holdings spokesperson said: "Regardless of what has been negotiated the government has previously indicated that the UFB deployment partners will not charge Retail Service Providers installation fees for residential connections, and appreciates this will be important for uptake."
One who knows the pleasures and pitfalls of fibre to both the home and business is Rod Drury, chief executive of online accounting company Xero. So keen was he to get connected that he paid his local electricity lines company $7000 to extend its fibre network 300m to his Hawkes Bay home. "If you have a business need like I have, and you want the benefits of living in the provinces and being able to do your work internationally, it makes sense."
So far he's somewhat underwhelmed. "You don't get a fantastic international experience and there is no real content. You've still got to pay for your Sky television and then you've got to pay extra, plus work out how to get a US iTunes account." What Drury really wants is to easily talk to his sales teams in the United States through services which enable group video chat, such as Google Hangouts. "I have teams all over the world and I want to do multiparty video conferencing. Fibre to the home doesn't get me that - it gets me pretty good Skype, but it's not flawless."
As Drury sees it, the UFB wholesale ratecard is incomplete - the missing component being international bandwidth, which he says is still too expensive and artificially constrained by the Southern Cross cable monopoly. Which is why he's also involved in trying to raise US$300 million for Pacific Fibre, a proposed second international fibre optic cable to the United States and Australia "You've also got to unlock the content pipes," he says.
"You've got to have Netflix or iTunes or Sky delivered over broadband, because you're not going to pay $60-70 month for Sky and $100 a month for broadband. You want to pay $99 for the lot."
Drury says the government has a choice to either regulate Sky, as happened in Britain, to deliver sports and other TV shows over the fibre, or negotiate with Apple and other content providers to get American TV programmes and movies delivered here via the net. "Let's untangle the copyright, so that there are some alternative content sources for New Zealand households. It's pretty obvious if you want uptake of fibre to the home then you've got fix the content."
More important, says Drury, is having really good cheap internet connectivity to the rest of the world to get small business thinking global. "We're a low cost labour market relative to Australia and the United States. When small businesses start exporting, that step changes the economy."
Step change, transform. The ultimate goal may be some time coming, but there are signs the government's ultrafast broadband intervention is transforming business communication costs. On the home front, however, it's likely more intervention may be required.
