Ultra-fast business

Rewiring New Zealand’s economy

University of Auckland Business Review, Spring 2014
Graphics: Andrew Caldwell
LENGTH : 12 min (2844 words)

> Its supporters hope that the roll-out of a nationwide high-speed digital network will fuel innovation.

New Zealand has begun a radical overhaul of its telecommunications infrastructure that will allow individuals and businesses to access information-based services through a high-speed fibre-optics system known as the UFB (Ultra-Fast Broadband) network. The government-backed infrastructure initiative is a political response to the slow uptake of optical-fibre technology by private operators and to research that shows the economic benefits of such high speed networks.

A World Bank study found that a 10 per cent increase in broadband penetration generated an increase in GDP of about 1.5 per cent. The government’s decision to connect 75 per cent of New Zealand households with optical fibre through a partnership model largely rests on the expectation that establishing a modern, high-speed network will fuel innovation.

Devising the arrival point

New Zealand’s UFB network is being funded through two investment models agreed with four partners. Three of those partnerships follow the Public-Private-Partnership (PPP) model which finds a middle ground between public and private investment. A PPP is defined as a contract between a government and one or more private partners that seeks an alignment of objectives while shifting a substantial amount of risk onto the private partners.

Under this model, funds from a government-owned company, Crown Fibre Holdings (CFH), are used to lay the ‘dark’ fibre along urban and suburban streets. When a customer subscribes to the network, the partner builds the ‘drop’ into the customer’s premises and a subscription-based retail commercial relation starts between the customer and a Retail Service Provider (RSP) of their choice, with the retailer paying for capacity to the Local Fibre Company (LFC) at fixed wholesale prices. The LFC is then ensured a revenue stream for that specific customer which is used to buy a share in the UFB network. The ownership of the network gradually shifts from CFH to the private investing partner, thereby freeing up funds for further extending the coverage of the network.

The agreement signed with the fourth and largest private party, Chorus, is not a PPP contract. In developing a strategy for its broadband initiative, the Government ruled that no bidders could be vertically integrated. This forced Telecom to split into two completely separate companies which, in late 2011, were listed on the New Zealand and Australian stock exchanges. These are Chorus, owner the old copper network and future owner of UFB fibre assets, and Telecom Retail, which retained the switched network, the wireless network and the national backhaul (transport) network.

In the contract signed between CFH and Chorus, the Crown invests directly in Chorus, and Chorus bears the risk associated with uncertain demand uptake. The investment takes the form of a zero-interest loan, in return for which Chorus must comply with specific coverage and uptake goals.

Likewise rural New Zealand will be connected through the mixed wired and wireless infrastructure built by the Rural Broadband Initiative (RBI). While UFB promises to deliver high-speed fibre-optics connection to premises, the RBI will connect rural New Zealand to the information backbone through DSL and fixed-wireless connections using the latest Long Term Evolution (LTE) standard.

Providing business stability and reducing uncertainty for fibre investors is crucial if the country is to reap the benefits of the new infrastructure. One decision with medium-term impact is the wholesale service price levels negotiated between CFH and its partners. Wholesale service prices are known until 2020, with price levels set for the first year of operation and changes predetermined in the negotiated tariffs. As a result, each RSP knows how much it will have to pay an LFC for a home or business fibre connection for the rest of the decade.

However, infrastructure and connectivity are not the only goals devised by the UFB/RB initiatives. Though monopoly rights have been conferred on respective LFCs, technological and regulatory principles dictate that the network must be open to any RSP willing to provide end-user services in each service area. In other words, consumers and business will be able to choose a provider from the many RSPs expected to operate on the UFB network, while LFCs can only provide so-called wholesale services to RSPs, and are forbidden from dealing directly with consumers.

A journey planner

  • In 2008 New Zealand ranked 22nd in internet speed amongst 45 countries, and 35th out of 66 countries in broadband quality of service.
  • The newly-elected National government announced that it would spend close to $1.6 billion in two connectivity programmes: the Ultra-Fast Broadband (UFB) initiative and the Rural Broadband Initiative (RBI), to offer New Zealanders high-speed access to the telecommunications network.
  • New Zealand was promised that by 2019 three quarters of households and businesses would be connected to the UFB by means of optical fibre connections.
  • A government-owned company, Crown Fibre Holdings (CFH), was created to manage the funds and search for private investment.
  • The bidding process ended in early 2011, with four companies winning shares of the available funds to be invested in partnership with CFH. The partnerships are known as Local Fibre Companies (LFCs).
  • Also in 2011 Telecom and Vodafone won bids to become CFH’s partners in the RBI. Under the initiative, 1,340,000 fibre connections are to be completed by 2019.
  • The four LFCs offer fibre connections to households and businesses in the following areas:

North Power Fibre in the Whangarei region, with 1.5 per cent of the UFB;

UltraFast Fibre in Hamilton, Tauranga, New Plymouth, Wanganui, Hawera and

Tokoroa regions, with about 14 per cent;

Enable Networks in Christchurch, Rolleston and Rangiora, with 15 per cent.

All other urban areas, comprising about 70 per cent of the country, will be served by Chorus.

  • Under RBI, Vodafone and Telecom are to build close to 250,000 connections to rural premises by 2016.

Middle of the road

As of June, 2014, a third of New Zealanders in UFB areas (517,000 people) had access to UFB, with about 40,000 premises connected. Whangarei was the first city in New Zealand to complete its fibre-to-the-home (FTTH) deployment, making North Power Fibre the first partner to reach the target.

As the fibre uptake gathers pace—from a marginal uptake rate a few months into the project to a current uptake of 7.7 per cent of premises—it is important to realise that similar figures have been reported elsewhere, including in Singapore and the UK, over the same time span. Future activity in New Zealand is expected to stabilise at about 200,000 new connections per year.

Under the RBI about 195,000 homes and businesses in rural areas have access to fast wireless broadband, and 72,000 out of 100,000 lines to rural households have been upgraded. The Ministry of Communications reports that 40 of the most remote rural schools now have peak speeds of at least 10 megabits per second and that 90 per cent of the targeted schools—more than 2,220 schools nationwide—can now connect to UFB, as can 32 of 37 rural hospitals.

The main hurdles facing fibre uptake are consumer awareness and a willingness to switch from current DSL connections, along with a willingness to pay for the equipment needed to connect to a retailer. One other issue which is becoming significant for the deployment rate is the need to coordinate construction of the drop into multi-dwelling properties and along shared driveways. As work progresses in city neighbourhoods, LFCs need to deal with multiple owners’ perceptions about the benefits of fibre connections, whereas RSPs need to step up efforts to make people aware of the services they will have access to once they sign up with the UFB network.

Some issues arising from industry concerns, regulatory decisions and market forces have the potential to affect the deployment of the UFB network. Foremost has been the Commerce Commission review on the price of the copper lines leased from Chorus by internet service providers.

Chorus owns and operates more than 90 per cent of New Zealand’s copper lines. Setting the right price for this infrastructure is of the utmost importance as the current internet market uses DSL-based technology, which in turn depends on the copper lines that connect the customers’ premises to the telephone company. In its review, the Commerce Commission ruled that the rental charge must drop by 23 per cent. Chorus responded that such a drop would hinder its ability to raise the necessary funds—$1 billion is forecast—to invest in UFB and would cause major delays in achieving its targets.

As of March, 2014 a legal appeal on one of the components of the Commission’s price cut was being reviewed by the High Court. Chorus also applied to the Commission for a review of its decision on another price component, claiming that a cost-based price should be used instead of the Commission’s international benchmark approach.

The dispute over the price of copper was exacerbated by the Government’s subsequent announcement that it would pass legislation to overrule the Commission’s decision. The Government has since backed away from its decision, but another episode reminds us of the frequent uncertainty surrounding the build-up of the UFB network. In 2011, when seeking to provide certainty to LFCs, the Government advocated a 10-year “regulatory holiday” to be instated in the Telecommunications Amendment Bill. Opposition from political parties and from the telecommunications industry prompted the Government to take a more considered approach to attracting investment for the project.

As the UFB network expands and providers start to bring their service offers to the markets—as of Q2-2014, 74 RSPs were actively offering services—transitioning to the new network operation while the old telephone network remains operational will continue to cause tension between policy makers, regulators and affected operators. The failed Australian approach to FTTH deployment sought to replace each telephone line as soon as fibre was connected, with the installation and switching being done regardless of whether the household owner agreed. Furthermore, the cost and management of the A$40 billion-plus project was borne entirely by the Australian government. As New Zealand follows a different pathway, in which a single private partner builds 70 per cent of the country’s promised connections while also owning the telephone lines, issues such as the price of copper line rental and the termination of the wired telephone network will need to be closely watched, by CFH as well as the regulator.

The road ahead

Industry experts routinely refer to central and regional governments’ lack of a vision for the role of the new infrastructure. The UFB and RBI were conceived as promoters of economic growth. There was also the expectation that high-speed broadband and an open-access platform would positively impact the way people learned, conducted business, procured health services and dealt with the government. It is therefore relevant to ask what can be expected of the UFB in the future.

In 2009 a group of World Bank economists coined the term “broadband ecosystem” to refer to the collective set of users, services, high-speed networks and applications involved in providing access to a broadband network, offering services to consumers, purchasing services from providers and intervening in policy decisions surrounding the network. By opting for a high-speed, open-access broadband platform New Zealand is effectively instigating major changes in the structure of the market, which in turn are expected to deliver profound changes in the range of services and the way they are delivered to consumers.

In the United States, Google is laying out FTTH connections in several locations (see side bar, page 34) and the duopolistic operators—cable and telephone companies—in affected regions have started to react to Google’s threat. The Singaporean market has been restructured around two entities—a dark-fibre provider, and a network operator—which together manage the National Broadband Network in an open-access manner. These market disruptors illustrate the potential for the UFB to radically change the telecommunications industry landscape. The first wave of new industry participants came about with the creation of the internet access market, and as New Zealand transitions to a fibre-based access network, other entities are being given the technical means and the necessary medium-term regulatory stability to operate on the UFB’s content markets. It is an unprecedented situation in the country’s telecommunications market history. The next five years will be a key period that will confirm (or reject) the disrupting role of the UFB network.

International cases illustrate what is currently at stake on the supply-side of a broadband market. The recently announced purchase of satellite television company DirecTV by AT&T in the United States adds to obvious moves by established operators to extend their commercial presence beyond network operation into the contents markets. Locally, although LFCs are forbidden to get involved in the provision of end-user services, Telecom as an RSP is committed to becoming a content provider. The company has embarked on a comprehensive rebranding exercise to signal this new direction, most overtly in August 2014 with a corporate name change to Spark. The implications of such integration of retail operation and content delivery is the likely consolidation of the company´s market share in the commercial services provided on the UFB network and as such is a clear threat to competitors in the retail market.

But these commercial interests in the mature television market contrast sharply with the efforts by promoters of fibre in places such as Chattanooga, Tennessee in the United States (see side bar, page 34). New Zealand´s broadband leaders must closely watch such developments and commit to turning the UFB platform into a place for creation and innovation. The Chattanooga experience shows that exploiting the potential of a fibre-based broadband network requires a good understanding of the broadband ecosystem concept so that by hosting innovative entrepreneurs at incubators and service development environments good ideas are turned into great solutions.

Telecommunications services have largely shifted from being place-focused—when a telephone line belonged to a building—to people-focused, as is the case of mobile networks today. Shortly they will also focus on physical objects, as it is expected that everything from electrical appliances and entertainment devices to industrial machinery and even ‘intelligent’ clothing will be connected to the ‘Internet of Things’ and to generate and transmit information in real time. These people-centred and object-centred connectivity modes will generate large amounts of data and information for which UFB will provide reliable connectivity pipelines.

As can be seen, then, the techno-policy decisions regarding the design of the UFB network have opened the door for new entrants in the retail service sector while the economic attractiveness of mass media services, such as television in its many forms, have created incentives for RSPs to integrate their broadband retail and content offerings. The next few years are likely to prove a battlefield between the aspirations of a fringe group of small-to-medium-size providers to make breakthroughs in service innovation and the plans of major corporates to dominate the industry. Even though UFB promises to be a level playing field, the role of regulation needs to be reassessed to ensure that integration does not turn into concentration and that New Zealand´s expectation for its broadband ecosystem are realised.

The US Experience

Kansas City

Google offers a fibre-to-the-home broadband internet service to a small number of cities in the United States. The initiative began in Kansas City, Missouri and has now expanded to Austin, Texas and Provo, Utah.

Google’s model of fibre deployment begins with an invitation to communities to become ‘Google Fibre towns’. The company negotiates terms and conditions with these municipalities and city councils and expects support in return. Since cabling the last kilometre is complex and expensive, Google has introduced so-called fibre huts, from which cables are laid along utility poles to homes in selected neighbourhoods.  A “reasonable use” clause, in the agreement, prohibits hooking up any type of server to the connection.

Undoubtedly Google’s strategy worries the incumbent cable and telephone companies which hold a strong duopoly across the United States. It is not clear whether Google will operate as an ISP but with the company aiming to connect some 8 million addresses by 2022 at a cost of $7 to $10 billion, it will become an important supplier of fast broadband.

Google’s presence in the broadband market is already forcing the cable and telephone incumbents to tweak their business models. Austin subscribers have been offered free wi-fi by Time Warner Cable, while AT&T has announced plans to build a fibre-to-the-home network in the same city.


Tennessee’s fourth-largest city, Chattanooga, developed a 1 Gigabit fibre-optics network using federal funds and private capital. Chattanooga’s community-owned electric utility invested in a FTTH network built to run a smart grid and offer internet-based services to its residents. The high-speed network, which is 50 times faster than the national average, is a collaboration involving the city government, the electric utility, and private investors. 

Chattanooga’s success has led to the creation of start-ups fostered by Gigtank, a business accelerator that seeks to exploit the potential of the network to bring new, fibre-based services to the market. Said to be the world’s only start-up accelerator connected to a living, city-wide fibre-optic network, Gigtank supports start-up teams through a network of mentors, industry specialists and business development resources. The teams have access to Chattanooga’s 1 Gbps internet service while conceiving businesses designed to operate and evolve on advanced broadband platforms.

Key take-outs

  • The decision to run optical fibre to 75 per cent of New Zealand households rests largely on the expectation that establishing a modern, high-speed network will fuel innovation.
  • Providing business stability and reducing regulatory and market uncertainties for fibre investors is crucial if the country is to reap the benefits of the new infrastructure.
  • Exploiting the potential of a fibre-based broadband network requires a good understanding of how users, service providers, regulators and networks combine to form an effective broadband ecosystem.
Fernando Beltrán

Fernando Beltrán is a Senior Lecturer in the University of Auckland Business School’s Department of Information Systems and Operations Management. His research interests lie at the intersection of network economics and artificial intelligence, and include agentbased computational simulation of telecommunications markets, the economics of broadband, and new approaches to radio spectrum management. He leads the PING (Pricing in Next-Generation Networks) research group.



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