Build shared 5G mobile network using the UFB model, says Chorus

Leaving 5G infrastructure to the market risked "the country being left behind."

The next generation of mobile telephony, known as 5G, should be built using the same government policy approach that supports the nationwide rollout of Ultra-Fast Broadband to create a shared, regulated backbone, says the chief executive of Chorus, Kate McKenzie.

"We've been saying that when you get into the 5G world, there's a pretty strong argument that we should be thinking about using the same model we've used for the fibre infrastructure," she said. "In a 5G world, the amount of capital that's going to have to be spent to build out those networks for a country of this size and this population, with small cells every couple of hundred metres - if three people (the current main mobile operators Spark, Vodafone and Two Degrees) do that, that's insane.

"That's just going to be not sustainable," she said.

Mobile 5G technology will involve placing thousands of new, closely spaced cell sites around the country to help transmit data from the millions of internet-connected sensors that are already starting to control machines, automated systems and gather data as the so-called Internet of Things (IoT) revolutionises efficiency and knowledge-gathering in a host of areas from urban planning to agriculture.

Leaving 5G infrastructure to the market risked "the country being left behind" because no mobile network operator would make the investment.

"It's a dead cert that's where we will end up" if a shared approach to 5G infrastructure was not taken, said McKenzie, although there was no immediate urgency for policy on the issue, which is more likely to become pressing in the early 2020s. "There would have to be public policy appetite before you would do anything in that direction and agreement with other mobile operators."

She conceded that telecommunications sector competitors might see Chorus's position on the 5G build as an attempt to both slow down and control the rollout of 5G to allow Chorus to maximise returns from its investment in the UFB network, for which it won around 70 percent of the rollout work. The UFB project has used competitive bidding for a $1.7 billion revolving fund established early in the life of the 2008-2017 National Party-led government to deliver UFB to 80 percent of New Zealanders by 2022.

However, she was finding widespread sympathy for the shared approach to 5G infrastructure.

"There's a certain sort of logic to it. People sort of go 'I don't know exactly what that looks like but actually, it is a sensible thing to talk about'," said the former Telstra executive who says New Zealand is now "far ahead" of Australia for broadband speeds and consumer packages.

McKenzie welcomed the fact the new government has allowed the Telecommunications (New Regulatory Framework) Amendment Bill to proceed to select committee and said Chorus would be seeking no changes to it.

"It's been consulted on for years and to death and ended up in a place that's probably reasonable for all industry participants," she said. "Get it through and get on with it."

Chorus investors were most worried about further instability in the regulatory regime, having experienced substantial value destruction from policy changes relating to the pricing of its copper network earlier this decade.

"That's a really big overhang for us."

While taking on additional increments of the UFB rollout had both increased Chorus's capital expenditure profile and pushed out beyond 2022 its expectations of substantial free cashflows after network construction is completed, McKenzie said there was no pressure to raise additional capital.

Chorus expected to sustainably pay "modestly increasing" dividends through to 2020.

"I'm not sure that we've promised rivers of gold, because it's not quite as stable as electricity, but it (an expectation of strong free cashflow post-build) is still the right investment thesis."

The company also today announced it was experimenting in two North Shore suburbs of Auckland with a proof of concept on a Long Range Wide Area Network (LoRaWAN) IoT network that seeks to eke further earnings from Chorus's existing network of poles and copper wires. The copper network is used to electrify localised cell sites mounted on Chorus network poles to receive data from sensors in "typically hard-to-access locations" such as underground wastewater or sewage pumping stations.

"The infrastructure's there, we've got spare copper, and it's just a way of reusing that infrastructure with interesting and innovative ideas," said McKenzie. Chorus was testing business models for an IoT future where the company would remain a commoditised telecommunications platform provider for the "gazillion ways" that IoT applications could emerge.

It was too soon to say whether such activity could be a material earnings contributor.

Chorus shares traded at $4.04, up 1.4 percent, today and are stable, up just 0.4 percent, for the year.


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