Government-funded fibre broadband - why it makes sense

OPINION: Ross Patterson on NZ fibre roll-out.

Bronwyn Howell, in her January 2016 article “Government-funded fibre broadband – not as straightforward as it sounds” asserts that the UFB project has not gone according to plan because “people don’t seem to want superfast fibre”. She says that by September 2015, the UFB build was 56% complete but “uptake remains sluggish” at just over 16%, and compares this level of uptake with the privately operated Reggefiber in the Netherlands, which she says “will not deploy fibre in areas where uptake is projected to be less than 30% of premises passed”.

She then asserts that not only has uptake not gone according to plan, but only 30% of retail plans are for speeds of 100 Mbps, which means “the vast majority of fibre subscribers are purchasing connections with speeds capable of being offered on alternative ADSL and cable connections”.

From these facts she concludes that “the combination of low uptake of ultrafast connections and low uptake confirms that there has not been a pent-up demand for fast connections” which she says “should be a clear warning sign for policy makers proposing subsidised fibre as a panacea for rural US locations”.

While this description of the facts suits Bronwyn’s theoretical standpoint that state funding is unambiguously bad, it bears no resemblance to reality. To the contrary, demand for fibre services is greater than anticipated at this stage of the rollout, and the proportion of fibre customers on 100 Mbps or higher plans is also ahead of expectations. Uptake has now passed 20%, and ultimate uptake in New Zealand will be well in excess of the 30% target of the private investor in the Netherlands.

New Zealand’s fibre roll-out has followed the same pattern as other countries, such as Singapore, which have embarked on national fibre rollouts. In the early part of the build, uptake is low, because retail service providers do not actively promote fibre services. If only 10% of the customer base has access to fibre, there is no business case to invest in services which 90% of the customer base cannot receive.

A tipping point typically occurs at about the 35% penetration mark, when service providers perceive that the available market is of sufficient size to justify launching new services. In New Zealand this tipping point was reached in March 2015, when the fibre network passed 600,000 homes, at which point Netflix entered the New Zealand market. 

Since that time, as occurred in Singapore, demand for fast fibre services has exploded, and waiting times for connections have blown out. At a recent industry forum, Chorus’ [NZX: CNU] Mark Radcliffe said that “we need, collectively, twice as many technicians that we have working by the middle of the year, it’s that kind of magnitude”, while Enable’s Steve Fuller explained that Enable had expected demand to peak in 2018/19, but “we’re now hitting that peak three years early”. Enable’s connection waiting time is currently around 40 days; Chorus reports 22 days, but 99 days for apartments, and 104 days for homes down rights of way, where consents are required. From a retail service provider’s perspective, Spark’s Simon Moutter says that “fibre is an easy sell at the moment”.

 All in all, this is not a picture of sluggish uptake.

Bronwyn is also wrong to suggest that consumers who elect to take the entry level 30/10 Mbps fibre service are simply receiving “speeds capable of being offered on alternative ADSL and cable connections”. Few ADSL connections can deliver anything close to 30Mbps download speed (particularly at peak times) and none can approach fibre upstream speeds. While cable offers superior speeds to ADSL, it is only available in a relatively small part of the country.

But even the 30% number is incorrect. While numbers vary among retail service providers, some report that more than 70% of their customers have taken a 100Mbps or higher service, well in excess of projections. In addition, others report that in areas where fibre has been available for two years or more, uptake has passed 50%. According to Akamai, average connection speeds in New Zealand increased by 30% in 2015.

The question Bronwyn should be asking is what would the NZ broadband world look like if UFB had not been introduced, and investment has been left, as she advocates, to the private sector? The best counterfactual is to be found in the United Kingdom, a country of similar size to New Zealand (although with far higher population density), where BT’s network arm, Openreach, is operationally separated from its wholesale and retail businesses, as was Telecom/Chorus prior to the UFB reforms.

BT/Openreach has been slow to invest in fibre to the home, preferring instead to deploy fibre to the cabinet to maximise the return on its existing copper assets. As a consequence, the UK does not even appear on the FTTH Council Europe’s Ultrafast Broadband rankings, because it does not meet the entry criteria of 1% fibre to the home penetration. In January this year the British Infrastructure Group, a cross-party group of 121 UK MPs called for BT and Openreach to be structurally separated, as “our future is being held back by systemic underinvestment stemming from the natural monopoly of BT and Openreach”. At the end of February, Ofcom, the UK regulator, ordered changes to Openreach’s governance arrangements to make it more independent of BT, and reserved the right to consider structural separation at a later date if necessary.

As a consequence, while the UK is tagged ‘the laggard of Europe’ for fibre to the home deployment, New Zealand has the highest annual growth in new fibre to the home connections in the OECD.

Dr Ross Patterson heads the Technology Media and Telecommunications practice at Minter Ellison Rudd Watts, and is a former NZ Telecommunications Commissioner. He has previously advised Chorus, other LFCs and other industry participants on a wide range of issues.

Tune into NBR Radio’s Sunday Business with Andrew Patterson on Sunday morning, for analysis and feature-length interviews.

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