Surprise: Vodafone and Vocus partner on unbundled UFB fibre

Telcos have a cunning plan to exploit a law change – but it hinges on Chorus playing ball on pricing. Let the political games begin.
Vodafone NZ boss Russell Stanners and Vocus chief executive Mark Callander at this morning's briefing.

Vodafone and Vocus staged a joint press conference this morning to say they will partner on an initiative to “unbundle” UFB fibre.

There move is a cunning plan to exploit a law change with the Telecommunications Amendment Bill – which, when passed, will set industry rules from January 2020.

However, it all hinges on when UFB network providers (easily the largest of which is Chorus) will offer them access to so-called “layer one” or “dark” fibre at a reasonable price (“layer one” means fibre optic cable and ducting; the raw physical elements of a network; “layer two” means the electronics that are added, so different types of services can be delivered).

Vodafone lobbied hard for unbundled UFB pricing to be regulated but failed. The Telco Bill emerged from select committee stage with a provision for unbundling but no regulated price. Chorus can charge whatever it likes for a retailer to install layer 2 electronics in one of its exchanges (though to completely take the mickey would still risk Commerce Commission intervention).

Hence, Vodafone – joined by Vocus – has switched to plan B: going public with its unbundling ambitions well before 2020.

If Chorus does set layer one access pricing that’s so steep it will derail Vodafone and Vocus’s unbundling initiative, they will have plenty of time to play politics and generally try to embarrass it into changing tack.

What is unbundling?
Today, every retail ISP – Spark, Vodafone, Vocus (including Orcon and Slingshot), 2degrees, Trustpower and smaller fry – has to take the same set of plans from Chorus (or, in a minority of areas, another UFB wholesaler).

Vodafone and Vocus want to move their own layer two electronics into Chorus exchanges.

That would give them the ability to offer plans with different speeds and features from other ISPs. Vodafone chief executive Russell Stanners says, for example, there could be a low latency (lag) plan aimed specifically at gamers, and a bandwidth-on-demand product for business.

It recalls the heyday of copper broadband, when Vodafone and Vocus both installed their own kit in Telecom exchanges to give themselves more freedom around plans – and, crucially, higher margins.

Mr Stanners appeared with Vocus NZ boss Mark Callander at the briefing.

Both said it would have a budget of “tens of millions.”

Mr Stanners said the pair would probably form a formal joint venture down the track. It would depend on how initial negotiations with Chorus and the three local fibre companies went.

Where's Spark?
It was notable that Spark, the largest retail ISP, was not present at today’s briefing. Mr Stanners and Mr Callander said they had not spoken to Spark yet. They both made polite noises about other retail ISPs being invited in at some point.

Back in the days of copper unbundling, Telecom still incorporated Chorus, so the company was a network owner and retailer.

Spark, as a retailer-only today (at least in the domestic market) also pushed for UFB unbundling but not for regulated unbundling.

Today it gave a muted response, with spokesman Andrew Pirie saying, “Spark views this as an interesting market development but we’ve got no substantive comment to make at this early stage.”

Chorus also gave only a brief, measured reply to NBR’s approach, with spokesman Ian Bonnar saying, “We commence consultation on unbundled fibre later on this year. Our view is the solution needs to work for all industry and be based on the real economics and technical requirements of fibre.”

Shifting alliances
Back in the days of copper unbundling, Vodafone and Vocus (or at least, the CallPlus Group, now owned by Vocus) went about things individually. Why team up on unbundling fibre?

“It’s about scale, so we don’t have to replicate everything in every exchange," Mr Stanners said. Vodafone and Vocus will share layer 2 electronics.

It’s also notable that Vodafone (426,000 customers) plus Vocus (200,000 customers) together have roughly the same number of landline broadband customers as Spark (the No 4 and 5 players, TrustPower and 2degrees, are both under 100,000).

Mr Stanners expressed broad interest in buying Vocus NZ when its Australian parent put it up for sale, at least in a world where regulatory obstacles weren't so high (Vocus NZ was ultimately taken off the table).

This deal gives Vodafone its desired increase in scale, at least when it comes to unbundling, so could be the next best thing.

Better support
Mr Callander says that as well as being able to offer a larger variety of UFB plans, and have more control over pricing, Vocus and Vodafone will be able to provide better service and support.

He says that in Singapore, where unbundled fibre is already working, there are 25% fewer customer complaints than in New Zealand.

Mr Stanners says the GPON 1 standard used for the UFB has become outdated. He says “it would be like us rolling out a 2G mobile network today.”

He says if Vodafone and Vocus are allowed to install their own electronics, they will go with a much faster next-generation GPON standard.

What do neutrals make of it?
InternetNZ chief executive Jordan Carter says, “unbundling is likely to lead to more innovation, better services and better prices for New Zealanders.”

IDC country manager Peter Wise noted at the media briefing, however, that ultimately it comes down to Vodafone and Vocus (and other retailers) seeing a way to improve their margin.

Potentially, both could be right. With UFB unbundling, Vodafone and Vocus could offer a greater variety of services and increase their margins at the same time … but only if they can wangle a cheap enough wholesale deal with Chorus and the three smaller local fibre companies (Enable in Christchurch, NorthPower in Whangarei and Ultrafast Fibre in the central North Island).

When the telco bill was still being considered by the select committee, Chorus pushed hard in the opposite direction from unbundling, lobbying to gain more control over residential connections. Having failed on that front, it is unlikely to give Vodafone and Vocus, or other retailers, an easy ride on unbundled UFB pricing.

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