KEY POINTS:
The $400 million Kensington Park housing development under construction at Orewa seems to have it all - pools, gymnasiums, a village green and what the brochure describes as "the latest fibre optic technology".
Engineers working for Telecom were this week laying underground cables that, once the townhouses and
apartments are built, will feed high-speed internet and phone services to the upmarket estate's new residents.
It's an early example of so-called fibre-to-the-home. Instead of receiving communication services over copper wires, as most New Zealand households do, high-capacity fibre will be the conduit.
One of Telecom's tiny competitors, Auckland-based WorldxChange, has been contracted to run a pilot programme at Kensington and other subdivisions around the country, delivering voice and internet services over the fast, new connections. Telecom can't deliver the service itself - it's yet to develop a Voice over internet Protocol service that runs over fibre.
"Initially, residents will be getting the same internet speed everyone else gets, but fibre is capable of delivering a heck of a lot more; IPTV [digital television], on-demand TV are possible," says WorldxChange director Cecil Alexander.
"We've got a lot of other property developers interested in this type of thing."
In the world of telecommunications, fibre-to-the-home is the ultimate delivery path. It's faster and more reliable than copper-based DSL services which Telecom and its rivals have used to build New Zealand's broadband market.
As internet use surges, the world's telecoms players are spending an estimated US$137 billion ($178 billion) - more than double the amount planned - to keep up with demand. A good deal of that investment is going into projects designed to push fibre further out into telecoms networks - to roadside cabinets and ultimately right to houses and businesses.
Just who will pay to install all that fibre has become a hot political issue all over the world as governments are urged to view the cables that deliver high-speed internet services as being as essential as power and road networks - and fund them accordingly.
Last week's Digital Summit in Auckland showed that the fibre issue has been getting close attention in the Beehive.
Kicking off the two-day talkfest, Communications Minister David Cunliffe said the Government's "long-term vision" for the country is fibre-to-the-home, with a more immediate goal of connecting roadside cabinets with fibre to improve broadband speeds.
By 2012, the Government wants towns with more than 10,000 residents - around 76 per cent of all telephone lines - to have access to broadband speeds of at least 20Mbps (megabits per second), twice as fast as Telecom's target for most homes.
Telecom, for its part, will spend an extra $303 million over the next four years laying fibre cables to its roadside cabinets at a rate of 1000 cabinets a year.
"This level of investment will make a significant contribution to improving broadband performance, but will not be sufficient for the country's economic aspirations," Cunliffe warned.
Building the fibre network the Government envisages will elevate New Zealand up the ranks of OECD nations in terms of broadband penetration, but will come at great expense and take years to complete.
In the meantime, the key means of delivering broadband is Telecom's copper-line network, which has been opened to its competitors through the process of local-loop unbundling.
But the process of unbundling is in danger of being derailed, ironically, by Telecom's efforts to put more fibre into its network and improve access speeds.
The telephone exchange serving the affluent Auckland suburb of Ponsonby has become a symbolic centrepiece in the latest wrangle between Telecom and its competitors.
In August, ihug and Orcon moved their equipment into the exchange to begin trials of local loop unbundling. The Telecommunications Users Association was on hand to observe the "milestone event".
"We look forward to a rapid roll-out of unbundling across New Zealand in the months ahead," said a buoyant Ernie Newman, the outspoken boss of TUANZ.
The Ponsonby exchange and others like it are key targets for Telecom's competitors, who already have customers in numerous urban locations and want to switch them over to an unbundled service, which in the long term delivers a better margin.
"We knew exactly how many customers we had, that we'd break even and over a period of time we'd make some money," says ihug chief executive Mark Rushworth.
But Telecom's plans to lay fibre to cabinets around Ponsonby and other exchanges will make ihug's original business plan unworkable, by effectively cutting off many of the existing customers served by the exchange. Instead, Telecom will increasingly serve customers from roadside cabinets fed by fibre optic cables, a process known as "cabinetisation". That's good for internet users - it means more reliable and potentially faster connections as homes and businesses are closer to the equipment delivering broadband. But it deals a blow to the business case for unbundling.
"We have a break-even point. If there's a smaller pool of customers to reach, it makes it a lot more challenging," says Rushworth.
Analysts suggest the window for earning a return on investment for an unbundled phone exchange is three years, with set-up costs ranging from $200,000 to $400,000 per exchange, depending on the number of customers per exchange.
Rushworth claims that 78 of the 105 exchanges ihug has identified as being viable to unbundle will be affected by the Telecom cabinetisation.
"And 45 per cent of lines in those exchanges disappear."
Ihug can still serve its existing and new customers, but in many cases will only be able to do so by reselling Telecom services, not running its own unbundled packages.
Scott Bartlett, the young chief executive of Orcon, which was bought this year by state-owned broadcasting provider Kordia for $24.3 million, is trialling his company's unbundled service fed from the same Ponsonby exchange, and plans to launch it more widely early next month.
But he says the cabinetisation plan has forced a major rethink.
"It's scaled back on the investment we would have been making and on the number of exchanges.
How many exchanges will be cut from the plan? Bartlett won't say exactly.
"It's a lot," he admits.
The result could be unbundling at a slower rate, more reliance on Telecom's wholesale offerings for competitors - in effect, more of the same. Hardly the lofty vision the Government has laid out for the country.
So what went wrong? Why didn't Telecom's competitors who were keen to get unbundling working, see Telecom's cabinetisation plan coming? Critics says Orcon and ihug have over-reacted and that Telecom's plans to upgrade its network were well signposted and keep unbundling intact.
But, says Bartlett, "to say that the industry knew this was coming, suggests that the industry had accurate information, which it didn't".
However, Matt Crockett, the head of Telecom Wholesale, the unit that under the operational separation provisions imposed by the Government is now obliged to deal with competitors on the same basis as Telecom's own retail arm, says that accusation is unfair.
As his new boss Paul Reynolds fronted at last week's Digital Summit to express his willingness to engage with competitors to build telecoms infrastructure co-operatively, Crockett was on the defensive over the cabinetisation plans. The argument centres on what Telecom presented as its plan back in June.
"We said they were draft plans, but they weren't pure speculation," says Crockett.
Subsequent changes to the plan, allowing for more extensive cabinetisation in some areas, came as a shock to the industry.
Crockett admits he should have done more to communicate the changes.
"There's no two bones about it, the answer is yes."
But he's adamant that in this case the industry is guilty of a major oversight.
"I'm not convinced that some of the people who come to the industry consultation sessions are doing a good enough job of taking that information back to their senior management," he says. He is proposing more direct contact with the chief executives of his wholesale customers - the ISPs - to avoid similar fallout in future.
Crockett has at least one ally in the industry: WorldxChange, Telecom's partner in the fibre-to-the-home pilot scheme at subdivisions around the country.
"They're either blind, not listening, or not showing up to the right meetings," says Alexander of his rivals at Orcon and ihug. WorldxChange, often a contrarian in the second-tier telecoms market, had decided against pursuing unbundling three years ago, partly based on Telecom's fibre extension plans, he adds.
"Telecom didn't hide the fact that's what they were doing. What's a surprise is that it was a surprise to everyone else."
Crockett is keen to downplay the impact of cabinetisation, taking us back to that telephone exchange in Ponsonby to prove his point.
He says 70 per cent of the lines currently served by the Ponsonby exchange will continue to be served from the exchange after the fibre-fed cabinets are dotted around the area.
"That situation is likely to continue for three years, possibly five or longer," he says.
Telecom also plans to wholesale fibre services, though exactly when they will become available is unclear.
Despite the claims of those closest to the subject - the internet providers - Crockett still feels unbundling can work.
"Overall I guess it does increase the challenges for unbundling but it does not destroy the unbundling business case."
Sydney-based telecoms analyst Paul Budde, who was in New Zealand this week to present his annual progress report on the telecommunications market, says Telecom's rivals should have known better.
"It's a clear indication that they've totally missed the boat," he says.
"Fibre is the future, guys. Local loop unbundling started in 1999, it had its peak in 2003, it's on the way out. You haven't even started it in 2007. That's a major problem."
Budde sees the cabinetisation debacle as a clear sign of the need for a culture change in the telecoms industry.
"The ISPs are very opportunistic, they can't survive unless they're assisted by the regulator," he says.
"The problem is that we're going to see a Telecom that will be far more competitive than ever before. For the first time ever, Telecom's able to focus."
As the industry changes there will be casualties, "roadkill on the information superhighway", says Budde.
"The only one that I think will survive as a national competitor is Vodafone-ihug. TelstraClear will still be here in 25 years, but looking after their transtasman business, Australian companies."
A regulatory fix to make unbundling work - so-called sub-loop unbundling - which would give Telecom's competitors access to those newly-fibred cabinets, is at least 12 months away by most estimates.
In the meantime, unbundling hopefuls have banded together to try to save their business plan. This week they visited the Commerce Commission, urging the competition watchdog to force Telecom to amend its cabinetisation plans. A Powerpoint presentation from ihug laid out some technical fixes that would get around the problems created by Telecom's fibre roll-out. Offering so-called "dual-feeds" - allowing some lines to be served from the phone exchange while others are served from the cabinets - would get unbundling back on track, argue Rushworth and Bartlett.
"If we can't get dual feed, it changes where we build and some exchanges that previously were viable will be totally unviable," says Bartlett.
If unbundling is increasingly looking like a marginal proposition, no-one is more aware of that than Cunliffe. If it is hard to get the industry to invest in unbundling, it is even less willing to shell out the large sums needed to lay fibre.
"A key barrier to investment in fibre-to-the-node is the reluctance of traditional telecommunications investors, particularly publicly listed companies, to accept the levels of return and longer time horizons that are needed to justify investment in fibre infrastructure," he told the Digital Summit.
"I am aware of growing debate on the potential of establishing an investment vehicle that is receptive to receiving lower levels of return than have traditionally been available in the telecommunications industry," he added.
The Government would lend its support to plans to build fibre infrastructure, said Cunliffe, including setting up a contestable fund to help pay for a second undersea cable across the Tasman to increase international data capacity. But so far, it's all been talk. Many of Telecom's competitors, with little in the way of capital to invest in fibre themselves, will be eagerly watching for signs of the Government turning words into action in next year's Budget.
"I hope Cabinet sees this is an essential part of infrastructure that's going to require investing in, more than just trying to poke and prod Telecom," says Bartlett.
"If someone had a billion dollars cash and went out and did fibre-to-the-home for every home in Auckland on an open-access basis, then Telecom's monopoly on the core infrastructure is broken forever."
So what if we all had a fibre cable running into our homes? What would we use it for and where would the much-touted windfalls come from?
Few people seem motivated to tackle that question in detail.
"It's clearly not just for Rupert Murdoch's benefit," says Budde, who believes new services will emerge in four key areas: entertainment, health, education and smart grids, where utilities begin using fibre to make their networks more useful and efficient.
"It will be things like video consultancies between general practitioner and patient. But if I can't claim that back on my health insurance, I'm never going to use video conferencing. Changing the health insurance system is a massive job, that's the type of challenges that will be faced by the Government."
Budde sees Cunliffe as a "top minister", pragmatic and visionary.
"But he's just one person involved. Some of the other people in government, I'm not so sure about."
If it is hard to put a figure on the gains widespread access to decent broadband infrastructure would bring, the New Zealand Institute has at least tried to do so.
In September it released a report which suggested that by targeting the media, education, entertainment and health sectors, as well as companies using communications to connect staff and customers, the early gains could be valued in the region of $2.2-$4.4 billion a year.
"Over time you would hope that that higher-speed access would be delivered to a larger and larger chunk of the population, but I think we have to understand it is not going to be an egalitarian distribution where everyone has access to the same quality," says the business think tank's executive director David Skilling.
The New Zealand Institute put the cost to the country of delaying building a fibre network by five years at $16 billion.
Alcatel Lucent's Australasian chief technology officer, Ric Clark, has seen fibre-to-the-home networks in play all over the world.
His Paris-headquartered company, which is responsible for Telecom's fixed-line and mobile networks, designs and builds them.
"Entertainment is a major driver, but we've pilots running around the world using high-speed capability in health and education," says Clark.
An Italian trial now underway involves set-top box technology and a regular TV set to allow call centres to provide people with assisted home care.
"We've been supporting a deployment in Belgium where the locally community runs a number of its own TV channels. It allows them to run what is effectively the same as YouTube, but in a closed environment," adds Clark.
Build fibre cables and the industry will find productive uses for it, says Budde.
"Once you make it affordable, you see things automatically developing."
Fibre how far?
* Fibre-to-the-node: Fibre optic cables run to a roadside cabinet that serves a group of buildings. Individual customers connect to the cabinet using standard wiring. Cheaper to set up than fibre-to-the-home, but can't provide as much bandwidth.
* Fibre-to-the-home: Fibre optic cables run all the way to individual homes and commercial premises. Very fast, but costly to install.
Telecoms snapshot
* The telecoms market grew by just 1.1 per cent in the 12 months to June 2007 - to $7.54 billion.
* Broadband subscriber growth is running at 30 per cent a year.
* The mobile market is now approaching saturation - subscriber growth is expected to drop to just 2.9 per cent in 2007-08. There are 4.47 million mobile subscribers.
* Revenue from voice calls dipped 2 per cent this year and is expected to fall a further 4 per cent next year.
* Growth areas include internet and data services (up 4.2 per cent) and pay TV (up 12.6 per cent).
Source: Paul Budde Communications 2008 NZ - Telecoms - Overview and Analysis
