Key Points:

New Zealand's three biggest broadband providers are questioning the economic benefit of Government plans to spend up large on super high speed internet access for all.

In a report released publicly today, Telecom, Vodafone and TelstraClear - who between them control the majority of the telecommunications market - say their long-term network improvements will deliver broadband speeds adequate for the needs of everyday internet users without the need for a boost from the Government.

An announcement on how the Government is expected to spend $1.5 billion earmarked for fibre-optic networks delivering high-speed broadband to 75 per cent of New Zealanders is expected this month.

With a global squeeze on investment cash, the telcos recommend the Government look seriously at the economic benefits of an extensive fibre optic network running to the nation's doorsteps.

The report, written by public policy advisers Castalia, challenges the belief that high broadband speeds for households - up to 50 times faster than what is currently available - would deliver significant economic benefits.

With the economy under strain, the report raises questions about how appropriate it is to spend taxpayer money enhancing broadband to speed the download of high-definition movies.

Report author Alex Sundakov said there is proven value in the Government putting money into high-speed broadband where the market is not delivering, such as rural areas, schools and hospitals, but suggests fibre stretching out to households is not prudent use of taxpayer money.

The telcos cautioned the Government to consider the enhancements their own infrastructure investment plans will deliver to consumers over the next five years - expected to at least double broadband speeds for 80 per cent of the country - before plundering the public purse for a nationwide fibre roll-out.

"Basically what we've found ... is if you look at the committed investment programmes from the three telcos in five years time there are no applications that we currently know or are forthcoming that would not be able to be used given existing technology that would require the additional fibre," Sundakov said.

National made an election promise to roll out a fibre network delivering "download and upload speeds many, many times faster than most Kiwis have ever experienced", a






cornerstone of its plan to improve everyone's lot.

In a pre-election speech, Prime Minister John Key said the country was missing out on the real promise of "this century's leading technology" due to the slow deployment of fibre networks.

Castalia were brought on board by the telco giants to present their world view to Communications Minister Steven Joyce and Infrastructure Minister Bill English in the lead-up to a decision on broadband spending.

Sundakov said it was important to get an understanding of what problems exist with broadband before pouring public money into it.

"When you ask what a government should be doing you are really asking 'what is it that the private sector isn't providing?'," said Sundakov.

"The reason why the Government should be spending money or doing anything is because the market outcomes are not what we want."

Castalia identified an unwillingness for consumers to pay for high-speed broadband; the age of wiring and computer equipment in homes; the high cost of international bandwidth; and the slow speeds experienced by rural users as critical barriers to high-speed internet which aren't being addressed by the market.

"No matter what the private sector is doing there will be parts of New Zealand that are sufficiently isolated and very difficult to get to that we'll never get the kind of services we want without Government support," he said.

"But our point is you've got to think really long and hard to decide what the problem is and the problem right now seems to be not that there is not enough fibre being strung to the homes."

Vodafone head of industry affairs David Stone dismissed any suggestion of a secret agenda behind the strange bedfellows.

"Why did we do this particular piece of work? [The $1.5 billion] represents probably the major government investment commitment that was made pre-election - certainly that was made before the world was stood on its head - and there was a strong concern from our chief executives that the decision making around this be made on an informed basis, not in a vacuum.

"There had been other pieces of research work that had been published that had made certain assumptions around the benefit and uptake. This is probably the best fact-based piece of work that exists around that because it's the only one that had access to the real data and what our markets tell us."

Sundakov said the competing companies had two options - to either lobby the government individually to gain an advantage over the others, or to band together to make competition as clean as possible.

"For each individual market participant you either want a well functioning market or you think you can outsmart the other participants and get something special from the Government," said Sundakov.

In a rare move, the big three clubbed together to give Castalia confidential market and investment information to create a comprehensive picture of the broadband market.

"Normally we're busy competing like crazy in the marketplace and beating each other up, but the importance to New Zealand of the Government's broadband plan prompted our CEOs to see there was some considerable benefit in putting some fact-based information on the table ," said Stone.

The latest figures available from industry analysts IDC show the three players have a firm hold over the broadband market capturing more 80 per cent between them - Telecom with a 60 per cent share, TelstraClear on 13 per cent and 9 per cent with Vodafone.
Lines company Vector has also expressed strong interest in expanding its own network in partnership with the Government, saying this week it would be prepared to commit hundreds of millions of dollars to fibre infrastructure.

The idea of utilities companies developing networks has the support of industry lobby group internetNZ.

In its own report, prepared last year by Network Strategies, it said the Government would get more bang for its buck by partnering up with local lines companies, utilising their network expertise and acceptance of steady, low returns over a long term.

However, Sundakov said Vector still faced the problem of a market only willing to pay $29.95 to fund an investment that requires $70 or $80 a month to provide a return.

THE BIG SPEND-UP

Public policy consultants Castalia gained a rare insight into the New Zealand broadband market as the big three players tabled confidential market and investment information.

Care was taken to conceal company secrets from the public and each other but the report provides an overview of the telcos' networks and plans.

TELECOM
* $1.4 billion on fibre to the cabinet.
* Deliver download speeds of more than 10 Megabits per second (Mbit/s) and upload speeds of 1 Mbit/s.
* Improvements available to 80 per cent of New Zealanders by 2011.
* $574 million invested into a new mobile network due for launch this June.

VODAFONE
* $500 million upgrade to its 3G mobile broadband network.
* Expects to eventually offer download speeds of up to 28 Mbit/s and upload speeds of 11 Mbit/s.
* Installing high-speed broadband technology - ADSL2 and VDSL2 - in exchanges in the main metropolitan areas.
* Promises speeds of up to 50 Mbit/s to some customers.

TELSTRACLEAR
* An existing fibre network in Wellington, Kapiti and Christchurch with speeds of up to 10 Mbit/s.
* Installing high-speed broadband equipment in metropolitan centres.
* Speeds expected to be up to 30 Mbit/s for business customers.