New Zealand needs to move quickly to create a new model to accelerate fibre investment
12 Mar 2008
The Institute’s last release on broadband estimated the economic value of high-speed broadband to New Zealand. We estimated that a high-speed broadband network would generate additional economic value of $2.7-$4.4 billion a year, with additional gains possible through enabling innovation. Given the rapid pace at which other countries are moving to deploy high-speed fibre-based networks, we believe that New Zealand should act with urgency to invest in fibre in order to build a position of competitive advantage in the weightless economy.
In particular, we proposed an aspiration in which New Zealand should aim to achieve fibre to the premises (FTTP) to 75% of the population, within 10 years. Delivering against this aspiration would allow for this economic value to be captured, as well as positioning New Zealand to capture additional economic benefits from building new strengths in its economy.
The presentation released today assesses the extent to which New Zealand’s current course and speed is likely to deliver against this aspiration. Over the past several months, a series of announcements have been made with respect to investment in fibre. Telecom, for example, has announced that it will be laying fibre to cabinets, delivering download speeds of 10 Mbps to 80% of the population.
However, this investment will only serve to capture about one third of the estimated economic value. The download and upload speeds that New Zealand will achieve by 2012 with these investments will still be behind the speeds that many developed countries have today. Upload speeds are not likely to exceed 1Mbps, and this will significantly constrain much high value activity. And at the proposed pace of deployment, it will take a few decades to achieve FTTP to 75% of the population. The proposed investment pathway does not come close to positioning New Zealand to achieve the broadband aspiration in a timely manner. Significantly more investment is required.
But the more significant concern about New Zealand’s current broadband pathway is that Telecom, the dominant investor, has weak incentives to invest significantly in a fibre access network.
Telecom is the only scale investor with announced plans for the fibre access network, and there is little expectation of significant investment by other firms in the fibre access network. Regulatory uncertainty, Telecom’s ability to respond to competitors, and the existence of low-cost wholesale products, make significant capital investment by other firms unlikely. Despite all of the regulatory action over the past couple of years, Telecom remains the only firm that looks likely to invest at scale in either DSL or fibre.
But Telecom faces weak incentives to invest. Capital markets are resistant to further scale investment by Telecom, given the risk and time profile of the returns from investing in fibre. There is also significant uncertainty around the current willingness of consumers to pay for higher speed broadband, and significant regulatory uncertainty remains.
Indeed, internationally scale investment in fibre access networks has only occurred in response to intense competition, government intervention, or in particular cities or regions where parties have been able to come together. These conditions do not apply in the New Zealand environment, and it is unreasonable to expect a listed telco, like Telecom, to invest at a scale sufficient to achieve the proposed broadband aspiration.
The longer that New Zealand proceeds down this current pathway, the more difficult it will likely be for New Zealand to move to an accelerated pathway. Continuing along the current pathway will close off options and will make it increasingly difficult to achieve a rapid roll-out of fibre to the premises. As more fibre is laid, the sector becomes more difficult to regulate.
We believe that New Zealand faces a strategic choice between the current approach of relying on Telecom for scale investment in the fibre access network, which likely means a slow pace of roll-out, or creating a new funding and regulatory model in order to deliver a more rapid fibre roll out.
Our recommendation is that New Zealand develop this new funding and regulatory model as a matter of urgency, as the current pathway will lead to slow deployment of fibre and will forego considerable economic potential. New Zealand needs to move decisively to an accelerated pathway to a fibre-based network. This will require both government leadership and policy change, as well as private sector led investment.
The Institute’s next presentation will describe a proposed funding and regulatory model that we believe will provide the incentives necessary to enable this type of investment. This presentation is scheduled for release in early April.
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For information please contact:
Dr David Skilling, Chief Executive, The New Zealand Institute, Ph: (09) 309 6230, Email: , Web site: http://www.nzinstitute.org
Notes to editors:
The Institute’s previous presentations on broadband are available on the Institute’s website at http://www.nzinstitute.org