Chapter 2

Telecommunications infrastructure: Entering the fibre era

Bill Bennett

In November 2019 Chorus engineers installed a strand of glass in a Wellington suburban street. When engineers lit the hardware at each end, the first stage of the Ultra-Fast Broadband network was complete. New Zealand telecommunications officially entered the fibre era.

Later that month, then communications minister, Kris Faafoi hosted a celebration to mark the project’s completion in Parliament’s Grand Hall. There was good reason to have a party. By every measure, the decade-long project had been a success. The build came in a few weeks ahead of schedule and on budget.

Moreover, New Zealanders were flocking to use the network. At the time of the function at Parliament, around 55 per cent of people who could connect to Ultra-Fast Broadband (UFB) had chosen to do so. The uptake number has continued to climb since then. By mid-2021, more than two thirds of homes or commercial buildings passed by fibre had taken connections.

Early enthusiasm encouraged the government to fund a second round of network building. The first stage of UFB reached around three quarters of the population living in cities and larger towns. A UFB2 extension was planned that would boost the numbers to 84 per cent of the population by the end of 2024. For the most part this connected smaller towns to the network. Since then, there have been further extensions; when UFB2 completes it will reach around 87 per cent of New Zealanders.

A few weeks before the function at Parliament, Spark Sport streamed the 2019 Rugby World Cup. It was the first time a major sports event was delivered by broadband.

Although there were technical hiccups at the start of the tournament for some users, the UFB network never wavered. Spark Sport says there were 212,000 live or on-demand streams when the All Blacks played Ireland in the quarter final. Data traffic on the Chorus network was highest for the France-Wales quarter final. At 9.05pm on October 20 the peak hit 2.6 terabits per second. These numbers were unthinkable a decade earlier.

Many New Zealanders without fibre, mainly in rural areas, had a less stellar experience. The consensus was the Rugby World Cup tested the UFB network to the limit and it proved its worth. At the time Spark said it would never have contemplated bidding for the rights to the tournament without a nationwide fibre network.

New Zealanders were already enjoying the potential of fibre broadband. Yet the toughest test was still to come.

Within months, the COVID-19 pandemic hit. New Zealanders were sent home to work and study when the nation locked down. It was a challenge for everyone: students, teachers, workers and employers. Digital adoption leapt forward by years in the space of a few days. Yet it was clear things would have been so much harder if the UFB network was not in place.

Record numbers of users went online to work and play. Video conferencing, collaboration, cloud computing and, after hours, streaming video entertainment saw unprecedented terabytes of data move around the country. On March 27, Chorus reported a peak of 3.03Tbps. This happened with barely a glitch for those people who had connected to the new network. The fibre network stayed uncongested throughout lockdown. People without fibre ran into problems, those with a fibre connection stayed connected to work and study.

UFB’s architects were vindicated. A decade earlier, Ernie Newman, at the time the head of TUANZ (Tech Users Association NZ), said the decision to restructure the telecommunications industry and provide government funds to help finance a fibre network would be visionary. As businesses and schools got back to work during a lockdown, it looked as if he was right.

The story of how we got there starts 30 years earlier in 1989. That is when the Post Office’s statutory telecommunications monopoly was completely removed. At the time Telecom remained in government ownership but had been corporatised. Overnight, the market was opened to competition. Telecom started on a massive restructure, making thousands of workers redundant and cutting costs. A year later State Owned Enterprise Minister, Richard Prebble, announced that the business was sold.

Part of the sale deal was the Kiwi-Share. This was a nod to the public service components of pre-competition Telecom. Among other undertakings, the new owners agreed that so-called ‘free’ local calling would remain, that line rental fees would not rise faster than inflation and rural telecommunications users would pay the same prices as people in towns and cities. Despite the Kiwi-Share conditions, Telecom’s profits soared, in part thanks to huge staff cuts.

In order to push through a fast sale, the government needed the money, it stripped out most of the other rules and regulations that governed the company. Telecom New Zealand entered its commercial stage in what was regarded as the world’s least regulated telecommunications market.

Least regulated did not mean competitive. It was not even a ‘market’ in the widely understood sense of the word. Telecom had a monopoly in fixed-line telecommunications. Looked at from a technical point of view, Telecom enjoyed a duopoly in the mobile market with Bell South, the company that was later purchased by Vodafone. Yet, at this time, Telecom’s market share was close to ten times that of BellSouth. The former state-owned monopoly had, in effect, become close to being a privately-owned telecommunications monopoly.

It took a long time for real competition to emerge. By the early 2000s, Telecom NZ faced Vodafone and TelstraClear, but it remained dominant and in a position to dictate the pace of change. The telecommunications market was starved of investment and innovation. Telecom did not see the need to invest. If it was not seen as a crisis at the time, people in government watching the market understood trouble was brewing. Around the world, telecommunications were moving into a digital era. Broadband was growing in importance, traditional voice calling, where Telecom NZ made most profit, was no longer centre stage.

The International Telecommunications Union, a United Nations agency set up to help connections between member states, published research showing New Zealand had the second lowest per-capita investment in telecommunications among developed nations. The nation ranked poorly in every international measure of broadband uptake. By overseas standards prices were high and internet download speeds were slow.

In June 2004, the government released ‘The Digital Strategy: A Draft New Zealand Digital Strategy for Consultation’. The document pulled together official thinking about how telecommunications should develop and its place in a wider information technology context. It included a series of specific targets for the sector to reach by 2010.

Businesses operating in the main centres and specialist users around the country would need benchmark speeds of 40Gbps and should be able to buy 100Gbps. Medium-sized businesses in provincial towns would need gigabit fixed line speeds and 100Mbps using wireless technologies. Residential customers and small businesses in 85 per cent of the country would get 50Mbps and have an option to buy 100Mbps services. The remainder could expect to see 10Mbps.

The Digital Strategy document made it clear that fibre would be needed to meet at least some of these goals. It suggested fixed wireless broadband was a possibility too, but had ambitious speed targets for the technology. Few fixed wireless customers see the projected speeds in 2021. In 2004 they were unobtainable.

The Digital Strategy is notable because it put fibre broadband on the official agenda for the first time.

Yet there was a problem. The private sector had little interest or incentive in building fibre networks. Left to its own devices Telecom would happily sweat the existing copper network with incremental technology upgrades for years to come. Copper broadband speeds were improving at the time and there was still headroom. Shareholders were unwilling to fund a fibre network build that would, potentially, run to many billions of dollars when they could get away with using faster copper technologies such as VDSL (very high-speed digital subscriber line).

When the Fifth Labour government was elected for its third term in 2005, David Cunliffe was appointed to cabinet. He became Minister of Immigration, Minister of Communications, Minister for Information Technology, and Associate Minister for Economic Development. He had previously held the communications portfolio outside of cabinet.

Cunliffe embarked on a programme to reform the telecommunications market with the specific aim of introducing more competition. This, he understood, would spur investment and catapult New Zealand’s broadband up the developed nation rankings. Much of his thinking was based on the Digital Strategy document.

December 2006 saw the passing of the Telecommunications Amendment Act. When he introduced the bill in Parliament earlier in the year, Cunliffe described it as a package of measures to help New Zealand’s telecommunications sector catch up with leading OECD countries.

This was the first step on the path to today’s telecommunications regime. The four components he outlined in this speech at the first reading of the bill sound familiar to anyone observing today’s market.

1. Legislation to deliver an effective wholesale regime.
2. Measures to encourage infrastructure based competition including:
   • Developing a package for rural communities; and
   • Ensuring we have a competitive cellular market.
3. Future-proofing the regulatory environment to technology change including:
   • Reviewing the Telecommunications Service obligations; and
   • Preparing for next generation networks.
4. Continued development and implementation of the government’s Digital Strategy to encourage the smart use of information and communications technology.

There were two immediate consequences. Telecom was forced into a three-way operational split into retail, wholesale and network organisations. The act also gave the communications minister and the Commerce Commission new and wide-ranging powers to monitor and enforce giving competitors access to the local telephone network. This was known as ‘unbundling the local loop’.

Unbundling meant that competitors could install their equipment in Telecom’s exchanges and the roadside cabinets used to extend the network. They would be able to set their own speeds and to offer independent services.

Until this point, internet service providers could only resell Telecom’s pre-packaged broadband products. That gave them little room for margins and profits were anaemic. Broadband was not making anyone rich apart from Telecom’s shareholders. Because Telecom’s pricing was opaque, it made hefty margins. Unbundling promised to change this, at least for the larger internet service providers (ISPs) with the resources to finance unbundling. Among other matters it would expose the true cost of the components of a broadband connection.

The government also ruled that Telecom had to offer ‘naked DSL’ (digital subscriber line) and ‘unconstrained bitstream’. Naked DSL means that service providers can buy a connection that does not have a dial tone. In other words, a service provider can sell an internet connection that is not used for traditional voice calls. Bitstream is a wholesale broadband service, at the time this would have been on the copper phone network. It is, in effect, what today’s ISPs buy from wholesale fibre companies.

All of this was progress, but it did not solve the issue of upgrading the copper network to fibre. In Asian countries like Japan, Korea and Singapore, governments were backing, even funding ambitious nation-wide fibre networks. New Zealand was falling behind its trading partners. If New Zealand was to get a fibre network, some government involvement looked inevitable.

Fibre moved onto New Zealand’s political agenda in the run-up to the 2008 election. Cunliffe and Labour planned a Broadband Investment Fund. He said they would spend $500 million rolling out fast broadband in the next five years and the same amount over a second five-year period.

It was not specifically about fibre. Cunliffe’s press statement says:

Our broadband package promotes the best fit between the best available technology and the needs of users in the region concerned. This model provides better value for taxpayers, encourages more service providers into the market and drives competition.

Our initiative provides a ‘base’ component throughout urban centres and suburbs that all operators will have access to, and offers fibre, wireless and DSL connections to end-users at a significantly reduced cost.

A critical aspect of the Broadband Investment Fund is that it offers grants to private sector investors rather than taking an equity stake in any organisation. As the government does not require any return, we are in a strong position to determine which providers and projects to support.

This is similar in many respects to the original plan for the Australian National Broadband Network which mixed technologies.

At a speech to the Wellington Chamber of Commerce in April 2008, National Party leader John Key, now Sir John, outlined a more ambitious and comprehensive plan to build a nationwide ultrafast broadband fibre network. This would be fibre-to-the-home. In 2008 Cunliffe and Labour were still thinking in terms of fibre-to-the-node.

Key said only fibre-to-the-home could deliver huge gains in productivity, innovation and extend New Zealand’s global reach. He identified the barrier to getting a network built:

Private operators have judged that for the foreseeable future, connecting fibre to homes just won’t deliver them or their shareholders enough of a return. They have made this judgment based on their private interests, and that’s fair enough.

But I think that lack of investment represents a significant market failure.

Private businesses naturally don’t take into account the returns that a nationwide fibre-to-the-home network will deliver to the public as a whole.

However, every year private businesses withhold that investment is another year in which Kiwis miss out on access to the technologies and communication capabilities that are defining the modern world.

That speech set the scene for what, a year later, would become the UFB network when Key formally announced the programme in his first term as prime minister.

The first Key government took charge as the 2008 Global Financial Crisis continued to trouble governments and central banks. Key says when the UFB plan was announced, the concerns for his government were high national debt levels and a fear that increased welfare spending would see them rise further.

Despite this, he says, ‘There is no doubt that spending on infrastructure was the right thing to do.’ Key says the challenge was like a board facing company shareholders. He says shareholders tend to be supportive of big capital spending programmes so long as they are convinced they are getting value for money and the company delivers. ‘UFB was an ambitious programme. We executed it really well. You can contrast this with the NBN [National Broadband Network] in Australia.’

New Zealand’s topography made the job harder than elsewhere in the world.

‘It’s straightforward enough in the metropolitan areas like Christchurch, but once you step outside the cities you are into difficult terrain where there are limited letter boxes and lots of space. It’s not efficient, it’s difficult and expensive,’ Key says. ‘Even in Auckland, it’s hard compared with places like South Korea or Hong Kong. There you are going up big high rises, connecting every floor. There’s massive density. We don’t live like that in New Zealand.’

Add in the consenting process and in comparison with elsewhere, building a New Zealand fibre network was always going slow compared with other countries.

Key’s government considered leaving the build to the market. However, he says the economics were just too big and the risks were too great. There is a long period of time when companies investing in such a network are unlikely to get returns as they wait for customers to switch over.

Another aspect of this is that the private sector would want to cherry-pick. There was a strong business case to build fibre in Auckland, Wellington and Christchurch. Elsewhere the returns looked less certain.

Key says: ‘We wanted to ensure there would be development outside of Auckland. This takes the pressure off major infrastructure. Without connectivity, a place like Tauranga might not grow, with it, it will grow fast because it’s a great place to live.’

There were plenty of arguments against government involvement. He says: ‘People said by picking a winner you’ll get it wrong. They said you won’t need a fibre network, it will all be mobile. The point they were missing is that the two are complementary. You need fibre to run wireless networks, without fibre you don’t have strong enough Wi-Fi.’

Key delegated much of the work planning for the fibre network to Steven Joyce, who was communications minister at the time. Key says: ‘He was always about attention to detail. Even if something was not in his portfolio, you could always rely on him being across the Cabinet papers and understanding them. He was the perfect person to do it.’

Joyce’s role started before the 2008 election. At the time he was the National Party campaign manager. Key asked Joyce to look at developing a broadband policy. Joyce says he heard from others that it might take $1.5 billion to connect 75 per cent of New Zealand. He worked through the numbers at home before calling Key back to say it was a practical proposition. It went into the manifesto.

After the election Key handed Joyce the transport folio and ICT (information and communications technology), telling him that he wanted the Ultra-Fast Broadband network built with a $1.5 billion budget.

Joyce says one of the challenges he faced was in deciding how to spend the money. Early on the government decided to earmark $150 million to improve broadband in schools. That left $1.35 billion for the UFB network.

At this point it was not certain the government would go with fibre. Joyce says the government considered using wireless technology. Wireless broadband speeds were increasing at a clip and promised to get close to what, at the time, was possible on fibre. In the event, it took ten years and the arrival of 5G mobile before wireless made it to fibre-like speeds.

Joyce says, ‘We considered whether wireless and cellular would at some point get to be as good as fibre. It seemed possible, but you’ve always got the contention issue. That is, the competing use of another wireless connection.’

‘Another point is that if you build wireless networks, you still need fibre to support it. The faster and more ubiquitous those wireless networks are, the closer they have to be to fibre for backhaul.’

Key and Joyce worried that New Zealand could lock itself into a technology that quickly became obsolete. Joyce says: ‘Generally, what happens when a technology becomes obsolete is a new technology appears with superior performance that people really want. We couldn’t envisage one. Fibre is ultimately limitless. The electronics you stick at each end of the line determines how much you can push down it. That wasn’t really a problem.’

Another issue facing the government at this stage was the fear they could get the network built, but that no-one would use it. Both Key and Joyce say they were aware they were building a network for applications that had yet to emerge.

The government established Crown Fibre, now known as Crown Infrastructure Partners, to oversee the project delivery. Joyce said that this would reduce the uncertainty. It hired Graham Mitchell as the organisation’s CEO who describes his role as ‘mitigating the risks, especially when it comes to negotiating contracts.’

Mitchell says, ‘Crown Fibre was set up when the government wanted someone to commercially execute. We all came from the private sector, and we had a private sector board. We had private sector negotiating expertise.’

‘We were government employees effectively operating as the private sector front-end for the government. We worked hand-in-hand with the government, but we had commercial industry experience at the negotiation table and private finance experience.’

The published terms of the UFB project expressly forbid a telecommunications company from participating if it has both retail and wholesale operations. This effectively ruled out Telecom NZ so long as it retained control of its Chorus access network division.

To get around this, Telecom announced it would be prepared to demerge the Chorus operation in return for winning the lion’s share of UFB contracts.

Crown Fibre went looking for private sector partners to build fibre-to-the-home networks in urban New Zealand. The country was divided into 33 fibre regions and each area would be bid for separately although bidders were allowed to bid in more than one area. The bidders fell into three groups. Telecom offered to build the entire network through Chorus, its network organisation. It submitted two bids, one was compliant with Crown Fibre’s request. The other was not. The company said it would be prepared to come to ‘an accommodation’ with the government if either of its proposals was rejected.

The other main bidder was The Regional Fibre Group. This was made up of electricity lines companies who submitted a series of consortium bids. Wellington-based TeamTalk submitted a bid for its home region. Along with these locally-based bidders a Canadian company called Axia Netmedia submitted a non-compliant bid.

UFB was always intended as an urban project covering the 75 per cent of the population living in cities and towns. That would later be extended to around 87 per cent coverage. Most, but not all of the rest of the country would be covered by the Rural Broadband Initiative (RBI). In a sense, this was an extension of the traditional universal service idea, that is where everyone throughout New Zealand gets a basic broadband service.

The $1.35 billion earmarked for the UFB build was a soft loan that would be paid back over time by commercial organisations set up to make a profit. Improving rural broadband needed a different approach. The government set up a $300 million fund, this money would be provided, in effect, as a grant to potential network builders. The idea was that the money would go to the bidder or bidders who could provide the most rural broadband for the available money.

Instead of funding the RBI from taxpayer funds, the government established the Telecommunications Development Levy. Each year the government collected $50 million from the largest telcos, individual contributions were proportional to a company’s revenues.

Fixed wireless broadband was the obvious answer for rural broadband. It suffers from congestion in built-up areas, but at the time the contracts were set up everyone believed demand would be low enough for that not to be a problem in the bush. Things did not work out that way. Today there are places where RBI fixed wireless works well, and places where it performs badly. There are still rural broadband users who have poor speeds and unreliable services, but the number continues to reduce over time.

At first the government looked for regional partners in much the same way as it split the fibre network into regions. It proved much harder to find suitable partners, so the focus switched to a nationwide approach. During the jockeying for UFB contacts, Telecom made it clear it wanted the rural and urban projects to be combined in a single bidding process. That never happened.

Eventually Telecom worked with Vodafone to submit a joint bid. This would see Chorus extend its fibre network to reach rural cell towers. Vodafone would then provide a fixed wireless broadband service from the towers. The plan involved recycling infrastructure, but adding a further 3000km of fibre and 154 new open access towers. Any service provider could rent space on the towers to deliver broadband.

The government’s goal for the RBI was modest compared with UFB. It specified that it wanted 80 per cent of rural homes to have at least 5Mbps. Prices would need to be ‘more or less’ in line with urban broadband prices.

Over the last decade or so the RBI footprint has been extended to the point where there are few remaining blackspots. Many of the gaps have been filled by WISPs — Wireless Internet Service Providers. These are small independent companies who often use innovative approaches to stretching the network’s reach.

Telecom was chosen as the government’s UFB build partner in 24 of the 33 fibre regions. This was about 70 per cent of the connections. It includes the potentially lucrative Auckland and Wellington builds. Christchurch was a special case, the city had recently suffered two major earthquakes and needed to get back on its feet. Crown Fibre awarded the contract to Enable Networks. NorthPower won Whangarei and Wel Networks, now known as UltraFast Fibre, won contracts in central parts of the North Island.

Today New Zealand ranks at twelfth place in the OECD broadband speed table. The average download speed across the country is 67Mbps. That is ahead of the OECD average and more than double average speeds in Australia. As with so many aspects of life here, this last comparison is important.

In the run up to the completion of the first stage of UFB in 2019, Sir John Key looked back on the project, saying:

UFB was an ambitious programme. We executed it really well. You can contrast this with the NBN [National Broadband Network] in Australia. I spend a lot of time in Australia, and the Australians are jealous that we delivered this fantastic outcome while they are still battling.

Bill Bennett is an experienced editor and journalist specialising in technology and business. He writes business and news features for the New Zealand Herald, a monthly technology column for NZ Business magazine, and is a regular on Radio New Zealand’s Nine To Noon. He recently edited The Download magazine for Chorus. Bennett has written for many overseas titles including Computer Weekly in the UK and PC Magazine in the US. He has previously worked for Australia and New Zealand’s best known newspapers including The Dominion, The Evening Post (now The Dominion Post), The National Business Review, The Sydney Morning Herald, The Age and Australian Financial Review. He has been a technology commentator on ABC radio, the BBC, Channel 7; and 2ZB, TVNZ and TV3 in New Zealand.