UFB unbundling now less likely post 2020

The parliamentary committee reviewing the Telecommunications Amendment Bill has released an 80 page report, and the lack of major changes within it leaves UFB unbundling looking less likely to become a commercial reality.

What is unbundling?

At present, Chorus or the local UFB carrier provides the ONT (terminating device a router is plugged into) inside the end users premises, and runs the service back through the local splitter cabinet to the local exchange where the Internet service providers handover is located. Unbundling would see an option introduced where UFB services are stripped back to only include fibre from the end users premises to the splitter cabinet. The ISPs would have to provide the ONT inside the users premises and their own hardware inside the splitter cabinet.

Industry bodies will recall the term ‘unbundling” from when the same process played out with copper prior to the advent of UFB.

The economics of unbundling

ISPs can potentially benefit from selling an unbundled service through the ability to set speeds and determine hardware used (potentially with enhanced features). With a lower buy price, the ability to grow margins if economies of scale can be reached is also enticing.

However, with almost 8,000 fibre cabinets around New Zealand and each of those only able to handle 148 connections, the cost per cabinet deployment is harder to claw back than was the case with copper unbundling where 143 exchanges each housed up to 7,000 connections each.

Ultimately, as with most things, the decision as to whether to pursue unbundled access will largely depend on the monthly cost of the fibre.

The Price

The parliamentary committee looks to have effectively left the decision on the pricing of unbundled fibre up to Chorus and the other carriers, deciding against setting a regulated price.

In my view it is not in the carrier’s interests to offer this service, yet alone provide a particularly attractive price point. ARPU would drop, and while you could argue that so to would install costs given the lower labour and hardware requirements, we can see from the other details within Chorus’s submission to the committee (where they sought to be allowed to have routers and WiFi added to products they can sell) that they are looking to add services, not strip them back.

Encouraging take up of unbundled access appears to run counter to Chorus’s current strategy.

I expect a price point that makes unbundled fibre uptake a tough ask for most ISPs to justify pursuing.

If this is the case, then the prospect of large telcos such as Spark offering competing wholesale services (in competition with Chorus, but using Chorus’s unbundled fibre) becomes much less likely. The margin just won’t be there.

Effect on the retail market

The counter argument to that put forward by Spark, is that smaller ISPs would be at a distinct disadvantage given the financial barriers to widespread unbundled fibre access.

If unbundling can be done well, without incurring restrictive overheads that offset the reduction in last mile fibre costs, big players could gain a distinct advantage against the smaller players in the market.

The current regulated price points enforced by the Crown ensure that ISP’s of all sizes are paying the same rate for the fibre that end users have available. I have previously voiced concern that unbundling could present a scenario where the regulatory regime as it currently stands no longer achieves what it was designed to do.

By leaving Chorus to set the unbundled price points, that scenario no longer looks as likely.

Brendan Ritchie

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