The casual observer may be wondering what’s going on in the New Zealand telecommunications industry at the moment. In August last year, with great fanfare, a couple of ISPs unveiled the first non-Telecom DSLAMs in a Telecom exchange. Then in November Telecom announced which of its exchanges are going to be “cabinetised” – and the first on the list are those that have just been unbundled. The ISPs cry foul. Are they justified or not?

So what effect does cabinetisation – pushing fibre out to cabinets in which the core network edge equipment is installed – have on the ISPs? With the UCLL (unbundled copper local loop) service only covering full loops between the end user and the telephone exchange, the ISPs won’t be able to serve any customers who are connected to fibre-fed cabinets with their DSLAMs. They claim this has destroyed their business cases taking advantage of unbundled loops.

On the other hand we have known for years that Telecom is rolling out its NGN, and FTTN has always been an important part of this. While one may question Telecom’s motives for choosing to cabinetise the unbundled exchanges first, a number of commentators are of the view that UCLL is too little too late and is going to be left behind by NGN (this view has been around for some time), or that the whole concept of UCLL is bad because it allows the competition to avoid investing in infrastructure.

To find out the answers, we need to take a step back and take in the whole picture.

In 2006, concerned about New Zealand’s low rankings in OECD telecommunications comparisons, and triggered by Telecom’s failure to meet its promise of 83,000 wholesale customers by the end of 2005, the Ministy of Economic Development undertook a stocktake of the telecommunications sector to review the state of the industry. The outcome of the stocktake was the May 2006 cabinet paper which preceded the Telecommunications Amendment Act 2006. The cabinet paper made a number of important recommendations:

• Facilitate competition by improving wholesale access to Telecom’s fixed local loop network through introducing LLU and naked DSL
• Encourage investment in alternative access network infrastructure by reviewing public sector investment, funding, ensuring availability of spectrum for wireless access technologies
• Future proofing regulatory environment
• Continuing the development and implementation of the Digital Strategy and encouraging the use of ICT.

It was Network Strategies’ view that New Zealand could not meet the original goal of being in the top quarter of the OECD broadband rankings by 2010; the cabinet paper sought through its recommendations to achieve a revised target of the top half of rankings by 2010 and top quartile by 2015. The paper’s recommendations are aimed at meeting these targets through increased competition.

To ensure there are no impediments to wholesale access, the structural separation of Telecom was recommended. This was replaced with operational separation in the Telecommunications Amendment Act.

When we compare the paper with the industry today, we note two important issues:

• The local loop unbundling recommendation included sub-loop unbundling (and associated backhaul). The Commission has started looking into sub-loop related services although it may be some time before unbundled sub-loop services become available
• Most importantly, the paper’s proposals are based on a “ladder of investment” concept that allows service providers and other operators to commence business with the low-start-up cost and low-commitment resale services, migrating to the wholesale and ULL services – which require higher levels of commitment and investment – and ultimately deploying their own alternative access network.

The ladder of investment is part of what the cabinet paper describes as a coherent package. Its intention was to take a holistic view of the industry, both now and in the future, and this package is therefore what it believes will provide the best methods of increasing competition in the broadband industry.

The ladder of investment is designed to ease concerns of competitors relying on Telecom’s network and failing to invest in alternative infrastructure. To achieve this there are incentives in place to encourage service providers to move up the ladder and eventually deploy competing access networks. Incentives included the early immediate auction of 2.3 and 2.5GHz spectrum for the use of wireless local loop, the allocation of 3.5GHz broadband wireless access spectrum, and the requirement (duly satisfied) that Telecom and Vodafone each sell 5MHz of spectrum from their mobile bands, or face losing 7.5MHz at auction. Additional funding may also become available in certain circumstances.

The first step on the ladder of investment, reselling Telecom’s services, allows competitors to bill customers themselves, but they are limited to offering the services and products that Telecom has available.

The second step, wholesaling, which gives competitors more flexibility in what they offer their customers, is available in the form of UBS services that were released in 2004. Wholesaling has become more flexible through the recent addition of non-constrained products and naked DSL (to be officially launched in the next few months).

The next step is full local loop unbundling (UCLL), which has been in place since August 2007 in a limited number of exchanges. Sub-loop unbundling will become available at a later date.

Finally, competitors are able to deploy their own competing access network whenever they see fit. TelstraClear has had its own copper/HFC (hybrid fibre/coax) network operating in Wellington and parts of Christchurch for many years, with which it provides telephony, broadband and video services to fully compete with services Telecom will provide over its fibre and copper NGN. The auction for 2.3 and 2.5GHz broadband wireless access spectrum has recently been completed, with Kordia, Woosh, Telecom, Vodafone, Blue Reach (CallPlus) and Canadian firm Craig Wireless Systems being successful bidders. While this spectrum is not available yet, the operators now have certainty with which to plan their business cases. In addition NZ Communications has bought 5MHz of spectrum from each of Vodafone and Telecom, and this would also qualify as competing infrastructure.

An important feature of the ladder of investment is that an operator uses each step as a stepping stone to build up its business, to enable them to raise the capital required to move to the next step on the ladder if they so wish. The move up the ladder in the long term should reduce overall costs.

In conclusion, LLU should not prove to be too little too late. It is an important step on the ladder of investment, allowing operators to build up sufficient customer base and stability before taking on the otherwise risky business of rolling out their own infrastructure.

In the context of the MED’s overall regulatory plan, are the operators justified in complaining about Telecom´s announcement to cabinetise the exchanges that it has just unbundled? On one hand, TUANZ believes that Telecom Wholesale should be given the benefit of the doubt while on the other hand InternetNZ consultants argue that any“anti-competitive outcomes must be treated as anti-competitive intent”. The only thing that is certain is new operators must be left wondering whether or not they can truly believe Telecom’s rhetoric that it is embracing a new competitive environment. Whatever view one takes, operators now face the task of ensuring they get a sub-loop unbundling determination that will strengthen their business cases.