Kiwi Connected: Lessons from the New Zealand Broadband Plan

Published:  July 29, 2011

For many people in the U.S., New Zealand isn’t just on the other side of the globe--its pristine landscapes and scenic beauty (made famous by the Lord of the Rings movies) make it feel like another world entirely. So it goes too with broadband.

Although the United States and New Zealand share the goal of bringing 100 megabit-per-second (Mbps) connections to three-quarters of their citizens, New Zealand is trying a different strategy from the one outlined in the U.S. National Broadband Plan. Whereas the U.S. policy is relying heavily on private companies to lead expansion, the New Zealand government is directly investing more than a billion public dollars--a significant chunk of its total economy--into telecommunications firms to spur construction of a new, open fiber network.<--break->

At an event held last week by the Open Technology Initiative, Graham Mitchell, chief executive officer of Crown Fibre Holdings, the government-owned company overseeing New Zealand’s broadband investment, outlined the complex workings of the plan before debating its implications with a panel of policy experts.

According to Mitchell, the New Zealand government will provide four companies a mix of equity and loans, totaling NZD1.5 billion (US $1.3 billion), to build direct fiber connections in three-quarters of the country by 2019. The total investment will come to about 1 percent of New Zealand’s gross domestic product; a comparable investment would be about $132 billion in the U.S.  (A separate government-funded program aims to bring higher speeds to rural areas of New Zealand, primarily though wireless.)

In return, fiber companies promised to get out of the business of selling to customers directly and will make their networks open-access. This means fiber companies can only sell wholesale network access, whereas retail internet service providers (ISPs) will bundle those connections together with international bandwidth and other features for home and business offerings. As part of this agreement, Telecom, the incumbent copper provider for much of the country and winner of 70 percent of the fiber contracts, will also “structurally separate,” or split off its retail and network-building arms.

The government also set maximum prices on wholesale connections: 30 Mbps residential services will start at NZD 37.50 (US $31), increasing to NZD 55.00 (US $46) for 100 Mbps speeds, with free installation of fiber to the home. These prices are set lower than those for current copper-based internet services such as DSL, in order to spur a competitive retail offering market, increase broadband uptake, and boost the overall return on the government’s investment.

In all, Mitchell said, the government expects that once loans have been repaid and it has sold off its equity, it will have spent NZD 600 million (US $520 million) to subsidize 25,000 kilometers (15,000 miles) of new fiber, although exact costs could vary widely depending on the success of the network and consumer interest. If the NZD 600 million estimate is accurate, the equivalent cost in the U.S., Mitchell added, would be about $27 billion.

For Blair Levin of the Aspen Institute, former executive director of the Omnibus Broadband Initiative, which wrote the U.S. National Broadband Plan, such a solution would not make sense for the U.S., nor would it be desirable. More than 90 percent of U.S. households “already have two wires running to them,” he said at the event, referring to telephone and cable, whereas only a handful of cities in New Zealand are served by cable. He argued that the focus in the U.S. should be on leveraging existing connections by allowing cable companies to continue to upgrade speeds. A government-funded fiber network, he said, would actually be “bad policy,” because it would destroy the value of the existing infrastructure, especially since wireless broadband will eventually replace much wired internet connectivity.

OTI has long been critical of this approach. For example, cable-based companies also provide video services and therefore have strong incentives to restrict speeds and usage to limit internet streaming and other broadband services that cut into their profits. In addition, the cable market is not particularly competitive, as many homes have just one choice of cable provider. Given the high cost of upgrades to traditional telephone networks, cable providers have little incentive to increase capacity and so continue to drive up prices. And in practice, cable is inferior to fiber-to-home networks over the long term, since even with new, faster DOCSIS 3.0 upgrades, all homes on a single cable node (upwards of 500 homes in some cases) have to split the available bandwidth, leading to average speeds far below the maximums advertised by companies (PDF). 

Meanwhile, wireless broadband continues to be far more expensive than wired connections, offers lower speeds, and limits usage by applying more restrictive data caps. As OTI policy director Benjamin Lennett said at the event, “we are investing in infrastructure that is not necessarily upgradable in the future. I’m not sure where that’s going to lead us.”

The New Zealand plan is not without its share of controversy. Like many projects involving large amounts of money, it has been criticized as wasteful and inefficient. For example, opponents have questioned favoritism towards Telecom and are looking into whether regulatory penalties for violations of the broadband contracts are steep enough.

OTI will watch the New Zealand plan, which has commenced as of mid-July, to see how it develops in relation to other national broadband plans (such as Australia’s), and what lessons it offers for broadband policy in the U.S. We are particularly interested in seeing how accurate build-out cost estimates turn out to be, whether the government’s return is as high as expected, and whether robust retail competition occurs, as it has in other countries that have opened up their broadband networks. Data caps will be another focus; as an island nation with only one major undersea link to the U.S, New Zealand currently suffers from some of the most restrictive data caps in the world. It is unclear what will happen as speeds jump dramatically upward, since ISP retailers set the caps based on the cost of acquiring international bandwidth. Data caps have become more common and more restrictive in the U.S., even as average speeds increase.

We predict that the lessons learned will prove invaluable. Broadband access increasingly underpins the strength of the economy, and the National Broadband Plan outlines a vision of broadband-driven electrical grids, health systems, government services, and education. But it is unclear how far private investment alone will go towards achieving these goals, or when. As Joanne Hovis, president of Columbia Telecommunications Corporation, asked at the event, “Why are the rest of the countries in the world building something we aren’t?”

 

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