At least three new nationwide high speed DSL2+ networks are likely to emerge once the devilish details of local loop unbundling are worked through and embedded in legislation.

Further networks may emerge if the nation’s larger ISPs agree on ways to co-operate by sharing port space, leasing DSLAMS or wholesaling their connections to third parties. Independent bandwidth wholesalers such as TelstraClear, CityNet, Vector, Inspire, FXnet and others will at last see their opportunity for expansion beyond city and regional boundaries.

Telecommunications’ Review understands at least one group of investors is keen to put their own DSLAMs into Telecom’s network to create an independent nationwide wholesale network. Details are being kept under wraps until the ink is dry on the LLU deal.

Certainly the LLU announcement, the most significant since deregulation, will spark another round of mergers and acquisitions as cash rich ISPs look to morph into full telecommunications carriers, broaden their customer bases and beef up skills and technology.

While ground work on legislation is now underway, with ISPs, industry groups and government officials in an endless series of meetings around the country, the specifics of the new environment are still months away. After legislation is drafted there’s the select committee process and pushing the resulting Bill through the house in a timely fashion. That could take at least a year unless there’s incentive to fast forward the process, possibly by cutting and pasting the best bits from the 26 OECD nations who have already gone down the unbundling track.

One thing is certain, business and home customers, held back from tasting the raft of rich media and smart services now available in many parts of the world, are in for a treat. New networks will by-pass old technology and go direct to DSL2+ DSLAMS and modems, capable of delivering up to 24Mbit/sec download speeds, which have now reached commodity pricing levels.

The new regulatory environment is expected to rapidly bring an end to repressive data caps that curb internet use, and hasten the arrival of pricing models and speeds more aligned with the marketing promises of the always-on digital lifestyle.

More than unbundling

The dilemma is whether unbundling alone is enough to kick start the market into a new era of rapid broadband growth. There’s a suggestion the whole market needs to be opened up and all obstacles to competition addressed in legislation and overseen by a regulator who is more than a paper tiger.

InternetNZ Executive Director Keith Davidson wanted to see the incumbent make some solid initial progress through voluntary structural separation into wholesale and retail divisions and to begin negotiations with UBS (unbundled bitstream) wholesalers as soon as possible.

Forced to concede access to its copper lines, there are concerns Telecom will ramp up its fibre roll out and its plan to take smaller cabinets closer to the curb, increasingly bypassing its main exchanges and shortening the copper. Unbundling fibre is not part of the proposed legislation and where it proliferates LLU competitors could literally be cut out of the copper loop.

While there’s undoubtedly room for additional equipment in Telecom’s larger exchanges, are the growing number of smaller roadside cabinets able to accommodate the rival DSLAMs? There’s also the question of Telecom’s connection ratio and the quality of service it might be able to offer. In other words how many users can share a single broadband link. British Telecom has a ratio of 50:1 for home users and 20:1 for business lines. It is alleged Telecom’s ratio may be as high as 140:1.

Need to work together

InternetNZ, ISPANZ, TUANZ, Orcon, ihug, CallPlus and others deeply concerned about the outcome of the LLU breakthrough are engaged in an ongoing round of meetings with each other, with ministers, bureaucrats, the MED and Commerce Commission. The industry has never been so organised, motivated, vocal and determined to have its way.

There’s general agreement that the framework, yet to be determined by the Ministry of Economic Development, the Commerce Commission, the Telecommunications Commissioner and the industry, needs to be foolproof and futureproof.

Certainly the right balance needs to be struck. If legislation is too prescriptive and literal it may limit access to smarter next generation technologies; if it’s too loose it may need to be revisited within three years and result in a kind of legal wrangles over detail that squashed competition in the first place.

Internet Service Providers Association (ISPANZ) vice president Scott Bartlett says while we now have local loop access ‘in theory’ the battle has just begun and there’s not much time to sort out the details.

"We need to start talking about access charges, backhaul charges, rack design, tenancy costs, third party access and that’s just the big ticket stuff. The legislation needs so much detail and work needs to go into empowering bodies like the Commerce Commission to make rulings on a lot of these issues otherwise we’re going to spend the next two or three years trying to make this thing good."

Individual ISPs need to stand up and be counted, he says. "Making LLU works for everyone is important – the more people we have singing from same song sheet the better."

Bartlett voices everyone’s concern about the price for access to the copper tails into homes and business. "If it’s not economically viable no-one will benefit". And he doesn’t believe there’s room for every ISP to start putting their DSLAMS on the Telecom network. "We’re still a small market with relatively low uptake of broadband to date and I don’t think there’s room for four or five new networks."

Sharing the ports

He says ISPs need to work together perhaps using ‘port credits’ as a way to ease the burden of investment and broaden coverage. If someone builds a network in Christchurch and another company builds in Auckland they could offer port credits on each other’s networks.

Bartlett says his own company Orcon has not only committed to build a co-located network in the main centres which it will wholesale to other service providers at ‘a fair price’ but plans to install in rural exchanges including New Plymouth, Whangarei, and Masterton.

"If we start getting independent networks throughout the country it would be such a waste. This is such and awesome opportunity to build an independent network for the whole country that runs at 24Mbit/sec with ADSL2 or VDSL. Why would you spend all that money just to do a couple of exchanges in one area," asks Bartlett.

He reminds ISPs the real cost is not the hardware but in operating the network. "We are talking millions – we couldn’t do any of our plans for less than $5 million and that’s fraction of the number it’ll end up being. It would be naïve to think that even $20 million would build a nationwide network."

Despite its Australian parent iiNet having suspended share trading due to temporary difficulties, New Zealand based ihug is still determined to invest at least an initial $20 million over two years to reach 100,000 homes through piggy backing on the local loop.

With ‘sensible LLU pricing’ there could be further investment. The final decision will be based on price per customer, per month for the copper and what the unconstrained wholesale UBS pricing will be. "If Naked DSL is $25 and LLU is $18, that will be too close to justify the risk of the capital involved for putting in my own equipment," says ihug chief executive Mark Rushworth.

A fair deal would be $12 - $16 per line, per customer per month, he suggests. The OECD average is $18 but for those who have had unbundling for a number of years it’s dropped closer to $12-$16. Of course the more lines you take, he suggests the greater the room for negotiation.

Fears over pricing

He suggests Telecom will keep wholesale prices for DSL quite high to get a reasonable return for its DSL2+ equipment. "The other mechanism that could be tricky is that LLU will be based on long term incremental costs while ‘naked’ UBS or DSL is the retail basket of goods from Telecom with a 16-18 percent discount which is what happens today."

Rushworth warns, if some small ISP decides to undercut the market just to get customers, Telecom and others are likely to drop their prices in response causing another decline in UBS making LLU payback longer and more difficult. "You have to be careful or you’ll end up in a death spiral; you need a reasonable return for your investment in equipment, that’s why everyone’s watching what these prices will be."

He’s not so concerned about speed, believing the environment to be similar to Perth. In Australia where iiNet co-locates DSL2+ DSLAMs on the Telstra network, customers are getting 22-23Mbit/sec speeds, depending on distance from the exchange and the quality of copper. ‘Heat maps’ of customer density and penetration in Perth reveal 90 percent of those using its DSL2 service get greater than 8Mbit/sec, close to 50 percent are above 12Mbit/sec and 30 percent are getting 20Mbit/sec plus.

That’s sufficient to deliver most triple play services; video streaming using a MPEG4 codec for example only requires 4Mbit/sec speeds. While ihug will focus on voice and rapid access it’ll also be looking closely at video on demand to keep the customers ‘sticky’. While its interested in content and business offerings based on guaranteed quality of service (QoS), which no-one but Telecom can offer currently, ihug sees mobile or ‘quad play’ as more attractive in the interim.

"Mobile will become increasingly important for customer retention. You’ll see Telecom come out with bundles in the next six months where broadband is cheaper if you also have your mobile with them," says Rushworth. That approach has proven a more sound business proposition in the UK through BT Fusion and Free Internet in France.

Eventually a multi-mode handset may be delivered as part of the broadband service operating with IP on the home line as well as wifi and GSM. "Any IP calls are free and they can roam on their home wifi network or the public wifi network or hand off to Vodafone beyond that," says Rushworth.

TelstraClear will undoubtedly be the biggest player in the new environment, and most likely the quickest to move. It already has independent networks in Christchurch and Wellington where it has its own cable based triple play offerings. It will relish the opportunity to deliver its own DSL service and begin picking up on the aborted 2001 plan to deliver high speed services across the country.

Like the other competitors it wants a speedy resolution on pricing, clarity on co-location rules for equipment at cabinets and exchanges and a ruling preventing Telecom using the RMA to prevent new cabinets being installed. "We’d like to be treated the same way Telecom treats its other wholesale customers - we are their largest customer so they should be actively trying to sell to us. To date that hasn’t happened," says TelstraClear spokesman Matthew Bolland.

LLU is fundamental for TelstraClear and Bolland says it remains committed to the residential market - the new residential contact centre in Kapiti is evidence of that. "We have spent $1.5 billion, have 1400 staff, and have been fighting for 10-years to get access so don’t think we’re going to sit by and not make the most of this opportunity."

Across the Tasman its parent Telstra has been forced to open up its coveted network to allcomers since 2000, and so far around 150 rivals have jumped at the chance. They mostly have their own cabinets within Telstra’s exchanges with racks of DSLAMs or have struck deals with others to provide that access.

Bolland says some of the potential nastiness between competitors is prevented by the fact that most of the contractors who install and service the equipment are neutral. There are standards in place to ensure they’re focused on keeping everything working smoothly, and no-one does anything to disrupt any other party’s service.

However Telstra remains a reluctant party to unbundling, still grumping away with the deregulation blues watching its market share and share prices eroded while it plays catch up with new network technology and dumping thousands of workers to become more competitive. It has already milked the ‘sorry we lost the keys to the exchange’ suite of delay tactics and earlier this year increased its rental on the copper lines it wholesales to the likes of Optus, Primus and iiNet by $8 per line per month to $30. It continues to debate the ‘averaged’ pricing constraints on what it can charge competitors.

Mixing and matching

Some local players who would have preferred to work with unbundling have already made alternative arrangements. CallPlus is sufficiently capitalised for the next two years of a plan to invest up to $200 million over five years in WiMax. Ideally though, its roll out of nationwide phone and internet services with IPTV as a likely third component, will involve a mix with DSL.

"It is quite appealing to go with WiMax and get out of Telecom’s face with genuine alternative speed and reliability in the local loop, totally bypassing all the negotiating and complaining and permissions," says CallPlus Director Malcolm Dick.

He definitely plans to invest in DSLAMs at the exchange level but doesn’t believe we’ll see any new blood entering the market in the short term. "No-ones going to rush in until legislation is finalised and the new rules are clearly understood - that’ll take at least a year."

Meanwhile, like everyone else, he’s waiting to see what kind of pricing is involved. "I would hope Telecom would come to us and discuss ways of doing a deal on the copper. Why wouldn’t they try and entice us to use the copper loop? At least they get some business from us this way but with WiMax they get zero."

He suggests Telecom should have a management change, mainly because is not well trained or experienced in doing win win deals. "They’ve spent 15-years playing an amusement park game where they run around waiting for the little rat to pop up and then try and hit it with the hammer. It’s must be really hard having to turn around and start feeding them instead."