A significant number of small cities and towns are already fully covered by passing fibre. In contrast, the two largest urban areas, Auckland and Wellington, lag behind with completion rates among the lowest in the country.
An early assessment of the effectiveness of the UFB deployment [4] suggests that the contractual form signed by the government with the three small LFCs (also known as the funds‐recycling scheme) is providing a higher incentive for fast deployment than the contractual arrangement with the incumbent (a combination of the investment model with technology replacement).
76.3 Open Access: Facilitating Innovation
Infrastructure and connectivity are not the only goals devised by the government‐supported broadband initiatives in New Zealand. LFCs are de‐facto monopolies but their networks must be open to any RSP willing to provide end‐user services in their coverage areas. The policy upon which such operational scheme rests is called open‐access. In the context of a government‐funded, high‐speed broadband network deployment this section explains open‐access and discusses it economic implications.
As of mid‐2016, the total number of RSP in New Zealand had almost reached 100 across the country with a customer being able to choose among 10 to 25 different RSPs, depending on her geographical location. This is in stark contrast to the pre‐UFB time when an average consumer would not have more than 4 or 5 different copper‐based internet service providers to choose from in major urban centres but even less in small towns. Thus, along with the healthy steady uptake of fibre, open‐access is providing the creation of a remarkable number of service retailers on the fibre.
In 2007 open‐access was mandated on Chorus (formerly Telecom) copper network, resulting in the introduction of choice for consumers. Such open‐access is a dual regulatory tool that includes Unbundled Bitstream Access (UBA) and Unbundled Copper Local Loop (UCLL); both allow the promotion of entry by new Internet access providers. Over the last decade benefits to consumers have accrued from the market structure that emerged from UBA and UCLL and their regulated access prices imposed on the network provider.
76.3.1 Open Access and a Infrastructure Platform
Even though there is no definitive, agreed definition for open access [4], in general terms, and in the context of modern telecommunications access network, open access is a wholesale agreement by which access is granted – enforced or voluntary – to operators seeking and needing to use broadband facilities, which commonly belong to a dominant carrier. The main rationale for regulators to apply open access is that usually access facilities cannot be economically replicated. Open‐access is a mode of facilitating non‐facilities based competition. It can be provided on a profit or non‐for‐profit basis. When the facilities are owned by a private agent, voluntarily providing open‐access is quite rare.
Open access is usually associated with fixed‐access networks which provide broadband services. It is used to designate mandated wholesale access to different layers, and even on different technologies. Using the hierarchical layer model of a modern telecommunications network – inspired by the OSI layer model, OECD (2013) distinguishes open access on the three lower layers as follows:
On the physical layer open access means being able to use conduits and facilities that allow the access seeker to install own equipment. It also means local loop unbundling, on DSL lines, and dark fibre leasing, on fibre optics networks. On the network layer it means access to bistream, using the packet‐based delivery of digital information.
What the tiered description of open access above implies is a variety of technical implementations and a relatively wide scope for differentiated services. Fig. 76.1 is a schematic representation of the open‐access concept when applied to a FTTH network, such as New Zealand’s UFB. In the model depicted in the figure LFCs are both Physical Infrastructure and Network providers, whereas RSPs are the Service providers.
Fig. 76.1Functional layered structure of a fibre‐based network
Currently any RSP seeking to provide end‐user services purchases wholesale services from the LFC; the service is based on bitstream open access, over which a number of end‐user services can be implemented. They all depend on variations on upload/download data rate combination. Residential users can get up to 100 Mbps download. Negotiated contracts between CFH and each LFC include provisions for access to lower layers after 2020, which will include unbundling of fibre access. The ongoing discussion in New Zealand is explained in Sect. 76.4.
76.3.2 Open Access and a Two‐Sided Market
The combination of technological characteristics of the network and policy and regulatory conditions render the UFB an open‐access network. The service delivery model and the market conditions that follow turn the UFB into a platform. In economics the term “two‐sided” platform has been used to designate markets whereby two sides exchange services and/or goods, with the platform facilitating the matching. As explained in [5] the UFB network can be regarded as a platform that facilitates the interaction in two markets: the access market and the content market. Access is provided by the platform to end‐users and RSPs; in turn, RSPs themselves can turn into platforms for delivery of contents. The latter is the one market structure likely to grow and transform the digital marketplaces.
The two markets economic characteristics are explained as follows (see [5] for further details): Access market: the access market operates on the access platform where end‐users pay no fees to join and RSPs must pay regulated wholesale charges according to the demand they face.
Content market: the content market is a multi‐platform competitive market whereby RSPs compete to attract content providers and other service providers, on one side, in order to attract consumers on the other.
The most important characteristic that a two‐sided platform model reveals is the existence of cross‐networks effects. A conventional FTTH investment approach by an incumbent not only would have been lengthy but it also would have been amounted to connection charges on consumers, a typical instance of a one‐sided, telecommunication access market. Instead UFB’s platform model, with expectations created around the possibility that end‐users can now meet a substantially attractive number of RSPs, adopted a price model, limited to the first nine years after the deployment started, at zero connection fee. Thus, the welfare‐promoting role of such CFH’s decision, alongside an unexpected raise in the price of wholesale copper services by the Commerce Commission, have resulted – so far – in a healthy uptake of the fibre.
On the content market, a RSP is a multi‐product firm that serves end‐users (residential and business), allowing them access to contents and other services. Some RSPs may simply enable Internet access for end‐users; some may start their own content offers; yet some may regard their position as a platform mediating two sides: content providers and end‐users. Such RSPs will try to exploit cross‐networks effects that emerge as content providers meet end‐users, mediating the conditions and ability to monetize the mutual attractiveness between the two sides. If enough RSPs contend for customers on the basis of operating as platforms, engaging in inter‐platform competition may translate into higher consumer benefits than those that other, single‐sided operator RSPs can offer. In this environment product differentiation and economies of scale will also play an important role in any RSP’s build‐up of market share.
76.3.3 Digital Platforms
A broadband platform endowed with an open‐access policy may encourage the creation of digital platforms. Digital platforms are changing business models in many markets; they are basically two‐sided markets that seek to leverage the availability of information to provide products and services in a way that maximises the efficiency of matching the two sides.
Ingenious ideas brought to fruition have developed as digital platforms that
bring together consumers and producers, two sides that find mutual attraction. Many examples of digital platforms exist which have been created to operate on the Internet. They do not depend on a particular access technology to thrive as abundant cases demonstrate it. However, innovative ideas that exploit the strengths of a broadband platform such as the UFB, namely, ultra‐high speed, reliability and open‐access, will be better positioned to use the digital platform model to succeed. For certain RSPs, platforms or not, if their business case entail product visualization, simulated user experience, high‐resolution graphics, or virtual reality the technical characteristics provided by the technological platform most definitely provide them with the necessary inputs; such businesses cannot thrive on DSL connections.
Compared with their single‐sided counterparts, platforms have shown to shorten the time to reach critical mass and, the most successful, produce very attractive returns on investment. Positive cross‐network effects fuel the platform’s growth as both sides find the presence of more agents on the other side ever more attractive, therefore creating a positive reinforcement cycle. Such platforms have reversed the ‘old economy’ pathway to growth and higher returns from supply economies of scale – and monopoly protection in some cases, to an environment where demand economies of scale prevail [6]. A seller in a market where supply economies of scale prevail needs to focus on exploiting its declining average production cost in order to use price as a strategic factor. In contrast, platforms whereby demand economies of scale may abound use technological improvements on the demand side to their advantage. For instance, in addition to efficiencies in social networks and demand aggregation [6] point at app development as technological improvement that impacts the demand side.
In the new digital landscape one of the most exciting prospects appears to be what [6] state about strategy and innovation. To a platform, strategy is no longer about controlling internal resources but managing external elements and finding adequate conditions for community creation and engagement. Then innovation can happen because of the presence of community participants throughout the platform.
76.4 Policy Issues in the Transition from Copper to Fibre
New Zealand’s UFB network is already providing high‐speed connections to consumers. Its customer base is growing and so are the new players, RSPs, which have arrived to the market. Their business propositions will compete in the market and, as argued above, some will turn the technical conditions and regulatory factors to efficient use as digital platforms.
Providing business stability and reducing uncertainty to fibre investors is crucial if New Zealanders are expected to benefit from their access to the UFB network and the markets that, operating on the broadband platform, will deliver products and services. In their first stage, UFB wholesale service prices (fixed until 2020) are regulated following a negotiation between CFH and its partners. The tariff structure includes several end‐user upload/download services at different combinations of data rates with price slightly increasing or slightly decreasing until 2020 depending on the service. Fixing the prices clearly ameliorates risk to RSPs as they know the cost they face on the inputs needed for standard and premium, home or business fibre connections for the remainder of the decade.
In late 2015 the New Zealand’s Ministry of Business, Innovation and Employment (MBIE) launched a review of the 2001 Telecommunications Act – the Review [7] – with a consultation process that has inquired about the best regulatory approach to the provision of access services on the existing copper network and the growing fibre‐based broadband deployment. The review reiterates the need for strong competition in all markets and/or regulation that supports it. In invoking the need for a regulatory regime the review acknowledges that its operation has created a visible degree of uncertainty and warns about the risk posed by regulation that only pertains and is applied to a particular industry. In accordance with current developments around the UFB network the Review insists that consumers should be able to get high‐quality fixed and mobile broadband connectivity at competitive prices; operators and other players should be able to innovate and compete; and the network should be “reliable, secure and resilient” [7].
As is usually discussed in many regulatory reforms across the world minimisation of regulatory uncertainty becomes also a factor to an efficient, innovation‐friendly regulatory framework. In New Zealand, for a number of years the current transition will occupy the attention of the Commerce Commission. In the meantime, as long as consumers still use the copper network and Chorus still operates the public switched telephone network convergence and the need for consistent regulation will be the key issues to be addressed to minimise the uncertainty.
Previous sections argued that UFB as a broadband platform is first and foremost a disruption of the telecommunications infrastructure. As the UFB consolidates a broadband ecosystem whereby competition in the provision of services is expected to flourish, major changes will start to occur to the telecommunications markets. However, the current regulatory framework is not capable to promote the goals sought by the broadband policy, neither is it a good fit to the challenges posed by the new techno‐economic structure of the renewed telecommunications infrastructure and the fibre‐based broadband services to be provided. In what follows two major issues of concern to future regulatory approach affecting the broadband ecosystem are discussed: consistent regulation and the potential unbundling of fibre.
76.4.1 Economic Efficiency and Consistent Regulation
The Review prescribes that the access price regime needs to be based on “a holistic view of the interdependencies between UFB and copper networks” [7]. Pricing of access services refers not only to access to the copper network‐based services but to the wider range of access modes enabled by the UFB network. In New Zealand the construction and operation of the UFB network sets the field for an important regulatory distinction that will remain for the foreseeable future. Any upgrade or change to current regulations will need to deal with the growing presence of fibre‐based access services while still having to deal with copper access services.
The Review needs to seriously address the interplay between economic efficiency and regulation to ensure the welfare of consumers and producers. However, from a regulatory perspective and even with high competition, regulation not always promotes competition to protect long‐term interests of end‐users. A recent decision by the Commerce Commission on the price of access exemplifies the latter point.
In 2015 the Commerce Commission released its final decision setting the wholesale prices the copper incumbent, Chorus, would be able to charge to retailers for using its local copper lines, including the wholesale broadband services UCLL and UBA. The decision was the outcome of a lengthy and thorough review process that involved a dispute between Chorus and the Commission resulting in hurdles on the ability of copper to compete in the home broadband market. The key issue faced by the Commission in setting the prices of the UCLL and the UBA services was to provide right incentives to the industry, that is, network providers and RSPs, to accelerate the migration to UFB.
The new copper prices, used as the reference pricing point for selling UBA and ULLA to retailers, may be incidentally aligning with the desire that the fibre is promptly adopted as the preferred mode for consumers to access broadband services. Nevertheless the way the UFB deployment is being carried out does not require customers of the copper network to switch anytime soon, neither does it provide a financial fund to purchase copper lines and convert them to fibre. This situation reaffirms the need for consistent regulation, able to incentivise players to follow preferred policy goals.
76.4.2 Unbundling in the Fibre Era
One contentious point for the future of the UFB refers to the mandate that post 2019 LFCs will be required to unbundle the
ir network by providing “dark fibre” services, which – already possible on a point‐to‐point connection basis – will need to be provided on a point‐to‐multipoint way. As shown in Fig. 76.1 access provided on a bitstream mode enables RSPs to reach end users; the diversity and scope of such services are superior to what copper can offer. The latter questions the need to provide unbundling at a lower layer, the physical infrastructure. The Government supports its determination to have dark fibre on the opportunities that would open to RSPs to introduce innovative services; however, it is not yet clear how the interplay between the robustness that the network infrastructure offers and the rising importance of wavelength unbundling will unfold. Those developments will determine the need for fibre unbundling at the physical layer.
LFCs may be particularly doubtful of the incentives to innovation that unbundling at the physical layer may bring to the market because in the new broadband ecosystem structure, innovation and service differentiation are expected to mainly be driven by competition. Thus, an interesting tension between unbundling and competition seems to be emerging. While the copper‐based environment unbundling led to competition, in the fibre environment competition has been introduced by decisions made about the network architecture and functionality. LFCs consider that their physical infrastructure/network layer monopolistic presence is threatened by any proposal that seek to further open the network on such layers. Any regulatory insight into this situation will have to address questions about the social gains in efficiency of physical layer unbundling.
Digital Marketplaces Unleashed Page 117