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International bandwidth for New Zealand: the future without an alternative fibre link

We started Pacific Fibre because we know how important it is to connect New Zealanders to global markets. The high cost of broadband in New Zealand makes it hard to connect globally and it is this market failure, not a technical failure, that we tried hard to solve.
Rod Drury, co-founder of Pacific Fibre

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Back in early 2010, industry and consumers welcomed the announcement of a new project that would end the monopoly of Southern Cross Cable, bringing better and cheaper Internet for all New Zealanders. A number of successful entrepreneurs, including Sam Morgan, Rod Drury, and Sir Stephen Tindall among others, had embarked on an ambitious project (“Pacific Fibre”) aiming to build a new generation trans-Pacific subsea fibre optic cable linking Australia, New Zealand and the US. This venture proposed to address the future traffic demand by removing the international capacity bottleneck, and finally bringing substantial benefits for consumers, through reductions in retail prices and more generous data caps.

Two years after that announcement, Pacific Fibre decided to cancel the project and cease operations after failing to raise enough capital to fund it. Although the project had been backed by a number of high profile investors and had signed up a number of foundation customers – including Vodafone New Zealand, REANNZ and the Australian ISP iiNet – it seems that the prospect of a second international cable was not sufficiently attractive for other investors, or to the New Zealand government.

How would Pacific Fibre have benefited New Zealand?

When Pacific Fibre was first announced, most of New Zealand’s international connectivity was provided through Southern Cross Cable – this situation remains unchanged. Having this scenario in mind Pacific Fibre would have introduced more effective competition into the international capacity market, as well as an increase in the available international capacity and additional resilience.

International capacity increase

The initial proposal of Pacific Fibre was to deliver five times the 2010 capacity of Southern Cross Cable’s 1.2Tbps. For a market such as New Zealand where more than 80% of the content is imported from overseas, an increase of this magnitude would definitely have a significant impact.

However, would there be any benefit or necessity of such an increase if Southern Cross Cable’s transit capacity was sufficient to meet the demand in the immediate future? When the Communications and IT minister Amy Adams was asked about the collapse of Pacific Fibre, she said that New Zealand still has “sufficient transit capacity to handle increased network demand from UFB.”

According to the most recent Cisco Visual Networking Index published in May 2012 (Cisco VNI Global IP Traffic Forecast, 2011 - 2016) New Zealand’s IP traffic will increase four-fold from 2011 to 2016, a compound annual growth rate of 33% (Exhibit 1).

Exhibit 1: New Zealand IP traffic growth [Source: Cisco]
New Zealand IP traffic growth [Source: Cisco]

Over the past three years Southern Cross Cable’s capacity has increased, and an expansion scheduled for completion by June 2013 will bring its capacity to 2.6Tbps (an increase of almost 117% from 2011’s 1.2Tbps). Southern Cross Cable’s system currently has the potential to increase its capacity to at least 7Tbps, which will represent about a five-fold increase from 2011. Considering this scalability, it seems that capacity won’t be an issue in the mid-term if New Zealand’s traffic demand grows as indicated by Cisco’s forecast. Furthermore, strategies by ISPs to increase local caching and Content Delivery Network (CDN) local traffic will release even more capacity on the international link.

Resilience and cable diversity

Naturally, the introduction of an alternative international link will provide further resilience. In this regard, companies and operators prefer to deal with two separate organisations. However, due to the fact that Southern Cross Cable network provides fully protected capacity through its self-healing ring architecture, an additional trans-Tasman cable would be enough to provide the necessary additional resilience, and of course would cost significantly less than a second cable across the Pacific.

From this perspective the most valuable contribution by Pacific Fibre would have been the introduction of more cable diversity. A stable business and political environment, low cost and clean energy, and a mild climate makes New Zealand an attractive location for international hosting and CDN operators, or the development of large global data centres. However, the lack of cable diversity is still seen as a barrier for those types of investment plans in the country.

New player in the market

A new entrant in a monopolised market will definitely foster competition, create innovation and provide lower prices for users. International experience shows that new submarine cable builds drive down prices and New Zealand would not be an exception. The cost of international connectivity in New Zealand has fallen dramatically over the last few years. This is in part due to the availability of new technologies which allow capacity increases reusing the existing fibre structure, and also due to increasing market competition in Australia. As Southern Cross Cable uses the same price structure in both New Zealand and Australia, New Zealand has always benefited from the more competitive Australian market conditions.

On average Southern Cross prices have decreased by around 22% annually since 2001 (Exhibit 2). Some of the most recent reductions on Southern Cross Cable prices have been attributed by some commentators to the potential entry of Pacific Fibre, and also to a joint venture between Axin and Huawei Marine to build a submarine cable between Auckland and Sydney.

Exhibit 2: Southern Cross Cable capacity and price [Source: Southern Cross Cable]
Southern Cross Cable capacity and price [Source: Southern Cross Cable] Note: Prices from 2011 onwards were estimated according to the information published by Southern Cross Cable.
 

Clearly Pacific Fibre would have brought an improvement to New Zealand’s international transit market, bringing more capacity and redundancy, but its most valuable contribution would have been in diversifying the current market structure. As Pacific Fibre co-founder and director Rod Drury said:

“We started Pacific Fibre because we know how important it is to connect New Zealanders to global markets. The high cost of broadband in New Zealand makes it hard to connect globally and it is this market failure, not a technical failure, that we tried hard to solve.”

Would Pacific Fibre have reduced New Zealand’s high broadband prices?

High prices for international capacity have always been cited as one of the reasons for the high retail prices and low data caps in New Zealand. While the increased competition through the entry of Pacific Fibre may have driven down international transit prices, the question remains whether those reductions would have been reflected in retail prices.

As noted above, international transit prices have been falling significantly in recent years. However, there is little evidence that these benefits flow through to the end users. Despite the fact that Southern Cross Cable uses the same pricing structure in Australia and New Zealand, New Zealanders still pay more for fixed broadband. According to the most recent figures published by the OECD in July 2012 (OECD Broadband Portal), except for the 6GB/month basket where Australians pay 1.2% more than New Zealanders, fixed broadband prices in New Zealand are between 28% to 60% higher than in Australia. Furthermore, in regards to the range of broadband prices per Mbps New Zealand is ranked 14 positions below Australia. This clearly demonstrates that there are other factors that contribute to the high broadband prices in New Zealand.

The gap in prices between the two countries represents the combination of several factors. The most significant is that Australia is a much bigger market and it also has much more competition at all levels of the market, not just the international transit segment.

While there is only one international cable in New Zealand, there are fewer wholesalers reselling international data capacity to retail service providers (Exhibit 3).

Exhibit 3: Structure of the New Zealand’s wholesale market for international data capacity [Source: Commerce Commission of New Zealand]
Structure of New Zealand's wholesale market for international data capacity [Source: Commerce Commission]

As was highlighted in a report published by the Commerce Commission of New Zealand (High speed broadband services demand side study – June 2012), there is some evidence of flow-on effects to down-stream markets such as reduced retail prices and higher data caps, as a result of New Zealand’s wholesale market becoming more competitive in recent years.

The availability of more international capacity can be translated into a benefit for the end user only where there is effective competition for the provision of access to those resources. Pacific Fibre would have solved one of the market’s failures, however more changes are needed to have a market structure capable of delivering Internet connectivity at cheaper prices and with bigger data caps.

What of the future?

As long as Southern Cross Cable remains reliable, making a feasible business case for an alternative trans-Pacific cable will be quite difficult. With the latest extension of its useful life to 2025 and the recent price reductions, it seems that the need for an additional link has been put on hold.

Nevertheless, the idea of building an alternative link still seems to be of interest to several industry players. Immediately after Pacific Fibre’s cancellation announcement, Hawaiki Cable publicly emerged as the new project promising to build a trans-Pacific optic cable. This venture proposes to link Auckland, Sydney and Hawaii, connecting many of the nations in the South Pacific along the way, including Fiji, New Caledonia, Western and American Samoa. More recently, Kim Dotcom made public his intention to bring back Pacific Fibre. However, the joint venture between Axin and Huawei Marine that aims to build a trans-Tasman link seems to be the most likely to materialise.

Without an alternative international link, New Zealand may miss opportunities to be seen as a potential global content hub. The incentive for new entrepreneurs and start-ups will may be low if connectivity to the rest of the world is still an issue over time.

Certainly the realisation of Pacific Fibre would have meant a major breakthrough for the broadband market in New Zealand. The creation of a healthier wholesale market structure would have brought direct benefits to the end user and, equally important, would have put New Zealand in a better position to attract further investment in infrastructure for content location. At the moment it seems that the conditions for an investment of this magnitude are not assured. Due to its small market size, New Zealand alone is not able to justify a project like this. Unless the Government or any other investor steps in, we will have to wait until Southern Cross Cable reaches the end of its effective lifetime to see a new trans-Pacific cable.

February 2013


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