Getting the Most from High Speed Broadband in New ... - Castalia

Getting the Most from High
Speed Broadband in New
Zealand: Investing in
Productivity Growth
Report to
Telecom, TelstraClear, & Vodafone
FINAL
December
2008
Copyright Castalia Limited. All rights reserved. Castalia is not liable for any loss caused by reliance on this
document. Castalia is a part of the worldwide Castalia Advisory Group.

Glossary
Below we discuss some key concepts and distinctions used in this report. This is followed
by a glossary explaining technical terms and acronyms we have used.
Key Distinctions Used in this Report
In thinking about the costs and benefits of different broadband development scenarios,
we need to clearly distinguish between several key concepts:
• Incremental and absolute costs and benefits
This report examines the incremental benefits from publicly funding high
speed broadband over and above what the private sector is likely to provide.
We focus on the incremental costs and benefits to New Zealanders from
government intervention (what economists refer to as marginal costs and
benefits).
It is important to distinguish this concept of incremental costs and benefits
from absolute costs and benefits. We do not question that high speed
broadband will ultimately deliver significant benefits to New Zealand.
However, absent any major structural barriers to investment, investment by
private firms is likely to deliver many of these benefits without the need for
government intervention. Thus to determine whether government action is
warranted we need to focus on the incremental benefits government action
can deliver, over and above what the market will deliver anyway, and the
incremental costs.
• Coverage and take-up
In this report we use the term coverage to mean the number of customers a
broadband network passes—that is, the number of customers who could
connect to the network should they choose to do so.
We use the term take-up to refer to the number of customers who actually
chose to connect to and use a broadband service. This distinction is critical as
the benefits delivered by any new investment in high speed broadband will
depend primarily on the number of customers who choose to connect and use
the new service. We would expect this number to be smaller than the number
of customers covered by the new service.
• Application and use
In thinking about the incremental benefits of high speed broadband, we need
to clearly distinguish between the applications broadband services enable
customers to access, and the uses customers have for those applications. In
this report, the term applications refers to software packages or data formats
which enable customers to transmit or receive certain types of information
over broadband networks.
Examples of applications include email, voice over IP, videoconferencing,
web browsing, video streaming, and digital television services (such as
standard definition TV, and high definition TV). In contrast, uses of
applications include “eEducation”, “eHealth”, and so on. In principle,
eEducation might utilise a variety of applications, from web-browsing to
access online learning materials, video streaming to view recorded lectures on
a given topic, to video conferencing enabling real time interaction with remote

Glossary 1
Term
teachers. Depending on the particular application(s) a given “eEducation”
programme is based on, the user may require different levels of customer
experience from their broadband connection, which in turn may imply
different underlying access technologies (see below).
• Customer experience and access technologies
A number of technologies can provide access to broadband services, with
differing technical characteristics. These access technologies include ADSL,
ADSL2+, VDSL, Hybrid Fibre Coax (HFC), fibre, 3G mobile technologies,
and wireless technologies such as WiFi and WiMax.
From the customer’s point of view, however, what is important is generally
not the technical specifications of the particular access technology they use,
but the impact that it has on the customer’s experience in accessing the
applications they wish to use. For example, does the customer experience
delays in sending an email, or downloading content from the Internet? A delay
of 500 mili-seconds will not be noticed in an email transaction, but would be
detrimental for a voice call or gaming experience. Is the customer able to use
demand hungry applications such as video streaming, or video conferencing?
Is the quality of Internet based voice or video communications acceptable?
Does the customer experience interruptions to their service, that disrupt their
use of applications? The impact of high speed broadband on the customer
experience in terms of speed, reliability, and the range of applications the
customer can use will determine the level of benefit from investment in new
infrastructure.
Definition
ADSL
ADSL2+
Broadband
Asymmetric Digital Subscriber Line is a form of DSL, a data
communications technology that enables broadband service over
copper telephone lines. It does this by utilizing frequencies that are
not used by a voice telephone call. Because phone lines vary in
quality and were not originally engineered with DSL in mind, it can
generally only be used over short distances, typically less than 4km .
Depending on the particular standard used, ADSL can provide down
load speeds of between 8 Mbps and 12 Mbps, and upload speeds of
up to 1.8 Mbps.
ADSL2+ is a newer, faster, standard of ADSL. ADSL2+ can provide
download speeds of up to 24 Mbps, and upload speeds of up to 1
Mbps.
The term broadband can have different meanings in different
contexts. For the purposes of this report, we accept the OECD
definition of broadband, which includes Internet access services that
provide download speeds greater than 256 kbps to end users.
In New Zealand a range of access technologies provide services that
meet this definition, including DSL technologies, HFC and optical
fibre, and a range of wireless services.
1
Some of the definitions in this glossary draw on material from www.wikipedia.org.

DSL
FTTH or FTTP
HDTV
HFC
High speed broadband
Internet Protocol (IP)
IPTV
SDTV
VDSL
Digital Subscriber Line is a set of data transmission protocols that
enable delivery of broadband services over existing copper telephone
lines.
Fibre to the home, or fibre to the premises. This refers to optical
fibre networks laid to the boundary of the customer’s premises. Fibre
can deliver broadband services with very high speeds (both upstream
and downstream). The distinction between fibre to the home and
fibre to the premises is that the latter explicitly includes business as
well as residential customers (although we use the two terms
synonymously in this report).
High definition television is a digital television broadcasting system,
which provides much higher resolution (and so better picture quality)
than traditional television systems.
Hybrid Fibre Coax, the technology TelstraClear uses to deliver
broadband services in Kapiti, Wellington, and Christchurch.
In this report, we use the term high speed broadband to encompass a
range of emerging access technologies that deliver download speeds
of 10Mbps or greater. This includes VDSL, optical fibre, HFC using
DOCSIS-2 standard, and fast wireless broadband. Generally, high
speed broadband requires upgrade of the final link from the
exchange to end users, to provide broadband speeds well in excess of
those offered by existing technologies
Internet protocol is a telecommunications protocol used for
communicating data across a packet switched network. A key feature
of Internet Protocol is that it breaks a data transmission (for example
a voice signal) into a series of “packets”, each of which can be
transmitted separately over the Internet, and reassembles these
packets at the transmission’s destination. This allows two-way
communication without the need for a continuous open circuit, and
so provides for much more efficient use of existing networks.
IPTV (Internet Protocol Television) is a system where a digital
television service is delivered using Internet Protocol, usually over a
broadband connection, instead of through traditional television
broadcast formats.
Standard Definition television (SDTV) is one of two of the new
formats for television broadcasts (the other being high definition
television, or HDTV). SDTV is a digital format that provides a high
quality picture, very similar to that of a DVD. SDTV is a lower
resolution picture than HDTV, but provides better image quality
than today's TV screens, as well as stereo sound.
The difference between SDTV and HDTV is that the signal on SDTV
is more compressed than that of HDTV. As the digital signal is
compressed, broadcasters can transmit five SDTV programs, whereas
HDTV can only broadcast one. The picture definition of SDTV is
also slightly lower than on HDTV.
VDSL (Very High Bitrate DSL) is a DSL technology providing faster
data transmission over a single copper telephone line. VDSL is
capable of supporting high bandwidth applications such as HDTV,

as well as telephone services (Voice over IP) and general Internet
access, over a single connection. In New Zealand VDSL/VDSL2+
could provide a maximum download speed of as much as 50 Mbps.
VoIP
Voice over Internet Protocol is a protocol for transmitting voice
signals over the Internet. In effect this allows users to make
telephone calls, from their computer or phone, at much lower cost
than traditional telephone services. (The quality of the call may also
be lower than traditional circuit-switched phone calls.) Skype is one
example of a VoIP service.

Table of Contents
1 Introduction 1
1.1 Focus of this Report 1
1.2 Outline of this Report 2
2 Broadband is about Access to Applications 4
2.1 An Overview of the Broadband Supply Chain 4
2.2 Broadband Access Technologies 7
2.2.1 The growing role of wireless in providing high speed
broadband 9
2.2.2 The impact of distance on DSL speeds 10
2.2.3 The role of fibre in improving broadband service
quality 10
2.3 Access to Applications 11
2.3.1 Residential users 12
2.3.2 Business users 13
2.3.3 Sector specific uses: eEducation and eHealth 13
2.3.4 Applications and broadband speed requirements 14
2.3.5 Applications: The future 17
2.4 Conclusion 18
3 Private Benefits of Broadband: Willingness to Pay 19
3.1 International Comparison of New Zealand Broadband Take
Up 20
3.1.1 Impact of the Telecommunications Service
Obligation 21
3.2 Trends in Internet Access in New Zealand 22
3.2.1 Residential broadband usage 23
3.2.2 Business broadband usage 23
3.3 Revealed Demand for Applications—Take Up of Broadband
Packages 23
3.3.1 Demand for access speeds 24
3.3.2 Demand for data 25
3.3.3 Demand for applications 27
3.4 Regional Differences 30
3.5 Conclusions on Willingness to Pay 32
4 The Counterfactual: What the Market will Provide 35
4.1 Investment Plans of Service Providers 35

4.2 Projected Demand for Internet Based Applications 38
4.3 What Users are Likely to Get under the Counterfactual 38
5 Incremental Benefits and Costs of Subsidising Broadband 40
5.1 Proposed Broadband Policy: Wide Scale Roll-out of Fibre to
the Premises 40
5.2 Comparing Access to Applications under the Government’s
Proposed Policy to the Counterfactual 41
5.3 Review of Benefits from the New Zealand Institute Analysis 41
5.3.1 Conclusion on incremental benefits 45
5.4 Incremental Costs of Policy Factual 46
5.4.1 Costs for users and companies 46
5.4.2 Wider economic costs 46
5.4.3 Incremental costs of the Policy Factual 47
5.5 Comparison of Costs and Benefits 50
5.6 Policy Conclusions 54
6 Structuring Public Investment in Broadband 56
6.1 Subsidies and Matching Policy Objectives 56
6.1.1 Understanding what should be subsidised 58
6.1.2 Fibre in New Zealand 60
6.2 Public Investment Options 61
6.3 Unit Subsidy 64
6.3.1 The role of transitional subsidies 65
6.4 Conclusions and Next Steps 65
Appendices
Appendix A : International Trends in Fast Broadband Deployment 67
Appendix B : Understanding the Benefits and Costs from Public
Investment in High Speed Broadband 71
Tables
Table 2.1: Broadband Access Technology Speeds 9
Table 3.1: Percentage of Businesses with Broadband Connections, by
Size (2006) 23
Table 3.2: Use of Applications and Implications for Access
Requirements 28
Table 5.1: Public Investment in High Speed Broadband 40

Table 5.2: Estimated Annual Incremental Benefits from FTTH by
Type of Use 42
Table 5.3: Components of Cost of Delivering FTTH 48
Table 5.4: Cost of Upgrading Internal House Wiring and Equipment 49
Table 5.5: Costs and Benefits of Broadband Scenarios—Summary 51
Table 6.1: What do Policy Makers in New Zealand Perceive as the
Problem? 57
Table 6.2: Comparison of Subsidy Options 63
Table 6.3: Practical Examples of Subsidy Options 63
Figures
Figure 2.1: Overview of the Broadband Supply Chain 5
Figure 2.2: Impact of Distance on Service (DSL Access Technologies) 10
Figure 2.3: Delivery Architecture for Major Broadband Alternatives 11
Figure 2.4: Applications and Download Speed Requirements—
Residential 15
Figure 2.5: Applications and Download Speed Requirements—
Business 16
Figure 3.1: Broadband Subscribers per 100 Inhabitants (June 2008) 20
Figure 3.2: Broadband Subscribers per 100 Inhabitants by GDP, June
2008 21
Figure 3.3: Internet Subscriptions by Connection Type (March 2006–
March 2008) 22
Figure 3.4: Broadband Subscribers by Size of Data Cap 26
Figure 3.5: Broadband Take Up by Region, 2006 30
Figure 3.6: Variation in Take Up between Urban and Rural 31
Figure 3.7: Reasons Given for No Broadband 32
Figure 3.8: Willingness to Pay for Fibre to the Home 33
Figure 4.1: Chorus Fibre to the Cabinet Solution 35
Figure 4.2: Development of the Counterfactual on the Supply Chain 39
Figure 5.1: Depiction of an FTTH Network 47
Figure 2: Topping Up 57
Figure 6.3: Public Investment Options 62
Figure 6.4: Transitional Subsidy 65

Boxes
Box 3.1: Take up of High Speed Broadband in Other Countries 26
Box 4.1: Telecom’s Broadband Download Service Targets Following
Cabinetisation 36

Executive Summary
The Government has focused its policy agenda on delivering a stronger economy and
higher wages for New Zealanders. Better broadband for New Zealand is a core
component of this agenda.
The Government’s objective is to enable at least 75 percent of the population to access
high speed broadband—enabling New Zealand to join other leading economies in the
top half of the OECD.
This report is about supporting the Government in achieving this aim.
For a small economy New Zealand has a vibrant information technology industry, and
considerable private investment is under way to improve the existing broadband
infrastructure. Our analysis shows that already committed investment programs by the
major infrastructure providers will deliver high speed broadband services, capable of
download speeds ranging between 10 Mbps and 20 Mbps, to at least 80 percent of New
Zealanders within the next few years. Considerable further work is needed to identify the
true costs of extending these planned investments, to deliver a complete fibre network to
the majority of New Zealanders.
For New Zealand consumers to gain substantial benefits from fibre to the home, they
must be willing to pay access prices that reflect the cost of rolling out fibre to the home,
and in many cases will have to invest in upgrades to their home wiring and equipment.
Available data shows that most broadband users are not currently willing to pay even for
the faster broadband packages that are available now. There is considerable uncertainty
about how much demand for high speed broadband there will be in the future, and when
this will emerge. This uncertainty is behind the current, low, level of investment in fibre
to the home.
The Government’s initiative to subsidise, or stimulate, the drive for fibre to the home is
in itself a clear signal that such a roll-out will not occur on a purely commercial basis for
some time to come. The Government is therefore considering a range of interventions to
promote greater use of fast broadband.
This report provides a framework for examining various intervention options that will
deliver the best outcomes for New Zealanders. The framework is based on:
• Developing a thorough understanding of the “supply chain” from the
suppliers of broadband applications to users, and of the costs and constraints
that impact on our utilisation of existing and emerging Internet applications. If
New Zealand is to realise the desired benefits from high speed broadband, we
must take an end-to-end view of the supply of broadband services, and not
focus solely on the “last mile” infrastructure. There is little to be gained from
investing in a world class local access service, if constraints elsewhere in the
supply chain prevent end users from seeing the benefits of that investment
• Developing a clear view on the existing and emerging Internet applications,
and the broadband technologies which are able to support those applications.
We emphasise that broadband is only valuable because of the applications it
allows users to access, and the quality of user experience it delivers. Hence, to
assess any policy intervention, we need to understand how that intervention
would alter the range of applications that customers use, and how these
applications are used. Our analysis shows that most existing and emerging
i

applications would not require the speed and consistency made possible by
fibre to the premises
• Developing a thorough understanding of the market counterfactual: the level
of investment in different kinds of broadband infrastructure which would take
place on the commercial basis, without any further government intervention.
A key challenge for the Government will be to ensure that policies to
encourage high speed broadband do not displace private investment in
improved services, but instead build on existing and planned investments.
Overall, we conclude that following the considerable improvements already being
undertaken the widespread roll-out of fibre to the home would deliver only a small
improvement in New Zealanders’ ability to use the existing and emerging Internet
applications over the market counterfactual. It is clear that most mass market
applications which do not require consumers to invest in very high cost specialist user
equipment also do not require the very high speeds supported by fibre to the premises.
This is consistent with the market reality of New Zealanders’ low demonstrated
willingness to pay for additional speed and reliability.
Our analysis of the speeds required by consumer applications suggests that the costs of a
policy which immediately subsidises a widespread roll-out of fibre to the home would
likely exceed its benefits. Instead, much of the economic benefit attributed to fibre to the
premises could be captured through targeted deployment of fibre to businesses, schools,
and hospitals rather than through a full deployment of FTTH to retail users.
This does not mean that there is nothing the Government can do to help New
Zealanders get the most benefit from high speed broadband, or that Government
support for fibre to the home may not be appropriate at some time in the future. Rather,
our analysis leads us to suggest a flexible approach to developing a long-term partnership
between the industry and the Government, with Government investment targeted to
those areas the market will not address. We believe this approach will achieve the desired
productivity and social outcomes in the most cost effective manner.
In particular, while the market will deliver high speed broadband access to most New
Zealanders, there are some key problems that the market will not address. These include:
• Low willingness to pay for high speed broadband, and uncertainty around
how this will evolve
• User equipment and wiring, which may significantly constrain the quality of
service users are able to experience
• The cost of international data capacity and “peering” is higher than many New
Zealanders are willing to pay. The cost of international capacity will need to
come down (or willingness to pay for high speed data transmissions increase)
for New Zealand to obtain many of the potential benefits from high speed
broadband, and
• Continuing slow service for rural users. Current private investment plans will
still leave around 20 percent of users—in rural and provincial parts of the
country—unable to access high speed broadband.
Some form of public-private partnership is required whenever a government wants the
industry to deliver services or investments which are not commercially viable, but which
the government believes to have a greater social value than indicated by consumers’
private willingness to pay. The challenge for the Government is to structure a publicprivate
partnership which builds on commercial incentives facing the private sector, on
ii

changes in technologies and demand patterns, and on New Zealanders’ evolving ability
and willingness to pay, in a way which delivers the best outcomes from the
Government’s contribution to the partnership.
The research undertaken for this paper leads us to the view that there is no single silver
bullet to ensure that high speed broadband makes the maximum contribution to New
Zealand’s productivity. The detailed design of any subsidy programme will depend on the
specific objectives the Government intends to achieve. More work is needed to clearly
formulate detailed objectives for Government intervention in the supply of broadband,
given the growing understanding of the end-to-end supply chain. For example, the
greatest initial uplift in productivity could come from building on current broadband
infrastructure improvement programs to helping low income urban residents take
advantage of the existing broadband infrastructure, before devoting public resources to
investment in additional infrastructure.
Any future partnership between the Government and the industry will need to clearly
define the services to be provided and the key standards of performance. The approach
that is adopted will have important consequences for the costs of the scheme, the
incentives faced by service providers, and the strategy for monitoring and verifying
performance. The partnership will also need to be structured in a way that minimises
governance risks, and ensures that subsidies do not become unnecessarily entrenched.
We recommend that the Government and the industry work together to address these
questions, and to lay the foundations for an effective partnership that will deliver the best
outcome for New Zealand.
iii

1 Introduction
The Government is looking to achieve a “step change” to significantly increase New
Zealand’s productivity, leading to a stronger economy and higher wages. Market
commentators widely view high speed broadband as an enabling technology with the
potential to make New Zealand more productive. It is not difficult to imagine that, if
most of us had ready access to very fast data transfers, our economy and community
could be transformed.
Previous studies have argued that widespread deployment of high speed broadband
would deliver significant economic benefits for New Zealand. For example, a recent
study by the New Zealand Institute estimated that the economic benefits from
widespread access to fast broadband would be in the range of $2.7 to $4.4 billion per
annum. These benefits derive from a combination of cost savings, productivity
improvements and access to new opportunities.
Fibre to the home is often regarded as the best available technology for delivering
reliable, fast broadband. For this reason, the economic benefits of widespread access to
fast broadband are commonly identified with the roll-out of fibre to most homes in New
Zealand.
At the same time, it is clear that users are not yet prepared to pay for the roll-out of fibre
to the home—if they were, there is little doubt that New Zealand’s information
technology sector would have responded to the profit opportunities. Where users are
prepared to pay, the private sector is delivering considerable investment in extending and
improving broadband services to New Zealanders. For example, it is worth noting that
New Zealand is close to completing the fibre to the node roll-out on a purely commercial
basis, while the Australian Government is in the early stages of procuring such a roll-out
through a massive subsidy program.
The Government has indicated its intention to promote the use of fast broadband in
New Zealand. In particular, it has proposed to subsidise investment in fibre to the home.
1.1 Focus of this Report
Castalia was jointly commissioned by Telecom, TelstraClear, and Vodafone to consider
policy options for achieving the Government’s objective of raising productivity through
greater use of fast broadband in New Zealand. The objective of this report is to
contribute to the formulation of detailed policies in this area. In particular, we were asked
to consider what can be done to achieve a genuine partnership between the Government
and the private sector.
Some form of public-private partnership is required whenever a Government wants the
industry to deliver services or investments which are not commercially viable, but which
the Government believes to have a greater social value than indicated by consumers’
private willingness to pay. However, the devil in such partnerships is in the detail. The
challenge is particularly great when the partnership involves long-lived investment, such
as fibre to the premises. In deciding how to structure the partnership and what its
contribution should be, the Government needs to consider:
• The timing of investment. The more the publicly-supported investment
runs ahead of consumer needs, the more the Government will end up paying
for the same results
• Technology risks. By supporting any particular type of investment, the
Government would inevitably be crowding out private investments in
1

competing technologies. The public-private partnership needs to be explicitly
structured to minimise this risk
• Trade-off between new investment and better utilisation of the existing
infrastructure. At present, many New Zealanders who have physical access
to fast broadband technologies either cannot afford or see little value in
utilising those technologies. This lack of take-up would not be fixed through a
roll-out of a better infrastructure.
Overall, a well-designed public-private partnership would build on, rather than distort,
the industry’s commercial responses to consumer needs, and would aim to achieve the
greatest social benefit for the least fiscal cost.
For this reason, the analysis in this report focuses on developing a clear understanding of
what the market will be delivering in the absence of any Government intervention, and
how the outcomes from possible interventions would differ from the market outcomes.
The industry in New Zealand is making significant investments in broadband
infrastructure, which will deliver large gains in service quality and create new
opportunities for users over the next few years. Added to this, improvements in
compression technologies mean that existing access networks will be able to deliver a
much wider range of applications, more quickly, than is currently the case.
To be able to analyse the incremental costs and benefits of possible Government
interventions, we:
• Develop a detailed picture of Internet applications which consumers use now,
or may use in the foreseeable future, and establish which broadband
technologies are required to support those applications
• Review the investment programs of the market participants to establish what
will be happening to the consumers’ ability to use various current and
emerging applications over the next few years. This review is based on the
committed investment programs currently under way
• Compare the consumers’ ability to use various applications under the market
counterfactual with their ability to use these applications under various policy
intervention options.
1.2 Outline of this Report
The remainder of this report is structured as follows:
• In the following section we provide an overview of the broadband
technologies that are currently available, or are likely to become available in
the foreseeable future
• Section 3 reviews available data on New Zealanders’ take up and use of
Internet access, and broadband in particular. Based on the available data we
draw conclusions on users’ willingness to pay for high speed broadband,
which in turn tells us how users value the private benefits to them from high
speed broadband
• In section 4 we describe the counterfactual. We base our counterfactual on the
extent and type of broadband services that are likely to be available to users
five years from now, drawing on known investment plans of New Zealand’s
large telecommunications service providers
2

• Section 5 describes the “factual” of government intervention. This section
focuses on the proposal to subsidise the roll-out of fibre to 75 percent of
homes in New Zealand. In this section we assess the incremental costs and
benefits of this factual compared to the counterfactual, and identify
opportunities to enhance the net gains from intervention
• In Section 6 we discuss how best to deliver a government subsidy for fast
broadband, drawing on international lessons from public-private partnerships.
We identify key questions the government would need to answer in order to
design an effective subsidy for high speed broadband.
3

2 Broadband is about Access to Applications
Ultimately, any discussion about the economic effects of broadband infrastructure
investments is about users’ ability to access applications, and the quality of their
experience in doing so. This concept underpins our analysis: consumers do not care
about how the network is configured, which technology is used, or about what else the
technology can do, as long as they can use all the applications they want at the level of
reliability they prefer.
In this section we:
• Provide an overview of the various elements involved in delivering Internet
applications to end users, of which the access network is just one component
• Review the broadband access technologies available in New Zealand now, and
the increasing role that wireless technologies will play in the future,
highlighting the download and upload speeds that are currently being achieved
in New Zealand, and
• Discuss what various access technologies mean for the Internet applications
used by households and businesses.
2.1 An Overview of the Broadband Supply Chain
Telecommunications networks are, in effect, a transport network for voice and data
services. Suppliers of a wide range of applications use these networks to deliver their
services to users. The quality of service experienced by users depends not only on the
network itself, but on the technical characteristics of the application being supplied at the
supplier’s end, and of the user’s wiring and equipment at the customer end. In addition,
the transport network itself comprises a number of components.
Figure 2.1 provides a simplified view of this “broadband supply chain”. The figure is
based on the network structure for an incumbent telecommunications provider, which
supplies broadband using a DSL access technology. Clearly the specific network
components of the supply chain will vary across different types of provider and different
network technologies, particularly in the local access network, but the main elements are
generally the same.
4

Figure 2.1: Overview of the Broadband Supply Chain
Modem
Local IP
cloud
International
gateway
International
backhaul
Local
backhaul
Core
network
Customer
equipment
Internal
wiring
Key:
Optical fibre
Street
cabinet
Local access
network
Copper
Internal wiring
“Last mile”
Problems in any single element of the chain, or in the way they interconnect to deliver
services, can compromise the quality of service customers experience in accessing and
using Internet applications. The policy debate about investment in fibre to the home has
focused on the bottlenecks created by the “last mile” part of the supply chain. In reality,
there are other constraints in the supply chain, which may have an even greater effect on
customer experience. The kinds of improvements in customer experience which would
be needed to achieve the desired increase in New Zealand’s productivity growth will
require a broader focus on constraints across the whole supply chain. The Government
and the industry will need to work together to address these constraints.
Customer end hardware
The hardware through which users access the Internet affects the quality they experience
in using Internet applications. The following elements are particularly important at the
customer end:
• Users’ equipment—computers or other equipment such as games consoles
and televisions: Most new computers should be able to keep up with the very
fast connection speeds fibre to the home would provide, although this does
depend on the type of application. 2 Computers more than two to three years
old may have a problem delivering Internet applications at these speeds. New
Zealand’s stock of computers is relatively old, and it is unlikely that
improvements in customer experience of broadband can be achieved without
a significant updating of the national computer “fleet”
2
For video applications, such as IP television or video streaming, the main constraint for computers currently on the
market is the speed of the video card. Many new computers are configured to provide a high resolution picture.
Some video cards are not fast enough to display high resolution video pictures and give a smooth viewing
experience. Users can fix this by simply changing the computer’s display settings to a lower resolution. In many
cases this will not reduce the quality of the users experience, as most video content currently available is not high
definition.
5

• Internal wiring (or wireless access), from the point of connection with the
broadband provider’s network to the user’s equipment: The internal wiring in
most New Zealand houses uses copper wires, designed for voice telephony,
which will continue to limit the speeds users experience, even with fibre to the
home. Wireless access points or modems can provide much faster speeds
within the home than copper wires, but will themselves have an upper limit. 3
Interference from other sources, as well as relative positioning within the
home, can reduce the quality of service provided by wireless networks below
their theoretical maximum.
The local access network
The speed and quality of service the local access network provides—from the local
exchange to the customer’s premises—depends on the access technology in use
(discussed in more detail in section 2.2 below).
Backhaul and the core network
Local backhaul and the core network were designed to support the pattern of use typical
of web browsing, that is a short burst of data flowing primarily in one direction, or
continued streaming of relatively narrow band applications. They were not designed to
cope with many users simultaneously accessing sustained bandwidth-hungry services,
such as video-on-demand. Backhaul is generally scalable, but any plans for deploying fast
broadband will need to account for the costs of increasing backhaul and core capacity.
International peering
New Zealand’s main connection to the rest of the world is the Southern Cross cable. The
cost of capacity on this international link is higher than many New Zealanders are willing
to pay. Alongside this, under international peering arrangements, the cost of transmitting
data depends on the balance of traffic. A country that, on balance, exports data receives a
net payment for this. Countries that are net importers of data must pay. New Zealand is a
net importer of data, which increases the cost of Internet use to New Zealanders.
Interconnection
Internet service providers must interconnect with each other so that their customers can
exchange data. For example, for a TelstraClear customer to access a web service provided
by a customer of Telecom’s Xtra service, TelstraClear and Telecom must have an
interconnection arrangement covering Internet services. The normal standard for
Internet interconnection is “best efforts”. That is, service providers undertake to use
their best efforts to deliver data quickly, but with the understanding that from time to
time bits of data may be delayed or even lost. Up until recently this standard has been
sufficient to deliver available Internet applications to an acceptable quality of service. For
applications such as email or file downloads, a delay in transmitting some “packets” of
data that make up the whole typically has no noticeable effect from the user’s point of
view.
However, this is changing. Some applications now delivered over the Internet require
low levels of latency (that is, little or no delay in transmitting pieces of data). Examples
include video-conferencing over the Internet and high quality voice-over-Internet
services. A best efforts interconnection standard cannot guarantee an acceptable quality
of service for these applications.
3
For example the Thomson TG123g modem supported by Telecom can deliver speeds of up to 54Mbps. This is
significantly faster than currently available residential broadband connections, but considerably slower than the
maximum speed fibre to the home could provide.
6

New Zealand Internet services providers are currently negotiating a new set of
interconnection standards for voice over the Internet and other low latency applications.
These new standards will include procedures for interconnected providers to control for
the quality of interconnection service, to give priority to low latency applications such as
voice over the Internet. However, New Zealand service providers will continue
experiencing latency problems with international service providers.
Intellectual property and anti-siphoning laws
Leaving the infrastructure issues aside, it is unlikely that ISPs will be able to deliver IPTV
or video-on-demand services without a change to the market structure that currently
determines access to content. Sky and other television broadcasters control premium
content in New Zealand. While Sky does wholesale content to other providers, it has a
lengthy satellite lease and has no incentives proactively to push content onto a new
platform such as broadband. Similarly, development of any new digital platform by
TVNZ (supported by the Government) would diminish incentive to make that content
available over the broadband.
The Government is currently undertaking a major review of the policy and regulation of
digital content. 4 This work will recommend detailed options on a range of topics,
including the existing arrangements for acquiring, packaging, wholesaling, retailing, and
transmitting content.
2.2 Broadband Access Technologies
There is no single definition for “broadband”. For the purposes of this report, we accept
the OECD definition of broadband, which includes Internet access services that provide
download speeds greater than 256 kbps to end users. 5 We distinguish between
broadband services and “high speed broadband”, which we define as any service
providing download speeds of 10 Mbps or more.
A range of different types of access technologies can provide broadband services,
including:
• Digital Subscriber Line (DSL)—DSL is a family of access technologies that
use existing copper infrastructure to deliver broadband services. DSL
technologies include:
– ADSL1 and ADSL2+, which Telecom and others currently use to deliver
broadband services, and
– VDSL, which Telecom and others will implement through Telecom’s
cabinetisation programme. TelstraClear recently announced that it is now
offering VDSL2 to businesses, and will have this service available in 14
centres by the end of 2008
• Wireless—in New Zealand, wireless broadband services include Vodafone’s
broadband offering, Woosh services, and various localised “WiFi” networks.
4
5
The Ministry of Culture and Heritage and Ministry of Economic Development are undertaking this work.
OECD Broadband Subscriber Criteria, accessible on the world wide web at
http://www.oecd.org/document/46/0,3343,en_2649_34225_39575598_1_1_1_1,00.html (accessed December
2008). The OECD has acknowledged that these current criteria will need to be reconsidered and possibly changed,
as new applications appear which require faster connections than the lowest-speed broadband connections can
support. (see Broadband Growth and Policies In OECD Countries, OECD 2008
7

Orcon offers a wireless broadband service targeted to rural users, with
download speeds of up to 1Mbps 6
• Mobile broadband—Telecom and Vodafone both offer mobile broadband
services, with plans to upgrade their network to provide faster speeds.
Telecom recently announced plans to roll out a new broadband mobile
network nationally by June 2009
• Hybrid Fibre Coax (HFC)—TelstraClear uses HFC networks to provide
broadband services in the Wellington region and Christchurch
• Optical fibre—-Optical fibre (“fibre”) is already widely used in New Zealand’s
telecommunications networks. Fibre makes up the core network, and in many
areas runs up to the local exchange or street cabinet (see Figure 2.1). Telecom
is currently implementing a cabinetisation programme to take fibre to the
street cabinet nationally. For businesses, Telecom, TelstraClear, Citilink, an
others supply optical fibre to the premises in some areas (in particular central
business districts)
• Satellite—BayCity Communications provides broadband satellite services to
users in New Zealand, reselling IPStar’s wholesale satellite offering. This
service is available anywhere in New Zealand, provided that the property has
“line of sight” to the IPStar satellite, in the western part of the sky.
DSL and cable broadband are the two most common types of broadband connections in
New Zealand. In Table 2.1 below we highlight the average download and upload speeds
available.
6
This service was originally developed by the state owned enterprise BCL, and was known as the “BCL Extend
Network”.
8

Table 2.1: Broadband Access Technology Speeds
Average Download
Speed
Average Upload
Speed
Typical Maximum
Download Speed in NZ
ADSL Approx. 5 Mbps 0.9 Mbps 7.6 Mbps (1)
ADSL 2+ Approx. 12 Mbps 0.9 Mbps 21 Mbps (1)
HFC
8.8 Mbps 0.8 Mbps
10 Mbps (Wellington)
25 Mbps (Christchurch)
VDSL/VDSL 2+ Approx 30 Mbps Approx. 5 Mbps 50 Mbps (2)
FTTH
(assumed) 78 Mbps 39 Mbps
2 x 1 Gbps
Fibre Optic Not available Not available 1 Gbps
Wireless (3) 1.6 Mbps 0.1 Mbps
Satellite Not available Not available 2 Mbps
Notes:
(1) This is normally a maximum speed that very few customers actually get. It is not known
exactly how many customers can get the maximum speed for ADSL and ADSL2+, Cable, and
VDSL, although we understand that it at least 10 percent should be able to. (Telecom no longer
advertises speed but other providers do.) Fibre to the home, due to its different technical
characteristics, should be able to deliver maximum speeds to all users.
(2) This is the maximum download speed VDSL will be able to provide to users, following
completion of Telecom’s cabinetisation programme (see Box 4.1 on page 36). In practice this
maximum speed will only be available to customers who live relatively close to the cabinet—
approximately 20 percent of users by 2011.
(3) This table reflects current wireless broadband speeds. As discussed below, wireless is expected
to deliver much higher speeds in the medium term.
In practice, the theoretical connection speed advertised by providers for broadband
access is not always reliably available to the customer. Providers in most cases have
allowed a greater number of subscribers than their backbone connection could handle at
one time, based on the assumption that most users will not be using their full connection
capacity very frequently. The cabinetisation programme being undertaken by Chorus has
started to ease some of these throughput issues, by increasing the extent of optical fibre
in the network down to the level of the street cabinet.
2.2.1 The growing role of wireless in providing high speed broadband
Over the last 10 years, mobile networks have made substantial progress in the cost
effective delivery of data services. This, combined with the declining cost of powerful
digital devices, has led to a rapid growth of mobile and wireless internet traffic. Ongoing
developments in mobile technologies are continuing to deliver increases in data speeds.
The speed and bandwidth that mobile networks offer today is similar to the performance
of DSL services three to four years ago. Wireless technology is expected to continue its
progress and to deliver in three to five years speeds materially higher than current access
networks. Recent announcements by Vodafone regarding developments in new
technologies such as Long Term Evolution (LTE) confirm that trend. Similarly, Telecom
has announced that it is rolling out WCDMA technology to provide coverage to 97
percent of the population by June 2009.
9

2.2.2 The impact of distance on DSL speeds
At present, the overwhelming majority of New Zealand local access lines are copper
loops from the exchange to the cabinet. The exchange is connected to the backbone
through optical fibre, and the connection from the street cabinet to the home typically
uses copper earth cable. The copper network was originally built to provide a voice
service over a public switched telephone network, well before Internet technology or
broadband were even conceived of. DSL technologies have emerged to enable
infrastructure providers supply broadband Internet access using these existing telephone
networks.
Using DSL technologies infrastructure providers can provide services with much greater
bandwidth than a normal telephone line could achieve. However, the speeds customers
can obtain from DSL services decline, the further the customer is from the exchange.
Figure 2.2 indicates the percentage of New Zealand homes that will be able to access
different speeds using DSL technologies.
Figure 2.2: Impact of Distance on Service (DSL Access Technologies)
Distance has particular implications for rural areas, as:
• Households are more dispersed than in urban areas and consumers may be
many kilometres from the exchange
• Local exchange buildings may not be located in the most densely populated
areas
• Copper pairs will be routed along streets and the loop length may be more
than double the straight line distance between the exchange and the customer.
2.2.3 The role of fibre in improving broadband service quality
In contrast to copper, fibre can provide high quality broadband services over very long
distances. Thus, by deploying fibre within their networks, infrastructure providers can
deliver high quality broadband services over a wider area. Fibre deployments essentially
amount to replacing existing copper with fibre in different parts of the
10

telecommunications network. Usually this will also involve changes to the network
topology, for example the number and placement of exchanges and street cabinets.
Most infrastructure providers use fibre to at least some extent, regardless of the
technology used in the local access network to provide broadband services to end users.
TelstraClear, Telecom, and Vodafone already have substantial optical fibre deployments
in their networks. For example, Telecom has around 20,000 kilometres of optical fibre in
its network. Of this, 8,000 kilometres is in the local access network, with the balance in
backhaul from exchanges, and in the core network. Chorus’s cabinetisation programme
currently underway will boost the reach of high speed DSL networks by bringing fibre to
the street cabinet.
Figure 2.3 illustrates how different fibre strategies can be characterised by how close the
fibre is brought to the customer.
Figure 2.3: Delivery Architecture for Major Broadband Alternatives
ADSL 2+
Optical Fibre
Exchange Copper
SC
Copper
12 Mbps
12 Mbps
VDSL
Optical Fibre
Exchange Optical Fibre
SC
Copper
30 Mbps
30 Mbps
FTTH
Optical Fibre
Exchange Optical Fibre
CP 100
100
Mbps
Mbps
FITH
Optical Fibre
Exchange
Optical Fibre
1,000 Mbps
1,000 Mbps
Notes:
“SC” stands for “street cabinet
“CP” stands for “customer premises”
“FTTH” stands for “fibre to the home”
“FITH” stands for “fibre in the home”
2.3 Access to Applications
In thinking about the value that New Zealanders might gain from public investment
subsidising the deployment of high speed broadband, we must first recognise that
different users demand different types of applications. Not all of these applications
require high speed broadband, or the same levels of speed and reliability.
The range of applications that potentially require broadband is large, and each application
has its own unique characteristics. The technical requirements for a given service are
often imprecisely defined. In only a very few cases there is a simple minimum bandwidth
(or latency), such that the service works perfectly with this speed, and fails completely
11

without it. The actual quality of the service, as it appears to the user, could and does vary
greatly. Users adapt to inferior service where they are “forced” to do so. Where the use
of certain applications is impaired, there must be a minimum point at which users judge
the service “inoperable” for normal purposes. Defining that point will often be a matter
of personal preference.
Users of applications can be separated into two main groups: residential users and
business users. We discuss the types of applications relevant to each group below. In
section 2.3.3 we describe two categories of use that commonly arise in the broadband
debate: eEducation and eHealth. In section 3.3.3 we discuss levels of demand for
different applications.
2.3.1 Residential users
We categorise the applications households are using or are likely to be using in the future
in the following way:
• Communication: E-mail is currently the most common communications
application that New Zealanders are using. However, as “voice over Internet
protocol” applications such as Skype and Yahoo Messenger are growing, more
households are using their internet connections to make phone calls. Around
25 percent of broadband users use the Internet for more data intensive peer to
peer file transfers. Video conferencing from the home computer is also
important for a number of residential users. This is a particularly important
form of communication for New Zealand’s deaf community. Video
conferencing allows deaf people to communicate directly with each other
using sign language. The deaf community is also seeking introduction of a
video relay service, which would enable them to make telephone calls to other
parties using a video conferencing link 7
• Web surfing and file sharing: Many New Zealanders use the Internet to
browse the world wide web. This includes accessing news and entertainment
websites, making transactions or purchases online, and personal research
including schoolwork. A large and increasing number of New Zealanders use
the Internet to access “Web 2.0” social networking sites such as Facebook and
Myspace, to share photos and communicate with others
• Audio visual entertainment: As compression technologies have improved,
more New Zealanders are able to watch videos and television programs
online, through using applications such as YouTube. Users can also listen to
radio, or listen to or purchase music over the Internet (for example through
iTunes)
• Research and learning: Many households use Internet access for personal
research, for example reading news reports, and for educational purposes such
as school homework, or remote school lessons.
Many studies of the social value of broadband ascribe benefit to working or learning
from home. The applications involved in working or learning from home fall into all of
the three categories set out above. Working from home requires the ability to
communicate with other colleagues, send files and access the world wide web. Similarly,
learning from home may require the ability to download video programs, to share files
and to participate in video sessions.
7
Video relay is a service that allows a deaf or hard of hearing person to make a telephone call via an Internet video
connection between the user and the relay centre staffed with sign language interpreters.
12

Hence, in order to understand whether a particular level of broadband service enables
households to derive benefits from working or learning from home, we need to consider
whether they are able to use the applications which fall into the above three categories.
2.3.2 Business users
Businesses, small and large, rely on access to the Internet for a range of core functions.
In general, as businesses grow they continue to use the Internet for the same types of
application, but the complexity of their systems, and associated bandwidth requirements
increase:
• Banking, payment systems: Using internet connections to enable credit and
debit cards to be used in purchases and to undertake banking
• Account keeping: Many small businesses use accounting packages which
require connection to the internet to function effectively
• Communication: Using e-mail to communicate with customers and
suppliers, including sending and receiving large files. Using voice and video
over Internet applications to communicate with staff working from home
• Research: Using the world wide web as a low cost, accessible research tool
• Advertising: Advertising products and services through websites. As server
technology prices have fallen, many small businesses are choosing to host
their own websites
• Flexible working arrangements: Using internet connectivity to provide
more flexible working arrangements, to improve the overall productivity of
their staff. This includes access to company data from external locations (for
example from home), and email over mobile phones. Businesses can provide
for flexible working in various ways, including giving staff access to a virtual
private network (“VPN”), or making their files and internal systems accessible
over the Internet. 8 This is happening now (although even faster speeds may
increase the value)
• Data storage: Backing up essential files and data on servers located at an
alternative locations. To do this effectively requires reliable internet
connections
• Video conferencing: Video conferencing is becoming an essential tool for
large businesses, in particular for those operating from multiple locations
• Inventory and stock control: Supply chain management has become globally
integrated, with large businesses needing permanent connectivity to manage
stock control and inventory processes effectively.
2.3.3 Sector specific uses: eEducation and eHealth
The terms “eEducation” 9 and “eHealth” refer to particular uses for Internet applications.
They are not in themselves applications. Rather they refer to the delivery of education
and health services using a range of electronic media. For example, eEducation is the
delivery of educational material using a variety of media, such as web sites, interactive
television, video, and video conferencing.
8
9
There are now software packages available that allow businesses to configure their systems for secure access over
the Internet.
eEducation is also sometimes referred to as “eLearning”.
13

eHealth refers to the use of electronic tools and communication to support effective
healthcare. eHealth can encompass:
• Sharing of medical records between different healthcare professionals
• Online information on evidenced based medicine—that is up to date
information on medical research to support diagnostic and treatment
decisions
• Collaboration between healthcare professionals, using applications such as
email and videoconferencing, to create “virtual” healthcare teams
• The use of electronic media for the delivery of clinical care to patients
(“Telemedicine”). For example this may involve video-conferencing to
conduct a real-time consultation between medical specialists in two different
countries, or to provide remote medical procedures or examinations.
Telemedicine can reduce the need for patients to travel to see a specialist, or
conversely can enable specialists to cover a wider population.
The New Zealand Health IT Cluster, 10 together with the Ministry of Health, is engaged
in a significant work program to improve the delivery of healthcare using the eHealth
approach. This “Connected Health” project is looking at ways to improve the flow of
information within the health sector, with the aim that patients’ medical information is
available to healthcare practitioners who need it, regardless of which part of the health
system they work for. The Cluster is also working to develop and implement systems for
electronic laboratory ordering and results, and electronic prescriptions.
2.3.4 Applications and broadband speed requirements
Increased usage, combined with more bandwidth-hungry applications, has meant that
demands on the broadband network have been increasing over a number of years. The
level of typical consumption of content, measured by the amount of data downloaded
per household has continued to rise dramatically since the introduction of broadband,
and this can be attributed in particular to the growth in peer-to-peer traffic and video.
As Table 2.1 on page 9 shows, broadband services currently available in New Zealand
provide average download speeds of 1Mbps for wireless broadband services up to
around 78Mbps for users that already have fibre to the premises. 11 Upload speeds—that
is the speed at which a user can send data to others—are generally much slower.
The figures below show approximate download speeds needed to access various Internet
applications at a reasonable level of service quality, separated into applications demanded
by residential users and by businesses. The figures show that users can access the
majority of Internet applications with download speeds in the region of 1 to 2 Mbps. The
exceptions are:
• For residential users: IPTV multicast services, real time video on demand,
high definition TV multicast services, and high definition eEducation
• For business users: high definition multi-media applications such as high
definition TV health consultations, high definition TV eEducation, high
definition video conferencing, and telepresence.
10 The New Zealand Health IT Cluster is an industry grouping of infrastructure providers, health software vendors,
consultants, and healthcare providers.
11 Fibre to the premises is currently available to some businesses, and residential users in selected new residential
developments.
14

To give some examples of the effect of access speed on the range of applications users
can access:
• Voice and email do not consume material bandwidth
• Gaming and browsing are today mainly restricted by latency rather than speed,
with content servers being the main bottleneck
• Users can start to access digital TV and similar quality video-on-demand at
speeds of between 2.5 and 3.5 Mbps
• High definition TV uses up to 8 Mbps per channel today, but should be
available at lower speeds as compression technology advances.
Figure 2.4: Applications and Download Speed Requirements—Residential
100
High Speed broadband
“Current generation” broadband
Downstream bandwidth requirements (Mbps)
10
9
8
7
6
5
4
3
2
1
Email
Mobile
eCommerce
Digital Radio –
DAB, WiFi
TV viewing place
/ device shifting
Video
Conferencing -
desk
Video on
Demand –
Real Time
VoIP over
Internet
Telemetry –
e.g. GPS
Mobile TV
Video streaming
– provider
Fully
interactive TV
HDTV –
multicast
Electronic video
programming
Intelligent
home
applicances
Gaming
Web 2.0 (inc.
social
applications)
Home security
– remote
monitoring
eEducation –
HDTV
lessons
eCommerce (online
purchasing)
Video on
Demand–
Trickle
Music
Download
eEducation –
SDTV lessons
IPTV –
multicast
Note:
“High speed broadband” encompasses those broadband access technologies that can deliver
download speeds of 10Mbps or greater, including: HFC, which TelstraClear already provides in
some areas); ADSL2+ which Telecom is already providing in some areas; VDSL and VDSL2+,
currently being rolled out by Telstra Clear and Telecom; and fibre to the home.
“Current generation broadband” includes those broadband access technologies that provide
speeds lower than 10 Mbps, such as ADSL.
15

Figure 2.5: Applications and Download Speed Requirements—Business
High Speed broadband
“Current generation” broadband
100
Downstream bandwidth requirements (Mbps)
10
9
8
7
6
5
4
3
2
1
Email
Telemetry –
e.g GPS
Data
back-up
Video
Conferencing
- desk
VoIP over
Internet
Videophone
–e.g
polycom
Software as
a service
eHealth –
HDTV
consultation
eCommerce
(on-line
purchasing)
Fixed/mobile
voice
integration
eHealth –
SDTV
consultation
eEducation
– HDTV
lessons
eHealth RFID
drug tracking
Digital Radio
–DAB, WiFi
eEducation
–SDTV
lessons
Video
Conferencing
-HD
Telepresence
Note:
“High speed broadband” encompasses those broadband access technologies that can deliver
download speeds of 10Mbps or greater, including: HFC, which TelstraClear already provides in
some areas); ADSL2+ which Telecom is already providing in some areas; VDSL and VDSL2+,
currently being rolled out by Telstra Clear and Telecom; and fibre to the home.
“Current generation broadband” includes those broadband access technologies that provide
speeds lower than 10 Mbps, such as ADSL.
The above discussion shows users can access most available applications using
broadband services that are currently available, or will become available in the
foreseeable future (such as ADSL, ADSL2+, or VDSL). Hence, any demand for even
faster broadband services would rely on the growing demand for greater quality of
service, where lack of congestion and spare capacity enable users to improve their
experience.
16

So far we have focussed on download speeds as the main concern for accessing
applications. Until recently Internet applications have generally been asymmetric in terms
of their bandwidth requirements—that is users downloaded much more data than they
uploaded. Examples include browsing web pages, or accessing videos and music. In this
asymmetric world download speeds were the main determinant of the quality of users’
experience. More recently changes in the way we use the Internet mean that users are
increasingly demanding fast two-way data transmission. “Web 2.0” applications also
require fast upload speeds. Examples include social networking applications, where users
exchange data such as photos, or YouTube which involves exchange of video files
between users.
2.3.5 Applications: The future
Growth in the volume of traffic, the range of available applications, and the number of
users is likely to drive greater demand for high speed broadband in the future:
• Internationally, demand for internet bandwidth has grown rapidly. YouTube
currently consumes as much bandwidth as the entire Internet did in the year
2000. Cisco forecasts an annual growth rate of 42 percent in global consumer
traffic
• New devices will increase the load on both core and access networks. The
extension of the IP standard to radios, TV sets, alarms, remotely-controlled
systems (such as heating and appliances) will continue to alter the profile of
use by increasing the number of devices that will simultaneously exchange
symmetric information on the web. The declining cost of computer memory,
monitors, and processing power will lead to continued enhancement of quality
of services. Similarly, users will increasingly be able to access the Internet
through arrange of devices, such as gaming consoles and television sets
• Changing demographics will shift toward heavier users of online services that
will spend more and more time on internet-connected devices and bandwidthhungry
applications.
As demand rises further, there are ways in which service providers can continue to
deliver more bandwidth out of the copper network. For example “bonding” techniques
combine the capacity of multiple lines to enhance access speeds up to 1 Gbps to users.
Providers can also improve access speeds through a range of technical adjustments, and
the way in which they maintain the physical infrastructure. For example, Telecom and
Pacificnet recently launched software company, PacByte’s, Video on Demand software,
which enables users to view virtually immediately DVD quality feature-length movies
over a regular 1Mbs broadband connection 12 . In addition, software producers (including
PacByte) are developing other types of technologies. Recent product releases include
compression patches that can reduce image files to one-fifth the size of JPEG, and audio
and video files to half the size of WinZip, effectively increasing the speed of any Internet
connection by up to 50 percent. 13
12 ThePacific.net media release 29 Mar 2008. “Revolutionary Video on Demand system launched in NZ”
http://www.tpnet.co.nz/index.php?page=Company%20News&article=Revolutionary%20Video%20on%20Demand%20system%2
0launched%20in%20NZ (accessed 28 October 2008)
13 ThePacific.net media release 29 May 2008. “Revolutionary Video on Demand system launched in NZ”
http://www.tpnet.co.nz/index.php?page=Company%20News&article=Revolutionary%20Video%20on%20Demand%20system%2
0launched%20in%20NZ (accessed 28 October 2008)
17

2.4 Conclusion
Our review indicates that, currently, most people should be able to access and use the
applications they want over the existing broadband infrastructure. The main exception is
rural access.
Where limitations in access exist, they may be caused by a number of bottlenecks in the
broadband supply chain. The “last mile” infrastructure may not be the most important
bottleneck, again with the exception of rural areas.
Recent research conducted by Phoenix Research, for the Auckland Regional Broadband
Advisory Group, found that people perceive the internet much like a utility, such as an
electricity or rail network. Much as people expect continuous and reliable access to
electricity and water, and to be supplied as much as they need, the research found that
people expect the same of internet services. That is, people expect internet infrastructure
to be renewed and improved over time to ensure they can do the things they want to,
when they want to do them. 14
Looking forward it is likely that users will become more demanding in terms of the
quality of service they expect from broadband providers, driven by the continuing
expansion of Internet applications and devices. Countering this, advances in compression
technology will enable suppliers of Internet applications to provide more over existing
broadband networks.
14 Small,J., A. Beer, C. Sweetman, D. Fougere, and C. Birch (2008) “Open Access Broadband in Auckland: Demand, Costs
and Benefits” Report by Covec, Teleconsultants and Phoenix Research for the Auckland Regional Broadband
Advisory Group
18

3 Private Benefits of Broadband: Willingness to
Pay
This section examines the private benefits of broadband—that is the benefits that fall
directly on users of broadband services. 15
New Zealanders are quite rational in deciding whether, and how much, to pay for
broadband. They will not pay more for a broadband connection than the value they
believe they will obtain from that connection. The best way to assess the private benefits
of broadband to users is thus to examine actual purchasing decisions to find what users
are willing, or able, to pay in practice. Accordingly, this section reviews available data on
New Zealanders’ willingness to pay for fast broadband services, as revealed by the
broadband packages users subscribe to.
As Section 2 discussed, the benefits of broadband access derive from the applications
users are able to access. Thus, willingness to pay for different levels of access gives an
indication of the value users place on different types of application.
Our review of available data on demand for broadband shows that:
• Many New Zealanders value broadband, however most New Zealanders do
not place a high value on high speed broadband service even though we have
some of the lowest priced broadband in the OECD (see section 3.1), and
• While the value of broadband services to businesses clearly varies widely,
depending on business characteristics, for many commercial and institutional
users, willingness to pay also appears to be low.
This finding has the following implications:
• It is likely that the perceived low use of high speed broadband in New
Zealand is a reasonable reflection of the private value to users at this point in
time
• Given the revealed willingness to pay, in the near term private benefits to New
Zealanders from government intervention to promote investment in high
speed broadband are likely to be relatively small. We would therefore need to
believe the wider social benefits are high in order to justify the cost of
intervention.
The remainder of this section assesses willingness to pay for broadband, based on data
on actual uptake of broadband services in New Zealand:
• We start by considering New Zealand’s take up of broadband services, relative
to other countries (section 3.1)
• Section 3.2 looks at trends in Internet access in New Zealand, and growth in
dial-up access and broadband usage
• Section 3.3 examines available data on willingness to pay for internet
applications. We analyse data on take up of different broadband packages, at
different prices, and compare the results to data on the types of applications
broadband subscribers use. We find that many users do not place a high value
15 See Appendix B for a discussion of the various types of benefits and costs from public investment in high speed
broadband.
19

on the applications high speed broadband would let them access, and
accordingly opt to purchase lower end broadband packages
• Sections 3.3 and 3.4 look at variations in broadband uptake based on income
and geography respectively
• Finally, section 3.5 reviews our findings on willingness to pay.
3.1 International Comparison of New Zealand Broadband Take Up
Before looking at detailed data on New Zealanders’ willingness to pay for broadband, it
is useful to consider our level of broadband take up, relative to other countries. Does the
available data show that New Zealanders are less (or more) likely to purchase broadband
services than residents of other countries?
International data on broadband take up across the OECD shows that New Zealand is
“catching up” to other countries. In June 2008 New Zealand had 20.4 broadband
subscribers per 100 inhabitants, only slightly behind the OECD average of 21.4 (see
Figure 3.1).
Figure 3.1: Broadband Subscribers per 100 Inhabitants (June 2008)
40
35
30
25
20
15
10
5
0
Denmark
Netherlands
Norway
Other
Fibre/LAN
Switzerland
Iceland
Sweden
Korea
Finland
Luxembourg
Canada
United Kingdom
Belgium
France
Germany
United States
Australia
Japan
Austria
* New Zealand
Spain
Ireland
Italy
Czech Republic
Hungary
Portugal
Greece
Poland
Slovak Republic
Turkey
New Zealand is currently ranked 19 th out of 30 OECD countries. This is a material
improvement over 2003 when New Zealand ranked 24 th out of the OECD, with 2.6
broadband subscribers per 100 inhabitants. Indeed, in the year to June 2008, broadband
penetration grew by 4.05 percent, well above the average OECD growth rate of 2.66
percent. 16
When we adjust for national income, we see that New Zealand’s broadband take up is
roughly what we would expect it to be, relative to other OECD countries (see Figure
3.2). This data clearly shows that we are not lagging behind the rest of the world when it
comes to broadband usage. Indeed, when we consider the fact that New Zealand, as a
Cable
DSL
Mexico
16 OECD Broadband Statistics (oecd.org/sti/ict/broadband), accessed October 2008. Only five other OECD
countries recorded higher growth rates in the same period: Luxembourg, Germany, Greece, Ireland, and Hungary.
20

net importer of content, pays relatively high peering charges, this suggests that New
Zealanders are using more broadband than could be expected.
Figure 3.2: Broadband Subscribers per 100 Inhabitants by GDP, June 2008
45
40
35
DK
NL
R 2 = 0.6026
30
25
20
15
10
5
TR
M
PL
SK
HU
KR
NZ
CZ
PT
GR
IT
FI
DE UK
FR
JP
ES
SE
IS
CA
BE
A
AT
CH
IE
US
NO
0
0 10,000 20,000 30,000 40,000 50,000 60,000
GDP per capita (USD PPP, 2007)
Note:
(1) We have removed Luxembourg from the data set, as it is a significant outlier on GDP per
capita, and so distorts the correlation. Luxembourg had 28.3 broadband subscribers per 100
inhabitants in June 2008, and a GDP per capita of USD81,781 (PPP, 2007).
International benchmarking shows that broadband prices in New Zealand are relatively
low compared to other developed countries. The Commerce Commission’s market
monitoring shows that New Zealand’s broadband prices are significantly lower than
average rates or a sample of 35 developed countries. 17 The Commission’s report shows
that prices in New Zealand are only 68 percent of average international prices for low
usage broadband packages, and up to 76 percent of the average price for high users (with
minimum download speeds of 4 Mbps, and up to 20 GB of data each month).
3.1.1 Impact of the Telecommunications Service Obligation
It is likely that the Telecommunications Service Obligation (TSO) has the effect of
reducing New Zealand’s broadband penetration compared to other OECD countries.
The TSO provides for free local calling for dial-up Internet access, which is likely to
reduce take up of broadband services. This is because in New Zealand, the additional
cost of broadband compared to dial-up access is higher than it would be otherwise, for
the same difference in quality as in other countries.
A recent OECD study on significant determinants of broadband penetration found that
low dial-up prices do reduce broadband take up. The study’s authors stated that “price
relativity is considered to be potentially important as the most common application of
Internet access is for e-mail which dial-up satisfies in many cases.” Of the 30 countries
included in the study eight, including New Zealand, had dial-up access that was “so
17 Commerce Commission, 2007 Telecommunications Market Monitoring Report 31 March 2008. The sample of countries
includes each of the 30 European countries covered by the European Union, plus five additional countries
(Australia, New Zealand, Japan, Canada, and the United States).
21

cheap that it impedes the adoption of broadband”. 18 Further, the report found that that if
the relative price for broadband in New Zealand were equal to the OECD mean for
price relativity, New Zealand’s broadband penetration rate would be 2.0 percent to 4.4
percent higher. 19
3.2 Trends in Internet Access in New Zealand
Trends in Internet access over the past few years tell us the same story—the number of
New Zealanders with access to the Internet is continuing to increase. At the same time
we are seeing a shift from dial-up services to broadband.
Statistics New Zealand data show that the total number of Internet subscribers in New
Zealand is increasing. As Figure 3.3 shows, even over the last two years take up of
Internet access has grown significantly, from 1.2 million subscribers in March 2006 to 1.5
million in March 2008.
Figure 3.3: Internet Subscriptions by Connection Type (March 2006–March 2008)
1,600
1,400
108
135
158 179
1,200
Subscribers ('000s)
1,000
800
600
470
493 574
647
712
Other broadband
Digital subscriber line (DSL)
"Dial-up" and ISDN
400
812
771 740
676
613
200
0
Mar 2006 Sep 2006 Mar 2007 Sep 2007 Mar 2008
Note: Data “Other broadband” are not available for March 2006.
Moreover, the proportion of subscribers with a broadband connection is growing
(despite the impact of the TSO noted above). In the two years to March 2008, the
proportion of subscribers using broadband increased from 37 percent to 59 percent. As
at March 2008, New Zealand had a total of 891,000 broadband subscribers. Of these,
711,900 used some form of DSL connection, and 179,100 used an alternative broadband
technology (for example wireless broadband or cable). 20
18 OECD Working Party on Communication Infrastructures and Services Policy, Catching-up in Broadband—What Will it
Take? 2007, page 8.
19 Ibid, endnote 18. This analysis was based on data from 2005, when New Zealand’s broadband penetration rate was
8.1 percent.
20 Statistics New Zealand, Internet Service Providers Survey, March 2008.
22

3.2.1 Residential broadband usage
Around 80 percent of households are now connected to the internet, compared to only
37 percent in 2001. 21 A Statistics New Zealand survey of telecommunications use in
households, in December 2006, showed that 33 percent of households have some type of
broadband connection. 22 Given the rate of growth in broadband subscriptions over the
past two years, the actual proportion of households with access to broadband now is
likely to be substantially higher.
3.2.2 Business broadband usage
Businesses account for 15 percent of Internet connections in New Zealand (221,200
subscriptions in March 2008). Around 77 percent of businesses have a broadband
connection, while 32 percent have a dial-up connection. 23
The larger the business, the more likely it is to use broadband (see Table 3.1)
Table 3.1: Percentage of Businesses with Broadband Connections, by Size (2006)
Business size
Total No. of Businesses
Businesses in Each
Category Using Broadband
Percent
Number
6–19 employees 25,974 73 % 18,961
20–49 employees 6,288 86 % 5408
50–99 employees 1,731 91 % 1575
100+ employees 1,440 94 % 1354
Notes: Data sourced from private enterprises with annual GST turnover greater than $30,000.
Businesses with fewer than six employees were excluded from this survey.
3.3 Revealed Demand for Applications—Take Up of Broadband
Packages
The previous sections showed that an increasing number of New Zealanders do appear
to be willing to pay for a broadband connection. The question we address here is: to
what extent are New Zealanders willing to pay for high speed broadband?
As we discussed in section 2, the benefits from broadband come from the applications it
enables subscribers to use, and the ease with which subscribers can access those
applications. So another way of putting the above question is: do New Zealanders value
broadband services that enable access to “bandwidth hungry” applications such as fast,
high quality movie downloads, YouTube, or social networking sites? Or are they more
interested in accessing email and surfing the web?
Access providers offer a range of packages differentiated on upload and download
speeds, and on the volume of data the user may transmit without paying an additional
21 Source: Statistics New Zealand. In March 2008, residential customers accounted for 1,282,800 Internet
subscriptions, and New Zealand had an estimated 1,598,000 households.
22 The most recent available national data on residential broadband up take in New Zealand dates from December
2006. Given the pace of change in the broadband market, the actual current level of broadband uptake among
households is likely to be substantially higher.
23 Statistics New Zealand, Business Operations Survey, 2006. Only 11 percent of businesses use dial-up only and 21
percent use both dial-up and broadband connections. Fifty seven percent of businesses use broadband only.
23

fee. Packages with lower speeds, and lower data caps, cost less than faster packages.
Through their choices of which package to purchase, broadband users give us
information about the value they place on the types of applications they could access
using currently available broadband services.
In this section we review available data on the types of broadband packages New
Zealanders are purchasing, and draw conclusions about what this means for willingness
to pay for high speed broadband. In particular, we look at available data on demand for
two key dimensions of broadband service:
• The speed (or “bit rate”) users can expect to receive, and
• The volume of data users can transmit or receive (without incurring additional
fees).
We then look at which applications broadband subscribers use, and what this tells us
about whether or not New Zealanders place a high value on high speed broadband.
3.3.1 Demand for access speeds
There is little evidence of substantial pent-up demand for higher bandwidth at higher
prices. Despite growth in the number of broadband connections, most broadband users
choose low cost broadband packages that provide relatively low speeds.
Data from telecommunications service providers show that the majority of broadband
users are on plans that allow maximum speeds of 4 Mbps or lower. 24 Generally, these
packages provide improved speed and reliability over the slower dial-up option, and
provide access to commonly used applications such as e-mail, voice over IP applications
(for example “Skype”), downloadable video on demand, digital radio, and in some cases
gaming and music downloads.
For approximately $10 to $20 a month extra, these users could purchase packages
enabling them to access a much wider range of applications including (potentially)
desktop videoconferencing, fully interactive TV and other television services, and real
time Video on Demand. 25 The fact that they don’t tells us that most users value these
multimedia applications at less than $10 to $20 a month.
In areas where they are available, only a very small proportion of customers are willing to
pay for high speed broadband applications at current prices. 26
This is consistent with the evidence from overseas that consumers in other countries
continue to prefer low prices for lower speeds, where the choice is available. For
example, up to July 2008, France Telecom had only 14,000 fibre subscribers out of a
possible 344,000 connectable homes.
It is possible that this low apparent willingness to pay for high speed broadband simply
reflects the fact that many users have not experienced high speed broadband before, and
24 For some users this may not be a matter of choice. For technical reasons, some households experience broadband
speeds substantially lower than the theoretical maximum using existing ADSL services. However, the number of
users on lower speed packages is significantly larger than the number of households that are speed constrained,
indicating that the majority of users prefer lower speed packages.
25 In practice even with higher speed packages customers may not be able to access all of these applications, at an
acceptable level of quality. The actual speed of the service the user experiences depends of a range of external
factors, as well as on the particular characteristics of that user’s connection (including distance from the telephone
exchange). In addition, the speed different applications require will also depend, among other things, on the
particular technical characteristics of the application in question, and any compression technologies in use.
26 By high speed broadband we mean services providing download speeds of 10Mbps or more, and theoretically able
to support HDTV, or similarly “bandwidth hungry” applications.
24

so don’t realise just how good it is. Once users try high speed broadband they may find
that they place a much higher value on the additional level of service they receive.
Alternatively, the low revealed value of high speed broadband to many users may be due
to a lack of content or applications that need it. In section 2 we found that most
commonly used Internet applications are accessible over relatively low end broadband
connections. The value of high speed broadband to users depends on the value of the
applications it makes available. If providers cannot provide a range of applications that
require high speed broadband, then the value users place on high speed broadband will
be correspondingly low.
3.3.2 Demand for data
Another indicator of the willingness to pay for high speed broadband is current demand
for data. 27
High speed broadband services will enable users to access “bandwidth hungry”
applications, such as real time video streaming, movie downloads, and high definition
television. These services all involve transmission of huge volumes of data. For example
a low quality movie typically comprises 750MB of data, whereas a DVD quality movie is
around 4GB. 28 If customers wish to access this type of application, we would expect
them to purchase broadband packages with large data caps to accommodate large file
downloads. However, almost 60 percent of broadband users currently purchase packages
that provide for less than 5GB of data per month.
27 On 1 October 2008, Telecom announced changes to its broadband offerings, including doubling data caps. The data
used in this section predates that announcement, and so reflects Telecom’s prices, speeds, and data caps prior to 1
October 2008.
28 The Communications Market: Broadband. Digital Progress Report Ofcom, Research report, 2 April 2007.
25

Figure 3.4: Broadband Subscribers by Size of Data Cap
20GB or more, 42,000, 5%
No cap, 67,400, 8%
5GB to less than 20GB,
253,200, 28%
Less than 5GB, 528,600,
59%
Similarly, data from telecommunications service providers shows that only a minority of
subscribers purchase data caps of 10GB per month or more. 29
This suggests that a relatively small proportion of users currently value the ability to
transfer the very large volumes of data required to frequently access and view high end
multi-media applications, or transfer large files.
This is consistent with usage patterns in other jurisdictions. For example, in the United
Kingdom, the majority of broadband subscribers download relatively small volumes of
data, while a small “tail” of subscribers is responsible for bulk of data volumes—the top
10 percent of users in the United Kingdom download almost twice as much content each month
as the other 90 percent put together. 30
Box 3.1: Take up of High Speed Broadband in Other Countries
Where coverage has reached a reasonable level, take-up of high speed broadband services
has appeared to lag. Starhub in Singapore and Korea Telecom in Korea have both reported
that the majority of users on their high speed broadband networks remain on “lite”
packages (4 to 10 Mbps).
In Italy the availability since 2004 of a fit-for-purpose Local Loop Unbundling (LLU)
product has seen the company Fastweb’s business expansion based increasingly on selling
LLU-based DSL services rather than fibre. Of its approximately 1 million users, only
around a quarter are believed to be using fibre-based products.
Caio, F. 2008 “Review of Barriers to Investment in Next Generation Access” Report to the United Kingdom
Government
29 We note here that (for most packages we have reviewed) the price for data increases steeply for packages providing
more than 15GB per month of data, which will serve to reduce demand. It seems likely that this reflects the high
cost of international data capacity.
30 The Communications Market: Broadband. Digital Progress Report Ofcom, Research report, 2 April 2007.
26

3.3.3 Demand for applications
We have reviewed the results of two surveys on commonly used Internet applications:
• A recent online survey of broadband users to find out more about how people
are using the Internet, conducted by Telecom, 31 and
• A survey by Phoenix Research of 299 households in Auckland, Waitakere and
Manukau cities, from March–April 2008. 32
Table 3.2 over the page summarises findings from both surveys on commonly used
applications, and the quality of access connection each application requires.
The results clearly show that most of the uses for which New Zealanders access the
Internet require relatively low access speeds. A broadband connection will be necessary
to provide a reasonable quality of user experience in accessing most of the applications in
Table 3.2. However, all of the applications covered by both surveys generally require
access speeds well below 1 Mbps. (Although, in practice actual speed requirements may
be greater than those shown in the table, depending on the characteristics of the
particular applications in use.)
In other words, the majority of New Zealanders can use the applications they currently
wish to over a lower end broadband connection. High speed broadband would certainly
improve the quality of the user experience by reducing any delays and providing more
consistent access performance between users, but for most users higher speed is not
necessary to access the applications they wish to use, and the improvement in customer
experience does not appear to be worth the extra $10 or $20 per month.
31 The survey used a 15 minute online questionnaire. The results quoted here are from a sample of 556 broadband
users (Telecom and non-Telecom customers), and have been weighted on age, gender and region based upon
proportions derived from the TNS Conversa market monitor dataset (and for Telecom customers in the dataset,
based on Telecom internal customer data).
32 Small,J., A. Beer, C. Sweetman, D. Fougere, and C. Birch (2008) “Open Access Broadband in Auckland: Demand, Costs
and Benefits” Report by Covec, Teleconsultants and Phoenix Research for the Auckland Regional Broadband
Advisory Group
27

Table 3.2: Use of Applications and Implications for Access Requirements
Application
% of broadband
subscribers (Telecom
survey)
% households (Phoenix
research)
Minimum download
speed (Mbps) (1)
Minimum upload
speed (Mbps) (1)
Email 98% 99.5% 0.064 0.064
General surfing (2) 94% -
Transactions (eg online banking, bill payments,
ticket bookings)
92% -
Researching or reading the news - 89.2%
Online auctions or shopping (eg Trade Me, Ferrit) 83% 78.5%
Sharing photos with other people - 60.4%
Downloading software 52%
Downloading music / listening to music or radio 51% 54.6%
Accessing social networking sites / blogging 52% 49.5%
Working from home - 49.9%
Playing games (3) - 42.8%
School work / education and training (4) 42% 53.3%
Downloading movies / watching TV or videos 25% 39.4%
online (5)
0.128 0.128
0.064 0.064
0.128 0.128
0.064 0.064
0.128 0.064
0.128 0.064
0.128 0.128
0.300 0.300
0.128 0.128
0.128 0.064
28

Application
% of broadband
subscribers (Telecom
survey)
% households (Phoenix
research)
Minimum download
speed (Mbps) (1)
Minimum upload
speed (Mbps) (1)
Peer to peer file transfers (6) 25%
Sharing videos or music with other people - 27.9%
Phone calls (7) - 27.1%
0.128 0.128
0.080 0.080
Notes: (1) These are minimum speeds. The quality of service users experience in practice depends on a range of factors. In general faster speeds will tend to provide a higher
quality of service, although this is not always the case. Depending on the application, users may experience a good quality of service at the speeds indicated here
(2) Speeds shown are for “Web 2.0”, including social applications
(3) Also requires low latency (that is low or no delay in the transmission of data)
(4) Assumes school work generally requires web based research. More sophisticated standard definition TV lessons would require speeds of 1Mbps both ways, as well as
low latency
(5) Speeds shown are for video streaming. Real time video on demand services would require higher download speeds (up to 5Mbps). Even for video streaming the speeds
shown represent absolute minimums—the quality of service experienced would be low at these speeds
(6) Speeds based on required speeds for data back-up and represent absolute minimums—the quality of service experienced would be fairly low at these speeds. Required
speeds also may be higher depending on the size of files been transferred
(7) Exact speed requirements depend on application type.
29

3.4 Regional Differences
The discussion above draws from national level data. We also need to consider whether
there is any regional variation in willingness to pay for broadband. This section draws on
Statistics New Zealand’s survey on Household Use of Information and Communication Technology
undertaken in 2006, which included data on broadband take up by region.
Figure 3.5 shows household uptake of broadband and dial-up access across the twelve
regional government territories, and average income data for each region. The data is for
2006. As noted above, broadband take up in New Zealand has increased significantly
since this time—the current level of broadband take up in each region will be higher than
the figure suggests.
Wellington, Canterbury, and Auckland all had broadband uptake greater than or equal to
the national average of 33.2 percent of households in 2006. In each of these three regions
broadband uptake was beginning to overtake dial-up access even then. This may not be
surprising—these three regions have higher average income levels than other parts of the
country, and their greater broadband take up may simply reflect this.
Figure 3.5: Broadband Take Up by Region, 2006
100
800
Percent
90
80
70
60
50
40
30
20
10
700
600
500
400
300
200
100
$/week
0
0
Wellington
Canterbury
Auckland
Taranaki
Waikato
Nelson / Tasman / Marlborough / West Coast
Southland
Gisborne / Hawke’s Bay
Otago
Bay of Plenty
Northland
Manawatu-Wanganui
Broadband Dial-up Income
Notes:
(1) Take up expressed as percentage of households in each region with access.
(2) Households may have both broadband and dial-up access.
(3) Broadband includes DSL, cable, wireless and other broadband connection types.
It is likely however, that the higher levels of broadband take up in Wellington,
Canterbury and Auckland also reflect supply side factors. That is, households in these
regions were more likely to be able to access broadband than in other parts of the
country, as:
• There is greater competition in these regions. For example, parts of the
Wellington and Canterbury regions have long had the option of TelstraClear’s
high speed networks, in addition to Telecom’s service. Woosh offers wireless
broadband in Auckland, Wellington, Canterbury, and Southland, and
30

• Higher population densities in Auckland, Wellington, and Canterbury have
meant a greater proportion of households could access Telecom’s broadband
offering.
Rural–urban variation
In considering regional variation, we also need to consider differences between urban
and rural areas. Figure 3.6 shows how take up of broadband and dial-up access varied
between urban and rural areas in 2006. As we would expect, broadband take up in the
main urban centres was markedly higher than in other areas. Broadband take up outside
the main urban areas was fairly constant, ranging between 22 and 24 percent of
households.
Figure 3.6: Variation in Take Up between Urban and Rural
50
45
40
National average
(broadband)
National average
(dial-up)
35
Percent
30
25
20
Broadband
Dial-up
15
10
5
-
Main urban Secondary urban Minor urban Rural centre Rural
Notes:
(1) Take up expressed as percentage of households in each region with access.
(2) Households may have both broadband and dial-up access.
(3) Broadband includes DSL, cable, wireless and other broadband connection types.
As the above figure shows, households in rural areas are more likely to have a dial-up
connection than urban households. The data shows that this is due to a combination of
availability and willingness to pay. As Figure 3.7 shows:
• 38 percent of rural households with dial-up access only indicated that the cost
of broadband was too high
• 35 percent stated that broadband was not available in their local area, while
• 22 percent felt that dial-up was sufficient for their household.
The Statistics New Zealand survey confirms that willingness to pay for broadband is a
major factor for many households that do not have broadband. Figure 3.7 shows, for
households with dial-up access only, the reasons given for not taking up broadband.
Apart from the issue of availability, which was a significant reason for rural households,
the major reasons given were:
• Costs too high (51 percent of those surveyed), and
31

• Dial-up access is sufficient for the household’s use (33 percent).
Figure 3.7: Reasons Given for No Broadband
Concern about service of broadband
suppliers
Dial-up access is sufficient for
household use
Urban
Rural
Costs too high
Not available in local area
0.0 10.0 20.0 30.0 40.0 50.0 60.0
Percent
Notes:
(1) Broadband includes DSL, cable, wireless and other broadband connection types
(2) Costs too high includes those who had concerns about the extra costs of exceeding plan
limits.
(3) Rural includes rural and rural centre areas.
(4) Urban includes main urban, secondary urban and minor urban areas.
Interestingly, 35 percent of respondents in rural areas gave “not available in local area” as
a reason for not subscribing to a broadband service. In fact, satellite broadband is
available now, anywhere in New Zealand, provided that the property has a “line of sight”
to the IPStar satellite. This result therefore suggests that many people are not aware of
the availability of alternative broadband options. As a result New Zealanders may
overstate the extent to which broadband is unavailable.
In summary, regional variation in the proportion of households with broadband is likely
to arise from a combination of factors. The availability of broadband is clearly a factor in
rural areas (and thus in regions with relatively more rural households). Willingness to pay
is clearly a factor for many households that do not have broadband access, even in rural
areas.
3.5 Conclusions on Willingness to Pay
Many New Zealanders are prepared to pay for broadband. However a review of
purchasing behaviour and available survey data shows that, while some users do value
high speeds and large data caps, these users are currently in the minority. The majority of
broadband users mainly use the Internet for applications such as email and web surfing
that do not require high speed broadband connections. As a result most are not willing to
pay even for the faster broadband packages that are available now. Telecommunications
firms report that it is difficult to attract large numbers of subscribers to high end
broadband packages offering high speeds and large data caps.
32

This is borne out by the results of a recent survey that examined, among other things,
respondents’ willingness to pay for high speed broadband. 33 When asked “how much
would you be prepared to pay each month to fund the delivery of fibre-optic broadband
direct to homes in New Zealand?” 65 percent of those surveyed indicated they would not
be prepared to pay anything, or any more than they currently pay (see Figure 3.8). Of
those who would be prepared to pay for fibre to the home, most would only be prepared
to pay $10 to $20 a month.
Figure 3.8: Willingness to Pay for Fibre to the Home
60
50
40
Percent
30
20
10
0
Nothing
The same as I currently pay
$10 per month
$20 per month
$30 per month
$50 per month
$100 per month
$200 or more per month
Don't know
Some previous surveys have produced higher estimates of willingness to pay for high
speed broadband services. For example, a recent study into demand for broadband in
Auckland, led by Covec, estimated a very high willingness to pay. 34
The Covec study surveyed 299 residents of the cities of Auckland, Manukau, and
Waitakere, to elicit information on how much respondents would be willing to pay for
two different broadband services (corresponding to fibre to the home, and ADSL2+).
Based on 250 complete responses, the Covec study found that, on average, respondents
were willing to pay an additional $77.90 per month for the additional functionality fibre
to the home would provide, over and above ADSL2+.
Such results, however, are not borne out by current data on what households actually
decide to pay for different levels of broadband service, and should be interpreted with
care. In other words, if consumers’ actual behaviour was consistent with their proposed
intentions, as reflected in willingness to pay surveys, then penetration of the higher speed
plans would be higher than is in fact the case. If such willingness to pay indeed existed, it
would be profitable to roll out FTTH, and the market would have done so already.
33 Survey undertaken by ShapeNZ for the New Zealand Business Council for Sustainable Development and Vodafone
NZ.
34 Small,J., A. Beer, C. Sweetman, D. Fougere, and C. Birch (2008) “Open Access Broadband in Auckland: Demand, Costs
and Benefits” Report by Covec, Teleconsultants and Phoenix Research for the Auckland Regional Broadband
Advisory Group
33

There is considerable uncertainty about how much demand for high speed broadband
there will be in the future, and when this will emerge. This uncertainty is behind the
current, low, level of investment in fibre to the home—current market demand for
broadband services is insufficient to create business case for widespread fibre to the
home. This may change in the future—as we found in section 2, continuing proliferation
of Internet applications and devices that utilise high speed broadband will encourage
users to demand faster broadband services in the future. Indeed it is possible that we are
approaching a tipping point, beyond which many users start to demand high speed
broadband, although there is no way to confirm whether this is the case or where such a
tipping point may be.
Even if the Government and/or telecommunications providers invested in wide spread
deployment of fibre to the premises, our review of current willingness to pay suggests
that high take up, at prices which reflect the cost of service, is unlikely.
There are a number of reasons why users might not see value in high speed broadband,
including:
• At the moment many people may not be aware of the applications they could
access using high speed broadband, and the potential benefits these could
generate. As people become more aware of what high speed broadband would
enable the to do, the value they place on it may increase
• Potential users may be concerned that, for a range of reasons, they may not
actually experience the speeds they pay for. As we discussed in section 2.1
problems in any element of the “supply chain” can reduce speeds below what
users should receive
34

4 The Counterfactual: What the Market will
Provide
This section discusses the level of broadband services that users are likely to experience if
broadband provision is left to the market—that is, if no new public investment is made
available by government to subsidise high speed broadband. This is the “counterfactual”
against which we will assess options for government intervention.
We develop the counterfactual by:
• Reviewing broadband investment plans publicly announced by the three major
participants in New Zealand’s telecommunications market (Telecom New
Zealand, TelstraClear, Vodafone) and other market participants; and
• Bringing the above information together, to build a picture of what
applications New Zealanders will be able to access in around five years time.
While this section is based on publicly announced investment intentions, we have had
the benefit of working closely with the main infrastructure investors to understand what
their investment programmes, will deliver in terms of the level and availability of
broadband services to residential and business customers.
4.1 Investment Plans of Service Providers
The private sector has committed over $2.5 billion in investment to 2012 towards the
deployment of high speed broadband infrastructure and other communications based
infrastructure. The majority of this investment has been announced by the three major
players in New Zealand’s telecommunications market.
Telecom New Zealand is delivering a $1.4 billion investment in deploying Fibre to the
Cabinet (FTTC) and other improvements to its network, delivering broadband download
speeds of at least 10 Mbps to 20 Mbps, and upload speeds of at least 1 Mbps, to
approximately 80 percent of New Zealanders by 2011. Telecom New Zealand’s
investment leaves potential for an upgrade to FTTH in the future. Figure 4.1 illustrates
Telecom’s FTTC solution. We describe the download and upload speeds Telecom
expects to deliver through FTTC in Box 4.1.
Figure 4.1: Chorus Fibre to the Cabinet Solution
35

Box 4.1: Telecom’s Broadband Download Service Targets Following Cabinetisation
By 2011: ADSL2+ accessible by 80 percent of users at least 10 Mbps with average upload
speeds of 1 Mbps
By 2011: VDSL accessible by 80 percent of users at >10 Mbps
By 2011: VDSL accessible by 20 percent of users at 50 Mbps with upload speed of up to
10 Mbps
Telecom has so far upgraded more than 400,000 homes and businesses from ADSL to
the faster ADSL2+ connections, and recently increased the data caps for its retail
broadband plans. 35
In addition, Telecom is also investing $574 million in deploying a new WCDMA mobile
network. Telecom’s new network will be available to 97 percent of New Zealanders by
June 2009, and will provide access to advanced 3G mobile broadband services.
Vodafone New Zealand announced in July 2008 that is extending the coverage and
speed of its 3G Broadband Network to 97 percent of New Zealanders, increasing its
total 3G infrastructure investment to $500 million. Vodafone expects to eventually
deliver broadband download speeds ranging up to 28.8 Mbps and upload speeds of up to
11.5 Mbps through its 3G network using High Speed Packet Access (HSPA). 36 It expects
to complete this infrastructure upgrade by April 2010.
Vodafone is also expanding the delivery of its fixed line services, known as the “Red
Network” following its announcement, in June 2008, that it is installing its own ADSL2
and VDSL2 capable equipment in 41 exchanges in Auckland. It expects to complete this
by the end of 2008, after which it expects to move into other major centres, including
Wellington, Hamilton, Tauranga, Palmerston North, Rotorua and Taupo, Christchurch
and Dunedin. Vodafone expects to offer a commercial VDSL2 product and plans by the
end of 2008, delivering download speeds of up to 50 Mbps and upload speeds of up to
20 Mbps. 37
TelstraClear’s High Fibre Coax (HFC) network currently offers users in Kapiti and
Wellington broadband download speeds of up to 10 Mbps, and up to 25 Mbps in
Christchurch. The HFC network delivers upload speeds of up to 2 Mbps.
TelstraClear has recently announced it will install its own equipment in approximately 70
exchanges over the next 18 months, including 44 exchanges in Auckland and the
remainder in the other centres in which it operates. It has so far installed VDSL2 capable
equipment in 140 of its cabinets.
TelstraClear recently became the first provider to offer VDSL in New Zealand,
launching, in October 2008, VDSL2 services delivering download speeds of 30 Mbps and
upload speeds of 7 Mbps to business customers in parts of Auckland City and the central
business districts (CBD) of Hamilton, Tauranga, Napier, New Plymouth, Wanganui,
Lower Hutt and Wellington. 38 It also plans to extend VDSL2 services on the North
35 New Zealand Herald, 27 October 2008. “Super-fast Broadband for CBDs – at a price”
36 Vodafone media release, 4 July 2008. “Vodafone invests $500 million to build nationwide mobile broadband”
37 Vodafone media release, 23 July 2008 “Vodafone – delivering the future today”
38 TelstraClear’s VDSL2 service achieved 80 Mbps download speeds and up to 25 Mbps upload speeds
36

Shore, in Waitakere, Manukau, Palmerston North and Dunedin, before December,
2008. 39
Other investments include Vector’s announcement in February 2008 that it is extending
its fibre network in Auckland, with coverage from Manukau through to Albany,
Henderson and Pakuranga, creating what it calls a “fibre backbone ring” for the
Auckland region. 40 In addition to providing wholesale services, with Vodafone as its
primary customer, Vector has also announced it is delivering its own broadband services,
delivering 2 Mbps download speeds and 1 Mbps upload speeds. 41 NZ Communications,
previously Econet Wireless New Zealand, is rolling out a third national 3G mobile
network, which will cover 80 per cent of the population. 42
There are also a range of smaller providers that are launching new services in New
Zealand’s broadband market. Woosh Wireless provides wireless broadband and calling
in Auckland, Wellington, Canterbury and Southland. Citilink provides a network of
singlemode fibre to buildings, rolled out in a mesh architecture, enabling fast
communication links between users in Wellington’s CBD. The company is also building a
new fibre network in Auckland’s CBD. 43 ThePacific.net provides a range of broadband
packages offering up to 2 Mbps download and upload speeds in the upper South Island.
In addition, ThePacific.net is actively promoting itself as an option for deploying fibre to
the home (FTTH) broadband in new developments outside of urban areas. The company
has recently installed a high speed fibre network in a retirement village in Stoke and is
currently bidding for several other FTTH projects. The company has also installed
private wireless networks for mining companies on the South Island. 44
While this summary is not exhaustive, the activities of these private firms demonstrate
that there is an appetite by profit maximising entrepreneurs to enter the market and
supply services in areas where they see profit opportunities—irrespective of whether
government support is available. In some cases, firms have made commercial decisions
not to apply for government support. For example, ThePacific.net recently stated that it
decided against applying for government funding because it prefers to provide services
over private fibre networks rather than supply services through open access 45 —which is
often a condition of receiving government funding.
The investment plans described above are in addition to infrastructure already in place.
Almost all New Zealanders can access some form of broadband now, whether it be
through a DSL connection, HFC or optical fibre, wireless or mobile broadband, or
satellite. The investments detailed above will deliver huge improvements in the quality of
broadband services available in New Zealand. As a result many more users will be able to
access high speed broadband than is currently the case.
39 New Zealand Herald, 27 October 2008. “Super-fast Broadband for CBDs – at a price”
40 Vector media release, 14 February 2008. “Vector announces fibre optic network extension”
41 Vector media release, 26 April 2008. “Vector Communications launches Infinite Broadband”
42
“Work starts on third mobile network” The Dominion Post | Monday, 17 December 2007
43 Citilink http://www.citylink.co.nz/information/locations/network-map.html (accessed 28 October, 2008)
44 The Dominion Post, 20 October 2008. “Retirees log on with fibre optics”
45 The Dominion Post, 20 October 2008. “Retirees log on with fibre optics”
37

4.2 Projected Demand for Internet Based Applications
The most “bandwidth hungry” applications currently available are those that deliver
video content. Demand for higher bandwidth therefore will likely come from users that
want to use entertainment based applications, including:
• “Web 2.0” applications, such as YouTube and social networking sites like
Facebook
• Interactive TV and gaming
• IPTV - multicast
• Video on Demand - Real Time
• HDTV - multicast
• Two-way HDTV (used in eEducation and eHealth)
• HD Video conferencing; and
• Telepresence
Given these applications require greater bandwidth to operate effectively, they will only
be available to users who choose to pay more for faster broadband packages. They are
therefore generally regarded as “premium content”.
There is considerable uncertainty over the size of the market for premium content
applications. For example, the recent report by Covec and others on the broadband
market in Auckland found that a divergence exists between different types of households
and the envisioned benefits of high speed broadband. The Covec report found that
higher income groups were more likely to suggest “remote learning” and “working from
home”—activities that can be accommodated using current broadband technology—as
the greatest opportunities offered by high speed broadband. In contrast, entertainment
options, such as watching videos and downloading music, and social connectivity, such
as making phone calls and sharing photos or videos, were more popular among lower
income households. 46
4.3 What Users are Likely to Get under the Counterfactual
Private investment in broadband is going to deliver considerable benefits to New
Zealanders over the next two to three years. Figure 4.2 illustrates how we expect the
supply chain for delivering broadband will develop under the counterfactual. The
counterfactual will deliver considerable improvements in the core and local access parts
of the supply chain.
Putting together the investment plans outlined above, we estimate that by 2012 at least
80 percent of New Zealanders will have access to broadband services capable of
download speeds of between 10 Mbps and 20 Mbps, and upload speeds of at least 1
Mbps. Provided no other barriers exist, this will enable users to access almost all
currently available Internet applications, at a good quality of service. The main exceptions
will be two-way high definition video applications, such as high definition videoconferencing
and telepresence, which will not be widely accessible under the
counterfactual.
46 Small,J., A. Beer, C. Sweetman, D. Fougere, and C. Birch (2008) “Open Access Broadband in Auckland: Demand, Costs
and Benefits” Report by Covec, Teleconsultants and Phoenix Research for the Auckland Regional Broadband
Advisory Group
38

Businesses located in the central business districts of most New Zealand cities currently
have access to fibre to the premises as a result of the investments of Telecom,
TelstraClear, and other smaller providers, and therefore can access download and upload
speeds of approximately 100 Mbps. Where this is not the case, businesses located in
central business districts will have access to download speeds of at least 30 Mbps and
upload speeds of 7 Mbps through TelstraClear’s new VDSL2 service.
In section 2.1 we identified a range of constraints that can impact on the actual level of
service users experience. We believe the following constraints will remain under the
counterfactual:
• The capability of hardware—that is internal wiring, computers, and other
devices—within the user’s premises
• The cost of international backhaul. Prices for capacity on the Southern Cross
Cable recently dropped by at least 44 percent, 47 which should make a positive
difference in the foreseeable future. However, it is difficult to predict how
prices for international capacity will change in the future as demand for
international capacity continues to increase.
If initiatives to negotiate new interconnection standards for low latency applications,
such as voice or videoconferencing over the Internet, are successful, this should deliver
substantial quality improvements for users of these services.
Figure 4.2: Development of the Counterfactual on the Supply Chain
Customer end
hardware: still
a bottleneck
Local access:
Improvements in
broadband service
quality; high speed
broadband to 80%
High costs of
international backhaul
& peering still likely to
be a factor
Modem
Local
backhaul
Local IP
cloud
Core
network
International
gateway
International
backhaul
Customer
equipment
Internal
wiring
Core network:
Capacity
improvements
Key:
Optical fibre
Copper
“Last mile”
Street
cabinet
Local access
network
Internal wiring
47 “Bold Steps to Support Hi-Speed Broadband”, Press Release: Southern Cross Cable Network, 3 November 2008.
39

5 Incremental Benefits and Costs of Subsidising
Broadband
In this section, we compare the proposal to subsidise the roll-out of fibre to the home to
75 percent of New Zealanders to the counterfactual described in the previous section.
We also review the New Zealand Institute’s analysis of the potential benefits from high
speed broadband. We use the results of this analysis to draw conclusions on:
• The incremental benefits and costs of government intervention to promote
high speed broadband, and
• The opportunities for greatest potential gains from government intervention,
and where they are in the broadband supply chain.
5.1 Proposed Broadband Policy: Wide Scale Roll-out of Fibre to the
Premises
Table 5.1 summarises the key elements of the Governments proposed broadband policy.
The “Better Broadband for New Zealand” policy statement commits $1.5 billion of
public investment, alongside expected private sector investment, to accelerate the
coverage of FTTH to 75 percent of New Zealanders. The policy also commits $48
million to accelerate the roll out of broadband services in rural and remote areas of New
Zealand.
Table 5.1: Public Investment in High Speed Broadband
Policy
Better Broadband for New
Zealand
Amount of Public
Funds Committed to
Subsidising High
Speed Broadband
Mode of High
Speed Broadband
Delivery
Period of
Funding
NZ $1.5 billion Fibre to the Home Five Years
Extended Broadband
Challenge Fund (Rural and
Regional areas of New
Zealand)
NZ $48 million
Will fund a mix of
fibre, satellite and
wireless technologies
These policy proposals are based on the following principles 48 :
• The public investment should not provide undue advantage to existing
broadband network providers
• The FTTH network is to be open-access so that many service providers can
compete to provide broadband services over it
• Excessive duplication of the network should be avoided
• “Everyday Kiwis” should receive affordable world class broadband services
• The public-private partnership engaged to deliver FTTH must be focused on
New Zealand’s economic future and not on legacy assets.
48 National Policy Statement “Better Broadband for New Zealand”
40

5.2 Comparing Access to Applications under the Government’s
Proposed Policy to the Counterfactual
The Better Broadband policy does not appear to specify where the FTTH roll-out would
occur. We assume that the FTTH roll out will occur first where fibre is relatively cheap
to deploy, that is in areas with high population densities. Accordingly we assume that
coverage of FTTH under the Government’s proposals will extend to urban centres,
towns and regions, similar to the coverage of Telecom’s cabinetisation programme.
Based on this assumption, the policy will deliver an upgrade from the services available
under the counterfactual to the much higher level of broadband service that fibre can
provide, for the 75 percent of users located in more densely populated parts of the
country.
Thus the incremental benefits from the Government’s proposals derive from the
difference in the quality of users’ broadband experiences in moving from ADSL2+,
VDSL or wireless internet to fibre to the premise. There are two dimensions to this:
• Affected users will be able to access those applications not supported by the
counterfactual, in particular two-way high definition video applications, such
as high definition video-conferencing and telepresence 49
• The quality of broadband service users experience in using Internet
applications will be much greater if all the other factors in the value chain have
also been addressed. This will be particularly noticeable for users of
applications such as YouTube, Facebook, gaming applications, and real time
video or television.
5.3 Review of Benefits from the New Zealand Institute Analysis
As we discussed earlier in this report, the New Zealand Institute has published several
reports including assessments of the benefits to New Zealand from bringing forward
investment in high speed broadband, and specifically rolling out fibre to the home for 75
percent of New Zealanders. The Institute’s findings have been widely used by
commentators and policy makers to justify the case for public investment in broadband.
It is therefore important that we examine the Institute’s analysis here, to form our own
assessment of how these estimated benefits stack up against the costs.
If we are to accept the Institute’s analysis, the estimated potential benefits for New
Zealand, in absolute terms, from deploying FTTH to 75 percent of New Zealanders is
between $2.7 and $4.4 billion per year. The Institute also estimated the benefits of the
counterfactual we have described to be between $0.9–$1.5 billion per year. 50 Based on
the Institute’s estimates, the potential incremental benefits from factual could be in the
range of $1.5 to $3.5 billion per year (see Table 5.2 over the page).
The Institute suggests that the annual benefit stream from the deployment of FTTH will
come from six specific types of use. Table 5.2 sets out the annual incremental benefits
from each of these usage categories, based on the Institute’s estimates, key assumptions
that underpin these calculations; and our assessment of how realistic these estimated
incremental benefits are.
49 As we discuss below, to access to this type of application, in particular telepresence, users must have the right
equipment. This can involve a potential large investment for users.
50 As the table indicates, the Institute considers that these benefits from the counterfactual will come from at least
partial realisation of estimated benefits from uses in health and remote working.
41

Table 5.2: Estimated Annual Incremental Benefits from FTTH by Type of Use
Assumptions Castalia Assessment Impact of bottlenecks
Sector Benefits NZI
($m) (1)
Estimate
(under the factual)
Telepresence • Reduces travel costs and
out of office time
• Potential growth by
increasing sales force
productivity
Digital
media
• High speed broadband
will increase the
productivity of “creative
companies”
260–430 • Requires sufficient roll out to
allow 500 large businesses and
5000 small businesses to take
up telepresence
680–1030 • Requires digital media
production houses to have
very fast, two-way, broadband
to enable transfer of very large
files (nationally and
internationally). This would
require, say, 70+Mbps
• Large businesses are already
connected to fibre
• Most medium term businesses will
be connected to fibre under
counterfactual if located in main
commercial areas
• Telepresence requires very high
level of customer site investment. It
is very unlikely that telepresence will
be viable for small businesses over
the next 10 years
• We assess no difference between
the factual and the counterfactual,
and hence no benefit
• Digital media production houses are
likely to be located in main
commercial areas, where they can
already access fibre
• To the extent that file transfer is a
problem under the counterfactual,
congestion in the core or backhaul
networks is a more likely cause than
the access network
• We assess no difference between
the factuals and the counterfactual,
and hence no benefit
• The cost international
capacity will affect the
cost and quality of
international
telepresence meetings.
• This is likely to reduce
estimated benefits
from telepresence
replacing international
travel
• The cost of
international capacity
will still be a factor,
and may reduce the
estimated benefits
42

Assumptions Castalia Assessment Impact of bottlenecks
Sector Benefits NZI
($m) (1)
Estimate
(under the factual)
Storage and
Manipulation
of Data
Remote
Working and
Healthcare (2)
Institute identifies this as a
potential growth market for
New Zealand
Remote Working:
• Increased workforce
participation
• Reduced travel costs
200–500 Assumptions include:
• 5 (new) data centres in NZ
• NZ captures 50% of growth
of hosted application
management and
infrastructure management
0–1010 Remote Working:
• Full benefits are based on
100% white collar workers
taking up remote working, that
is an additional 950,000
workers
• Assumes extra 35,000 white
collar workers aged 65+yrs
begin remote working
• Since fibre to the premises is already
available in main business centres,
there are no barriers in the access
network to the creation of data
storage centres
• We assess no difference between
the factual and the counterfactual,
and hence no benefit
Remote Working:
• Applications required for remote
working, including
videoconferencing and file
exchange, will be useable over
ADSL2+ and VDSL. We assess no
difference in access to required
applications between the
counterfactual and the factuals
• There is little evidence that remote
working reduces travel costs.
Remote working is often a daily
addition to on-site working. We
assess very minor differences
between the factual and the
counterfactual in travel costs
• Benefits unlikely to exceed $100
million
• Costs of international
capacity may reduce
New Zealand’s
competitiveness in
providing data
warehousing for
offshore customers
• Customers’ internal
wiring, and the
capacity of their
computers, will limit
the perceived value of
fibre to the home,
which may reduce the
total estimated
benefits
43

Assumptions Castalia Assessment Impact of bottlenecks
Sector Benefits NZI
($m) (1)
Estimate
(under the factual)
Education
Healthcare:
• Better access to medical
records (through ability to
transmit large files
quickly)
• Preventative care
• Better patient monitoring
• Improved
communications
• Reduced professional
training courses
• Potential for export of
education services
(Remote learning)
Total 1490–3470
Healthcare:
Assumes sending data files as
large as 240 MB
Healthcare:
• Majority of healthcare facilities
already located within reach of fibre
to the premises
• Low take up is a function of
affordability, not lack of
infrastructure
• The factual is unlikely to differ from
the counterfactual
350–500 • Most high schools, universities and
other tertiary training institutions
are already within reach of fibre to
the premises
• Export of education services does
not require fibre to the home
• We estimate no difference between
the factual and the counterfactual
Export of eEducation
services may be
constrained by the cost
and capacity of
international backhaul in
the future
Note: (1) The benefits shown are incremental benefits, that is the New Zealand Institute’s estimated absolute benefits, less the benefits the Institute consider
will accrue under the counterfactual.
(2) The New Zealand Institute estimates absolute benefits from remote working of $610 million to $810 million per annum, and from health of $620
million to $1100 million. The Institute estimates the counterfactual will deliver $900 million to $1500 million of these benefits, across health and remote
working.
44

From the Institute’s analysis, the greatest benefits are expected to be delivered by
businesses (digital media and data storage and manipulation), followed by education and
telepresence. However, securing these benefits either does not require wide deployment
of FTTH, or the benefits will be prevented by factors which are not addressed either
under either the counterfactual or the factual. To the extent that the benefits require fibre
to the business, most businesses located in main commercial areas will readily have access
to such opportunities under the counterfactual. To the extent the benefits depend on
other parts of the supply chain that are themselves constrained, there will be no, or
limited, benefit from FTTH.
Similarly the benefits the Institute suggests will come from education and health would
most effectively be captured by deploying fibre to schools and hospitals rather than
through a roll out of FTTH. Most of that deployment can occur under the
counterfactual.
Health and remote working appear to be the only areas where the deployment of FTTH
to 75 percent of New Zealanders would be required to secure the benefits. However, the
Institute states that significant benefits (between $900 and $1500 million each year) will
be captured under the counterfactual we have identified, through Telecom’s FTTC roll
out, and therefore do not require FTTH. 51
It therefore appears that the majority of the economic value to be gained, which the
Institute associates with the deployment of FTTH, could in fact be captured by a more
targeted deployment of fibre to premises of businesses, schools and hospitals rather than
through a full deployment of FTTH to retail users.
Overall, a line-by-line review of the Institute’s analysis of benefits from FTTH shows
that most of the estimated benefits will largely be available—should businesses and
households choose to invest in the necessary customer-premises hardware—under the
counterfactual.
Importantly, it is clear from a detailed review of the Institute’s findings that for New
Zealand to obtain many of the benefits from high speed broadband:
• The cost of international capacity will need to come down (or willingness to
pay for high speed data transmissions increase), and
• We will need to address the bottleneck created by the capacity of many
customers’ internal wiring, computers, and other hardware.
5.3.1 Conclusion on incremental benefits
Estimating public benefits from activities such as eHealth and eEducation is incredibly
speculative. However, by focusing our analysis on access to applications we can focus on
the real differences between the factual and the counterfactual. When we look at the
current and emerging applications, it is striking that the key differences between the
counterfactual and the factual lie in improved access to high definition television services.
To the extent that these services are mainly used for entertainment purposes, it is
difficult to see what public benefits may arise. For health and education services, the
incremental public benefit in moving from using ordinary videoconferencing to using
high definition videoconferencing may be small. In any case, high levels of consumer site
investment which would be required to take advantage of this benefit would likely
preclude it from arising unless consumers perceived significant private benefits.
51 The New Zealand Institute, March 2008. “Assessing New Zealand’s Current Broadband Path: The Need For
Change) www.nzinstitute.org (accessed, 28 October 2008)
45

For example, imagine a specific example of eHealth: ability to consult a specialist
remotely, without having to travel to a major centre. Such a consultation may require
high quality videoconferencing facilities, enabling the specialist to observe the patient. It
may also require instantaneous testing and transmission of diagnostic results. While such
a remote consultation is easy to imagine in principle, it is hard to imagine it being
conducted from home. The customer site teleconferencing facility, as well as the
diagnostic equipment, is likely to be too expensive for the household, as well as generally
unnecessary. It is much easier to imagine a patient travelling to their nearest health
centre, which will have the necessary facilities and the necessary high speed connection.
5.4 Incremental Costs of Policy Factual
In this section we discuss the types of costs associated with the deployment of high
speed broadband. Williamson and Marks (2008) 52 usefully categorise these costs as:
• Costs for users and companies
• Wider economic costs.
5.4.1 Costs for users and companies
Apart from paying for the service itself, users are likely to face additional costs in order
to use high speed broadband. As we have discussed, this may include purchasing new in
home equipment and upgrading writing in their homes, in particular in the case of older
homes. Companies too will need to upgrade the main elements of their core networks to
support the delivery of high speed broadband. Without addressing these limitations,
users would not be able to enjoy the benefits of high speed broadband.
Where public investment accelerates the adoption of high speed broadband to the point
where it displaces the ability to utilise current technologies, consumers will be forced to
pay these costs if they want to use online applications. 53 For example, if an FTTH
network was built using existing trenches, and replacing the current copper
infrastructure, market participants would no longer be able to provide cheaper dial up or
DSL services as it is not possible to provide these services using fibre technology.
5.4.2 Wider economic costs
There are a number of wider economic costs associated with public investment
subsidising the deployment of high speed broadband which we must consider:
• Stranding sunk investments: Existing investments are in effect written off
or devalued, where public investment leads to the construction and purchase
of new infrastructure and equipment that displaces existing assets prior to the
end of their economic life. This outcome, often referred to as “asset
stranding”, is a cost for all New Zealanders, not just for the shareholders of
companies that own the infrastructure and equipment. The value of existing
infrastructure and equipment to New Zealanders is in the benefits they would
forego if these assets were no longer available to use
52 Williamson, M. & Marks, P. (2008) “A Framework for Evaluating the Value of Next Generation Broadband: A Report to the
Broadband Stakeholder Group” PLUM Consulting. We discuss the categorisation of costs and benefits further in
Appendix B.
53 A precedent for this occurring can be drawn with the proposed switch off of the analogue television network. The
New Zealand has mandated that the analogue television network will be “switched off” once 75 per cent of
households have digital television or by 2012, whichever is sooner. (New Zealand Government media release, 29
November 2007)
46

• Displacing of private investment: Public investment which subsidises
outcomes that would have otherwise been delivered commercially effectively
displaces private investment and therefore reduces economic activity. This
represents a transfer of cost from the private sector to the taxpayer. As public
funds are scarce, allocating public funds to outcomes that could be delivered
commercially would also come at the cost of not funding—or funding to a
lesser extent—other public policy priorities. 54
There are also welfare costs associated with using taxpayers’ funds to pay for
subsidies. For example, if the policy makers were forced to increase taxes (or
were unable to reduce taxes) because of the need to fund subsidies, we need
to account for the deadweight loss from tax collection
• Externality: Public investment in accelerating the deployment of high speed
broadband will affect users and businesses in indirect ways. For example, the
laying of buried fibre may require roads to be closed and new trenches to be
dug, causing road traffic congestion and disruption to people and businesses.
Using this framework, we now turn to the incremental costs associated with the policy
factual.
5.4.3 Incremental costs of the Policy Factual
Figure 5.1 presents the components required to deliver a FTTH broadband network.
Figure 5.1: Depiction of an FTTH Network
The market is already delivering fibre to the cabinet (FTTC). Hence, the main cost in
deploying FTTH is in laying and connecting fibre from the cabinet to the home (the
aggregation segment), replacing the copper sub loop that market participants currently
use to deliver broadband services. We understand that on current estimates this will cost
approximately $6.2 billion (inclusive of the promise of public investment of $1.5 billion
to fund FTTH). The Government’s proposal anticipates investment by market
54 Economists refer to this as “opportunity cost”
47

participants to provide the $4.7 billion difference between the proposed public subsidy
and the total cost of FTTH.
The key components of the total estimated cost of FTTH are presented below in Table
5.3.
Table 5.3: Components of Cost of Delivering FTTH
Type of Cost
Distribution costs
Common equipment costs
Basic house costs (not including internal
house wiring)
Description of Components of Cost
• Cost of fibre
• Laying the fibre in existing distribution
ducts
• Project management costs.
• An ONU (Optical Network Unit)
terminates the optical signals at the user side
• A fibre splitter, which separates the
transmission fibre into multiple fibres for
delivery to street kerbs outside homes.
• This involves the connection of the fibre
from the street (kerb) to the house. It
involves burying a fibre lead in to a HONT
(Home Optical Network Terminating Unit)
• Power is also required to operate the
HONT.
While we have not been able to verify the total cost of rolling-out of FTTH—and there
are certainly some who argue that new fibre laying techniques could reduce costs
dramatically—it seems clear that the infrastructure costs will fall in the $3 billion to $6
billion range.
In addition to the above direct costs, the policy to subsidise the deployment of FTTH
would have the following additional costs:
• Internal house wiring and equipment upgrade: Most homes in New
Zealand continue to operate with internal copper wiring. As discussed above,
unless upgraded, outdated internal house wiring will restrict the ability of users
to enjoy the full speed, capacity, and benefits offered by FTTH. Without an
internal wiring upgrade, the effects of FTTH on customer experience may not
differ materially ADSL2+ and VDSL. At present, there are no policy
proposals to subsidise the upgrade of internal wiring in users’ homes.
Therefore, users will need to balance the cost of rewiring their homes—in
addition to the cost of accessing high speed broadband—with the perceived
benefits delivered by FTTH. We estimate that it would cost approximately
$400 per home to upgrade wiring and purchase in home equipment to ensure
users receive the full benefits of FTTH once they take it up. We present the
components of our cost estimate below.
48

Table 5.4: Cost of Upgrading Internal House Wiring and Equipment
Cost Value ($)
Rewiring of house $300
Internal equipment $108
Cost per house $408
Number of houses likely to be covered by
Factual 2
Total cost of replacing internal house
wiring and equipment
1,360,500 houses
$555.1 million
• Asset stranding of existing sunk investments by market participants:
Deployment of FTTH will displace the existing copper sub loop, owned by
Telecom (Chorus), and currently accessed by all market participants in
delivering DSL based broadband services. Deployment of FTTH will also
make redundant the equipment operating in cabinets, known as DSLAMs,
which have recently been upgraded by all market participants in order to
enable them to provide ADSL and VDSL high speed broadband services. All
of the major market participants own and operate equipment of this type in
delivering their broadband services.
Deployment of FTTH will also devalue TelstraClear’s sunk investment in its
Hybrid Fibre Coax (HFC) network. The extent to which the HFC network
may be devalued will depend on whether users choose to migrate from the
HFC network to new high speed broadband packages offered over FTTH. As
most applications can currently be delivered effectively using the HFC
network, users are likely to base their decision on the price of FTTH
broadband packages relative the broadband packages offered by TelstraClear
delivered though the HFC Network.
FTTH will also devalue Vodafone’s sunk investment in its 3G Mobile
Broadband Network and Telecom’s new investment in a WCDMA network,
although to a lesser extent than for fixed line assets.
• Non quantifiable costs: the deployment of FTTH will create externalities
for users and businesses, as we described in section 5.4.2.
• Risk of “getting it wrong”: Through acting now and investing in FTTH,
New Zealand loses the option of waiting to see how new technologies evolve,
increasing the risk of “getting it wrong”. The deployment of FTTH may
deliver benefits to New Zealand in the longer term. However, we suggest that
there is a large benefit attached to the option of waiting to invest in FTTH.
As Williamson and Marks (2008) suggest, uncertainty on the types of benefits
that can be delivered by FTTH will be reduced as new internet based
applications, requiring higher bandwidth and speed levels, are developed. In
particular, the main uncertainty associated with deployment of FTTH—
willingness of users to pay for high speed broadband services—is likely to
decline as information about willingness to pay and take-up in relation to high
49

speed broadband will expand considerably as more data becomes available
from deployments of FTTC and FTTH trials in New Zealand and in other
countries. In addition, as technologies develop further, service providers will
gain more and better information on the optimal architecture for FTTH
access networks. 55
Overall, the total incremental costs of the policy factual is likely to be well in excess of
$6.0 billion.
5.5 Comparison of Costs and Benefits
We summarise the potential costs and benefits associated with the counterfactual and the
factual below in Table 5.5.
55 Williamson, M. & Marks, P. (2008) “A Framework for Evaluating the Value of Next Generation Broadband: A Report to the
Broadband Stakeholder Group” PLUM Consulting
50

Table 5.5: Costs and Benefits of Broadband Scenarios—Summary
Counterfactual
Key features Benefits Costs
• Delivery of high speed broadband with
download speeds of between 10Mbps and
20Mbps to 80% of New Zealanders
• At least 80% of New Zealanders will be able
to access all available internet based
applications, accept for those that require
high definition video content
• Outcome delivered commercially without
public investment distorting market outcome
• Based on estimates by The New Zealand
Institute, the additional benefits stream from
Telecom New Zealand’s cabinetisation
investment could be between $0.9 and $1.5
billion.
• Publically announced private investments by
market participants total over $2.5 billion to
2012
• Ongoing operating costs of new investments
• Cost of externalities caused through
“cabinetisation” process and other network
investments.
51

Key features Benefits Costs
Policy factual • Objective to deliver FTTH network to 75%
of New Zealanders over six years,
commencing with health and education
institutions and first tranche of homes.
• Based on estimates made by The New
Zealand Institute, ultimately, National’s plan
may deliver an incremental benefits stream
to the market led scenario of between $1.5
and $2.9 billion (Castalia assesses the
incremental benefits to be much lower)
• Once implemented, 75% of New Zealanders
will have access to 100 Mbps upload and
download speeds—far in excess of the
required capacity to use any application
currently available effectively
• Users will benefit from higher broadband
speed, capacity and network reliability than
offered under either the market led scenario
or Labour’s policy
• National’s policy provides users with the
ability to access all applications currently
available, including ‘bandwidth hungry’
applications
• The excess speed and bandwidth capacity of
FTTH means that it will cope with any new
‘bandwidth hungry’ applications that come to
market for the foreseeable future.
• Deployment of FTTH estimated to be $6.0
billion. 1.5 billion funded by taxpayers
• Asset stranding of existing network investments
• Cost of upgrading internal house wiring needed
to secure benefits delivered by FTTH estimated
as up to $555 million
• Cost of externalities caused through network
construction
• Risk of “getting it wrong”.
52

Our analysis suggests that simply deploying fibre to the premises to a wide group of users
is unlikely to deliver the anticipated incremental benefits, relative to what would occur
under the counterfactual. Bottlenecks in other part of the broadband supply chain would
still constrain the potential benefits, while the costs of such a wide scale deployment
would be extremely high. The key reasons for this finding are:
• A majority of broadband users are still demanding low data cap (and
lower cost) plans: The value New Zealanders place on broadband (and what
it enables them to do) currently remains relatively low. While willingness to
pay may increase in the future (as we discussed in section 3.5) there is
considerable uncertainty over when, and to what extent. As a result, even if
fibre to the home was available, many users may not take it up, or may not be
prepared to pay prices that reflect the cost of provision
• The market is delivering investment in high speed broadband without
new public investment: Private companies have publically committed to
investing over $2.5 billion to 2012 56 in deploying high speed broadband and
other communications based infrastructure. Each of the three main market
participants providing broadband services in New Zealand has announced
major investments directed at delivering high speed broadband services. This
indicates that the deployment of high speed broadband in New Zealand in the
short to medium term is likely to accelerate. In addition, a number of smaller
private providers have entered the market, providing competitive high speed
broadband solutions targeted to specific consumer groups. In some cases
these firms have opted not to apply for government subsidies, preferring
instead to provide broadband services on their own terms without open access
limitations
• High speed broadband delivered by the market will support most
applications: The most popular internet based applications demanded by
users (e-mail and general web surfing), and even “bandwidth hungry”
applications such as videoconferencing, will be accommodated by the high
speed broadband services and associated compression technologies that will
be available to most New Zealanders under the counterfactual
• Constraints in other areas of the supply chain will constrain the delivery
of high speed broadband: The quality of service users obtain from high
speed broadband depends on the capability of all the elements involved in
supplying the service. These include not only the telecommunications
network, but also on the international link, backhaul infrastructure, and user’s
own wiring and hardware.
It is likely that the internet will always suffer from congestion. The internet is a
collection of networks. Thus the limits of other networks, wherever they are
located, will always impact on user experience. The overall internet experience
for users will only significantly improve with global improvements in capacity,
even where significant public investment to deploy high speed broadband
domestically is made available
• Public investment subsidising the deployment of fibre to the premises
risks devaluing existing sunk investments by private companies: This
outcome would also add uncertainty to New Zealand’s investment climate.
56 “Digital Strategy 2.0 http://www.digitalstrategy.govt.nz/Digital-Strategy-2/ (accessed 25 September, 2008)
53

Public policies that subsidise the deployment of fibre to the home will devalue
existing sunk investments. This is likely to discourage market participants
from investing in infrastructure in the future
• The Government can capture the anticipated economic value from fibre
to the premises through targeted infrastructure upgrades and/or
subsidies: Where not captured under the counterfactual, the economic
benefits associated with the deployment of fibre (digital media, data storage
and manipulation, telepresence, education and health) come, in the most part,
from business users, education providers, and health facilities. Capturing these
benefits does not require the deployment of fibre to the home. In fact, these
benefits would be most effectively captured through deploying fibre directly to
businesses, schools and hospitals, through reducing the cost (or increasing the
availability) of international bandwidth, and by reducing bottlenecks in other
areas of the network. In addition, most businesses, tertiary education
institutions and hospitals are likely to have access to fibre to the premises
under the counterfactual. Importantly, fibre networks have already been
deployed and are operating in most central business districts in New Zealand.
Overall, it is likely that significant public investment in the short term will generate a
large over supply of broadband infrastructure for retail users, where demand from New
Zealanders currently does not exist. In other words, New Zealand could repeat the
experience of countries such as Singapore and Korea. Such policies are based on the
hope that building new infrastructure to deliver high speed broadband (particularly fibre
to the home), will attract demand for it. Current demand patterns for broadband services
in New Zealand suggest this is unlikely to be the case for some time. The simple reason
is that the applications people actually want to use do not require such infrastructure, and
the new applications are increasingly economical with bandwidth.
5.6 Policy Conclusions
In summary, our analysis shows that simply subsidising an immediate wide scale roll out
of fibre to the premises may not deliver the “step change” the Government is looking
for, with the costs of the intervention exceeding the benefits. This is not to an argument
against any Government intervention, or that the time will not come when public sector
support for fibre to the home will become justified. Rather, our careful analysis of the
supply chain, and of the limits to the use of Internet applications, suggests that a policy
which focuses on the replacement of the “last mile” infrastructure may be too blunt in
addressing the constraints on the use of high speed broadband in New Zealand.
There are some key problems that the market will not address—and where real
opportunities exist for government intervention to deliver significant benefits in the
short term. These are:
• Low willingness to pay for high speed broadband, and uncertainty
around how this will evolve: This is one of the reasons why private investors
are not currently planning to deploy fibre to the home on a wide scale. If the
Government wishes to stimulate additional deployment and up take of high
speed broadband, then it will need to address the low willingness to pay
currently exhibited by most users
• International backhaul: Costs and capacity of international data
transmission impact on the overall quality of service users experience. If not
addressed, this will substantially limit the potential benefits from any
investments in high speed broadband in New Zealand
54

• User equipment and wiring: Users will only see benefits from high speed
broadband to the extent permitted by the capacity of their internal wiring and
other hardware. For the full benefits of high speed broadband to accrue, many
users will need to invest in new hardware such as wireless modems, upgraded
internal wiring, and possibly new computers. Any policies to promote high
speed broadband will need to take account of the cost of such upgrades
• Continuing slow service for rural users: Under both the counterfactual and
the Government’s proposed broadband policy, around 20 percent of users—
in rural and provincial parts of the country—will not be able to access high
speed broadband. These users will still be able to access broadband using
satellite, wireless, or broadband mobile services. However the speeds they will
enjoy, and thus the range of applications they will be able to use, will be more
limited.
Overall, our analysis suggests that the Government should consider a flexible policy,
which progressively draws more and more New Zealanders into fast broadband, and
which addresses bottlenecks to productivity improvement in order of “bang for the
buck”: pick the low hanging fruit first. This policy may still have a place for subsidising
the roll-out of widespread fibre to the home, but such a subsidy is likely to come further
down the track.
55

6 Structuring Public Investment in Broadband
While our analysis in the previous section suggests that there is little justification for
significant short-term public investment in broadband infrastructure, we appreciate there
is considerable uncertainty over public benefits. Our analysis also shows that there are
strong arguments to target subsidies at specific supply chain bottlenecks, and to retain
flexibility to subsidise investment in the “last mile” as the market evolves. For example,
one can easily imagine a situation where the emergence of new applications, or
reductions in the cost of customer site equipment could put the spot-light on the “last
mile” infrastructure. Equally, it is possible that new data compression techniques, and
increased demand for mobility, will see the market evolve towards greater reliance on
wireless infrastructure.
In this section, we consider how the Government could structure a public-private
partnership which builds on commercial incentives facing the private sector, on changes
in technologies and demand patterns, and on the evolving ability and willingness to pay
to deliver the most effective intervention from the Government.
We do not aim to provide definitive answers. Our analysis for this paper suggests that
there is no single silver bullet to ensure that fast broadband makes the maximum
contribution to New Zealand’s productivity. The detailed design of any subsidy
programme will depend on the specific objectives the Government intends to achieve,
and more work needs to be undertaken to formulate these detailed objectives given the
growing understanding of the market bottlenecks. Instead, we highlight the important
questions that will need to be answered to ensure that a subsidy for high speed
broadband delivers the desired outcomes in the most efficient way possible.
This section is set out as follows:
• Section 6.1 provides a summary of what subsidies are and how they should be
structured to deliver efficient outcomes. The section also outlines the
importance of clarifying the objectives of policy intervention if the most
efficient results are to be achieved
• Sections 6.2 highlights and assesses different approaches to public funding for
the deployment of high speed broadband
• Section 6.3 discusses in more detail what we believe to be the best option—a
unit subsidy structure, and raises important implementation questions, and
• Finally, in section 6.4 we summarise our conclusions on delivery options, and
on questions that will require further work if the Government decides to
proceed down this track.
6.1 Subsidies and Matching Policy Objectives
The purpose of a subsidy is to increase the consumption of a good or a service where the
price customers are willing to pay is lower than the price suppliers are prepared to accept.
Figure 2 illustrates this concept. The figure shows a situation where the market is
demanding a level of broadband that is lower than the government’s target (as is the case
in New Zealand). The gap between what it costs to deliver the service and what the
market is willing to pay means that the social target will not be achieved.
56

Figure 2: Topping Up
This is where subsidies can help. Subsidies can be used to close the gap between the full
cost of providing the desired level of service and the available commercial revenues,
where:
• At current income levels, there may be limited ability or willingness to pay for
access to high speed broadband
• There are important positive economic externalities.
However, there are many possible ways for the Government to define its broadband
access objectives. The most critical question is whether the objectives relate to the
availability of technology or to its take up. The high level objectives which tend to be
enunciated in the New Zealand policy debate actually provide little guidance to the
specific policy objectives. Examples of such high level policy announcements are
presented in the table below.
Table 6.1: What do Policy Makers in New Zealand Perceive as the Problem?
“We need widespread broadband to fully access the power of the new
digital world. Broadband is necessary to support Next Generation
Networks (NGN), which underlie enriched and highly interactive web
services.”
“New Zealand has fallen behind its global competitors when it comes
to broadband. As a result, we are missing out on the opportunities of
this century’s leading technology – the Internet.”
“Fibre will deliver huge economic benefits for our country in terms of
enhanced productivity, improved global connectivity, and enhanced
capacity for innovation.”
But what does access to fast broadband mean? Should the government be more
concerned about households which currently have no access to broadband infrastructure,
or the households which have the technological access, but are not able or willing to take
up that opportunity? At present, less than half the households that can technically take
up broadband do so, and most of those take up limited options. Should the first priority
of the government be to roll out access to new technology, or to ensure that people
derive full benefits from the existing infrastructure?
57

High level principles provide little guidance to such specific questions. Keeping the
policy discussion at the high level contributes to confusion, and increases the risk of poor
quality outcomes.
A clear definition of the intended policy objectives is going to be critical to the success of
any proposed intervention. This involves deciding who the recipients of any subsidies
should be and what the subsidised service should be. The policy objective should drive
the subsidy structure, rather than the other way around. Broad commitment to public
investment in the fibre infrastructure pre-defines policy objectives, even if those
objectives turn out to be inappropriate. If the objective is unclear, then the subsidy will
fail to deliver.
6.1.1 Understanding what should be subsidised
Both the policy rationale for public funding and budgetary constraints will influence
decisions on what to subsidise. Where public funding is intended to introduce new
services for New Zealanders generally, the pool of intended beneficiaries could
potentially be very large and may include almost everyone in New Zealand. In many
cases, the beneficiaries of such subsidies may have been willing to pay for the full cost of
the service at the appropriate time, or they may attach very little value to the service
which will be offered.
Where subsidies are aimed at making services more affordable or accessible for particular
population groups, the targeted pool is likely to be smaller—for example low income
households or those living in rural areas. In that case, the deadweight loss from any
subsidy regime is likely to be lower.
There are two important distinctions underpinning decisions on what to subsidise:
• Does the government want to promote coverage or take-up?
– Promoting coverage of high speed broadband services makes the service
available to more people. But the benefits from this will not accrue unless
people actually decide to use the service
• Does the government want to promote particular technologies or services,
or take a technology neutral approach?
– Promoting particular technologies or services is more direct, and simpler to
implement, but risks closing out alternative technologies (including those
that may emerge in the future). In the longer run this may do more harm
than good.
Roll out of particular technologies
If the government has the specific objective of increasing the deployment of a particular
technology, such as fibre to the home, this would raise a number of questions such as:
• Should the government fund deployment only in high-cost locations, where
commercial provision is commercially unviable?
– This makes sense in principle, but raises difficult issues about where exactly
to draw the line between areas which should (and should not) be eligible
for funding
• What will the government do if take-up of the subsidised service is low?
– Subsidising roll out of a particular technology will not necessarily mean that
the technology is widely used. If users do not see the value in it for them,
58

they will not choose to subscribe and the expected benefits will be lost. In
designing the subsidy policy makers need to take account of the likely takeup
by users
• What about alternative technologies?
– As noted above, if the government promotes deployment of a specific
technology (or technologies), this will skew market outcomes in favour of
that technology (this effect is sometimes referred to as “picking winners”).
No one has perfect information on how broadband technologies will
develop in the future, which means there is a real chance of getting it
wrong, and promoting a technology or combination of technologies that is
not the most economically efficient solution for New Zealand over time.
The concerns raised above about the risk of getting it wrong apply in particular if the
subsidy aims to promote take up of particular technologies.
Defining how much utilisation is enough
It is unlikely that 100 percent take up of high speed broadband will be an efficient
outcome for New Zealand. Not all households and business need or would use high
speed broadband. For example subsidising broadband for users who either do not have
access to a computer or high definition television would clearly be a waste of public
funds. It is likely that at least some users would use a high speed broadband connection
to do the same activities that they could over a lower speed connection (email, web
browsing, online transactions). While high speed broadband would deliver some marginal
benefits in terms of the speed and quality of these applications, it is hard to see how this
would warrant a subsidy.
The problem here is how to determine the “optimal” level of uptake of broadband, after
which the costs of subsidising new connections would outweigh the benefits.
Where a product or service carries very high fixed costs, as is the case for broadband
services, it is often efficient to price discriminate. Price discrimination makes it possible
to maximise take-up of the service, despite wide differences between users’ preferences
and willingness to pay. 57
Policy makers and other commentators often oppose efficient price discrimination as it
appears to unfairly target particular groups of customers. However, price discrimination
is generally economically efficient, and enables service suppliers to maximise take up by
users. If the government wishes to maximise take up then any policies restricting price
discrimination would run counter to that goal.
Access to technical capabilities
If the government wishes to maximise coverage of high speed broadband, and thus
access to emerging high end applications, the technologically neutral option of
subsidising access capabilities is an attractive one. However, this approach raises a
number of complex challenges that would require careful attention. In particular:
• What quality compromises are acceptable?
57 In simple terms, price discrimination is where a seller of goods or services charges different prices to different
groups of customers, and the difference between these prices does not reflect any difference in the cost of serving
those customers. Common examples are lower entry rates for students and pensioners at movie theatres, or higher
airfares for business class or first class passengers. Price discrimination allows firms to recover high fixed costs,
while minimising the negative impact on demand from pricing above marginal costs (and the associated loss of
economic benefit that would result).
59

As we discussed earlier in the report, different access technologies have widely
different characteristics. In addition to different technical characteristics,
external factors can impact variably on different technologies. Electric fences
and distance can reduce the quality of DSL services, while the weather and
local geography can impact on the quality of wireless broadband. Important
questions include: what minimum quality characteristics must a technology
have to qualify for the subsidy? What quality compromises due to localised
factors outside the provider’s control would be accepted? and how would the
government monitor and enforce these quality standards once the subsidy has
been allocated?
• How do technologies fit together?
An important feature of telecommunications networks is that in order to
operate they need to interconnect with each other. This means subsidised
technologies must be able to interconnect with other networks (without
causing technical problems for the other networks or their users).
Take up of particular services
If the government wishes to encourage take up by users of particular services or
applications, this raises questions about targeting:
• Are the government’s priorities related to particular social groups or sectors?
This question relates not just to who is eligible for the subsidy, but also which
services the government should subsidise
• Is there still a technology deficit?
Overall, we would recommend a work programme which would:
• Identify the groups in New Zealand society which would benefit from taking
up fast broadband, and the level of broadband access they need from the
public policy point of view. For example, such analysis may indicate that the
biggest initial returns would come from subsidising access by lower income
urban population to the existing broadband infrastructure. The resulting
subsidy program may include both assistance with purchase of customer
premise equipment, and support for monthly access fees
• Identify the groups in society which would most benefit from access to fibre
to the premises, and develop a subsidy program which supports a progressive
roll-out to different categories of customers.
6.1.2 Fibre in New Zealand
Importantly, fibre is not the only solution to deliver next generation broadband to New
Zealand. As evidenced by the recent rollouts of 3G broadband, technology continues to
evolve as do the capabilities of individual platforms with it. Globally, DSL continues to
be the most commonly taken up broadband technology. In the European Union for
example, it accounts for 80 per cent of broadband subscriptions while fibre accounts for
only two per cent. A range of technology platforms can provide the broadband capacity
to satisfy demand for current and most emerging applications and uses. A mix of
technologies should always be the starting point for connecting New Zealand to fast and
scalable broadband. What will suffice in metropolitan or urban New Zealand is very
unlikely to be the optimum solution for the most remote parts of the country.
Clearly, the availability of broadband is not the only indicator. The relatively low take-up
of broadband over fibre in South Korea demonstrates that consumers will access what
60

they need at a price point they can afford and via a technology that suits their individual
needs.
Most consumers are largely indifferent to the technology used to deliver their broadband.
They are interested in its ability to connect them to the services they need and that it lets
them perform the tasks they want, when they want and where they want. It is highly
unlikely that the majority of consumers will want to pay for capacity they will not use.
6.2 Public Investment Options
Any intervention to ensure the deployment of faster and more reliable internet services
will require a subsidy structure that helps to mobilise commercial funding from Telecom,
Vodafone, TelstraClear and others, whilst at the same time ensuring accountability for
results. It is also important to design schemes in ways that build and reinforce good
governance, particularly in awarding and monitoring performance contracts, and that
ensure cost-effective administration. In this section we assess the advantages and
limitations of various public funding approaches.
While there is a wide range of possible subsidy models, all of them broadly fall into four
categories:
• Subsidies delivered through equity investment in the enterprise which
provides the desired services. By definition, the subsidy must imply that the
return on such investment is less than the commercial return. In other words,
the subsidy is the difference between the commercial return on equity and the
return which is acceptable to the government to ensure the desired outcomes.
In most cases, subsidised equity investment involves 100 percent ownership of
the enterprise
• Subsidies delivered through low interest debt. In this case, again, the subsidy is
the difference between the interest rate and other terms at which loans are
commercially available, and the terms offered by the government. Subsidised
debt could, for example, involve the government on-lending to private
enterprises at its own cost of borrowing, or even below it. Subsidies through
low interest debt do not require government ownership of the enterprise
• Lump sum subsidies, where the government provides overall support to the
enterprise for the losses incurred in providing the socially desired services.
The subsidy is based on the difference between the total costs incurred, and
the total revenue earned by the business
• Unit subsidies, where the subsidy is provided for the performance of a specific
obligation by the business. For example, the government may pay a bounty for
each new broadband connection, or provide a voucher to reduce the price to
the customers.
The figure below presents these four investment options.
61

Figure 6.3: Public Investment Options
In principle, subsidies can be structural or contractual and the dividing line between any
one of the highlighted option for delivering public investment is not strict. However,
there is one key difference under a structural subsidy approach: the government invests
in an economic activity on the expectation that it will not be able to earn the commercial
rate of return on such investment.
Regardless of the return that the government will or will not be making it will still need
to understand the underlying business of the state-owned or controlled service provider
Structural approaches have the potential to create governance problems, and it may be
difficult to disentangle an efficient subsidy component from subsidising the inefficiency
of a state-owned or controlled service provider. Options one and two in general
represent a structural subsidy approach by the government.
Options 3 and 4 represent contractual approaches. A contractual approach would
involve:
• Leaving the private sector to deliver further broadband investment where this
is commercially viable, and
• Contracting for the delivery of non-commercially justified outcomes, with the
government taking financial responsibility for the gap between what
consumers are willing to pay, and what the government wants to see delivered.
The table below compares and contrasts the structural and contractual approaches
against a range of criteria:
• Governance: what effect would the mode of delivering subsidy have on
corporate governance, and the incentives for the performance of the
enterprise?
• Competition: what effect will the mode have on promoting market
competition, or distorting competitive conduct?
• Regulation: will the mode of delivering subsidy require additional regulation,
or could it provide a basis for lessening the regulatory burden on the industry?
• Deadweight loss: how likely is the subsidy to be applied to services which
would have been provided anyway, or to consumers who would have
purchased them anyway?
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Table 6.2: Comparison of Subsidy Options
Governance Competition Regulation Deadweight
Loss
Option 1: Lower return
GovernmentComplex share
structure
equity
Less commercial
Option 2: Service provider can
remain more
Cheap loans
commercial
Option 3:
Lump-sum
subsidy
Option 4:
Unit
subsidy
Overall subsidy for
providing noncommercial
services
Subsidy for specified
outputs (e.g.
connections)
Would reduce
competition
Risk of government
protecting its interests
Would still distort
competition
Subsidy can be
provided to any
number of providers,
with less effect on
competition
Subsidy can be
competitively bid out
Non-commercial
objectives may allow
for less intrusive
regulation
Loans would need to
be linked to regulated
service targets and
prices
May still require tighter
regulation to ensure
subsidy well spent
No need for further
regulation
May change definition
of regulated services
Difficult to ensure
good corporate
performance given
social demands
In effect a lump-sum
subsidy
Difficult to contain
subsidy demands
Least amount of
subsidy required
International experience suggests that contractual approaches are preferable to structural
approaches. A more efficient approach is an explicit performance-based subsidy or
unit subsidy to promote the delivery of new (or improved) broadband connections. This
subsidy would be a “top up” in addition to user charges, sufficient to make the
investment viable. Payment of the subsidy would be tied to the actual delivery of the new
connections.
This approach has become increasingly popular internationally in recent years, and is
now used in a number of jurisdictions to promote access to infrastructure in areas, or for
groups of customers, that are not commercially viable.
A key benefit of this approach is that the structure of the subsidy ensures that
telecommunications service providers are actively encouraged to deliver new
connections. The amount and timing of the subsidy would be set out in a contract
between the government and the telecommunications service provider (or providers),
giving providers the certainty they need to invest.
In the table below, we briefly outline the examples of how the four options of delivering
subsidy have worked in various jurisdictions.
Table 6.3: Practical Examples of Subsidy Options
Option 1:
Government
equity
Experience
In theory, fits the SOE model, but no
working examples
Logical extension is full government
ownership
A common PPP option is an
infrastructure lease:
Government owns core assets
Private operator leases assets, owns
operating assets
Implementation issues
No established PPP models for
partial government equity
participation
Lease contracts require complex
governance
63

Option 2:
Cheap loans
Option 3:
Lump-sum
subsidy
Option 4:
Unit subsidy
Relatively common under concession
contracts in Europe and Asia
NSW rail system:
Loss-making corporation
Regulator sets efficient cost
Subsidy to cover difference between
efficient cost and fare revenue
Common model for procuring subsidised
infrastructure services:
Shadow tolls
New Zealand primary health care
Requires common financial
model.
“Open book” negotiations
“Open book” negotiations
Service requirements need to be
linked to the subsidy
Competitive procurement, but
requires network architecture
which is consistent
6.3 Unit Subsidy
As a general principle policy makers want to ensure that their objectives are going to be
achieved at least cost, which makes linking public finding to actual service delivery
important. A unit subsidy approach achieves this.
This approach has been used in a number of sectors including water, sanitation,
electricity, transport, telecommunications, education, and health care. The two key
features that distinguish a unit subsidy approach from other forms of tax payer funding is
that unit subsidies are explicit, and they are performance based.
A unit subsidy approach is explicit because it articulates the following:
• Why the funding is being provided
• Who is receiving the funding
• Who is providing the funding, and
• What is being funded—both the activity and the financial sums involved.
This approach is performance based because it links outcomes to funding. Further a unit
subsidy approach can help to improve the effectiveness of tax payer funding generally by:
• Increasing accountability, by transferring performance risk to the service
provider, which maintains pressure on the provider to deliver the pre-specified
outputs
• Improving transparency, through explicit recognition and identification of
funding flows, specified publicly
• Increasing value for money, through competitive award of unit subsidy
funding which, together with the transfer of performance risk to the service
provider, can increase the value for money, and
• Reducing economic distortions, by clearly recognising and identifying the
funding.
A key benefit of this approach is that the structure of the subsidy actively encourages
ISPs to deliver new connections. A contract between the government and the ISPs
would set out the amount and timing of the subsidy, giving providers the certainty they
need to invest.
64

6.3.1 The role of transitional subsidies
High speed broadband services are what we might call an “experiential service”. Before
people use high speed broadband they may not really appreciate the potential benefits.
For some users at least, once they have used high speed broadband they may be very
keen to keep on using it. 58
Earlier in this report we identified willingness to pay as an important contributor to low
uptake of fast broadband services. Willingness to pay for high speed broadband could
increase over time under a transitional subsidy approach. This would involve subsidising
take up of high speed broadband for a limited period, with the idea that at the end of the
transition users would, having experienced high speed broadband, be more willing to pay
the full cost of the service (see Figure 6.4).
Figure 6.4: Transitional Subsidy
A unit subsidy approach provides the greatest potential for delivering the highest level of
return on tax payer funded outcomes. This is because:
• Performance risk can be transferred to service providers by introducing
subsidies within a competitive regime or by developing specific, performancebased
subsidy contracts
• The creation of competitive pressures on providers wanting to bid for the
right to provide services will help to ensure value for money, by minimising
the subsidy required, or maximizing the benefit from a given subsidy amount.
A big challenge in designing performance based regimes is determining what outputs to
link the payment of subsidies to—that is, which outputs will deliver the desired
outcomes.
6.4 Conclusions and Next Steps
The Government is seeking to achieve a significant uplift in New Zealand’s productivity.
Our analysis shows that an immediate injection of funds into supporting a fibre to the
home roll-out may be a blunt instrument in improving access to fast broadband
58 In some cases the converse may be true—after trying out a new service users may decide that actually it does not
live up to their expectations, and they would rather use a lower cost option.
65

applications, while the resulting market distortions and risks to the quality of market
governance could actually undermine productivity.
At the same time, there are clearly important bottlenecks to greater utilisation of fast
broadband in New Zealand, which will not be solved by the market. There are strong
arguments for a flexible intervention framework, designed to address bottlenecks
progressively, and to provide support in ways which creates greatest social value at least
costs.
The analysis in this paper shows that any future partnership between the Government
and providers will need to clearly define the services to be provided and the key
standards of performance. The approach that is adopted will have important
consequences for the costs of the scheme, the incentives faced by service providers, and
the strategy for monitoring and verifying performance. The partnership will also need to
be structured in a way that minimises governance risks, and ensures that subsidies do not
become unnecessarily entrenched.
The process of designing a subsidy approach would require decisions on the following
points:
• The role and sustainability of public funding. What is the rationale for
public funding? How might budgetary constraints and sustainability issues
influence design?
• Who will be eligible to receive services that attract public funding. Who
are the intended recipients? How will they be targeted?
• Who will be eligible to provide services. What criteria should govern
eligibility?
• The market environment. Will services be provided in a competitive or
monopolistic market?
• Definition of performance. What should the service package include? How
should key performance standards be defined?
• How to link payment to performance. What should be the form and size of
payment? How will payments be structured?
• The shape of other aspects of the contract. What should be the form and
duration of the contract? How will issues of contractual adaptation and
dispute settlement be addressed?
• How to structure the administration of the scheme. What should be the
scope of the scheme? Who should be responsible for administering the
scheme?
We recommend that the Government and the industry work together to address these
questions, and to lay the foundations for an effective partnership.
66

Appendix A: International Trends in Fast Broadband
Deployment
International experiences provide useful insight into the benefits and challenges of
different regulatory and investment approaches for broadband connectivity. However, it
is inevitable that there will be differences in approach and technologies which reflect the
unique geography, population base and market conditions in each country. It is
important when comparing countries that these differences are taken into account.
A.1 Australia
In Australia, the two major cable networks only reach 2.7 million premises and Telstra
owns one of these networks. As a result, there is only one ubiquitous national fixed line
network in Australia—the predominantly copper network—which is also owned by
Telstra.
A.2 United States of America
The United States currently has two providers rolling out different technological
solutions: Verizon are deploying their FiOS service over FTTH; while AT&T are rolling
out their U-serve service over FTTC. Verizon aims to pass 18 million homes by 2010 as
part of a US$23bn deployment, while AT&T plan to reach 18m homes by the end of
2008, at an estimated cost of US$6bn. 59
The main rationale for the deployment of these fibre networks is the competitive
pressure created by the presence of the cable network. Competition in the provision of
TV services within individual states increased the pressure on copper network operators
and increased the need to build out fibre closer to the home. 60
Roll-out has been aided by regulatory forbearance, as the regulator decided the
competition between fibre and cable networks was sufficient that mandating wholesale
access on the fibre network was not required.
A.3 Japan
The Japanese broadband market was built upon a strong platform of competition
following the split of NTT East and West and the unbundling of the local loop. The two
NTT businesses hold a combined market share of around 45 percent, up from around 32
percent in 2004, in part attributable to their investment in fibre access without a
requirement to unbundle. Since 2005, Japan has seen more new FTTH/B subscribers
than DSL subscribers, with 800,000 adding a quarter and more than 10 million in total.
FTTH now accounts for 38 percent of the total broadband market. 61
The Government has set a target of 30m subscribers by 2010, although at current rates
of growth this will prove very challenging. The Government is now reported to be
examining the potential for establishing unbundling in fibre last mile access in densely
populated areas (from Japan Telecom, KDDI and PoweredCom, albeit mostly targeted at
business customers).
59 http://online.wsj.com/article/SB117856112849694724-
search.html?KEYWORDS=AT%26T&COLLECTION=wsjie/6month
60
For a fuller discussion of evidence from the US, see Appendix C, pp 99-103, in ‘A Framework for Evaluating the
Value of Next Generation Broadband’, Broadband Stakeholder Group, June 2008.
61 Source IDATE
67

The Government, through its u-Japan broadband strategy, provides money for cities to
wire schools and community centres, provides zero-interest or low-interest loans for
cities and businesses to deploy broadband, and provides tax breaks for the purchase of
networking equipment. The universal service requirements on the NTTs are currently
provided for by charging all subscribers. There are though proposals to allow the NTTs
to cover remote areas through wireless. 62
A.4 Korea
In Korea, often cited as the world leaders in broadband, the government has taken an
active role in investing in infrastructure. The Government sought to offset costs of
upgrading the access network by funding its own backbone network connecting
Government departments, on which SPs can rent capacity. 63
It has additionally funded R&D for US$700m and provided low interest loans of around
£1bn, mostly targeted at access networks in remote areas.
Additionally, the Korean government provided low interest loans to Service providers,
initially for urban roll-out and then increasingly to facilitate roll-out in remote areas. By
contrast with Japan, the strategy has not been built upon local loop unbundling, which is
not a major feature of the market, but low barriers to market entry and a relaxed licensing
structure have provided for a number of competitors.
A.5 France
In France, fibre deployment is happening as result of fierce competition in current
generation broadband services, brought about principally by the introduction of a
rigorously-enforced local loop unbundling regime in the early part of this decade. 64 A
number of companies responded to this regulatory development by entering the market
to offer bundled broadband packages including VoIP, IPTV and a home gateway to
provide in home-connectivity between different devices such as TVs and PCs.
An entrepreneurial startup firm, Iliad (ILD.PA), which offers broadband services under
the name Free, launched DSL service in October 2002, and now has over 2.5 million
subscribers, all of whom use VoIP and get 90 channels of IPTV through the company’s
Freebox offering. This service is offered for a monthly subscription of €29.99, a price
point that has stayed the same throughout the period since launch although the offering
itself has expanded very substantially during that time.
Iliad, and fellow new entrant Neuf Cegetel, have subsequently moved to replace their
leased copper loops with self-provided fibre connections. This is particularly attractive in
larger urban conurbations in France where population density is generally high, most
people living in apartment blocks, and per customer costs of upgrading to fibre hence
relatively low. Iliad is planning to deploy fibre in Paris (although this may be delayed
pending resolution of some regulatory issues). The City has provided low cost access to
the sewers. The solution—a point-to-point fibre-to-the-home architecture—might be
rolled out in other major French cities. The overall cost is estimated to be around EUR
1bn. At the end of 2007, Iliad had passed 240,000 homes with fibre.
62
Source on strategy Global Insight
63 At a cost of US$25.3 bn (source McKinsey)
64
French details draw on http://lw.pennnet.com/display_article/321309/63/ARTCL/none/none/1/France-
Telecom-plans-massive-FTTH-roll-out-in-2009/; figures for rollout and homes passed from IDATE
68

The operator Neuf is also offering FTTH in Paris (point-to-point) and a GPON offering
in other cities, and reported 17,000 customers by the end of 2007. It plans to spend EUR
300m to pass 1m homes, and by end 2007 was reported to have passed 120,000. This
competition has prompted France Telecom into deploying fibre, on a GPON basis, with
a major roll-out planned for 2009. By the end of 2008, France Telecom plans to have 1
million homes passed and 150,000 homes connected (by end 2007 it was reported to
have passed 146,000). The French regulator ARCEP is also active in securing access to
France Telecom’s duct space for its competitors, including by undertaking an audit of
FT’s ducts to establish whether there is space for additional fibre. ARCEP has now
stated its intention to mandate access to FT’s ducts.
Actual numbers of subscribers to fibre products in France remain reasonably low—less
than 50,000 in total.
A.6 Italy
One of the most striking scale deployments of fibre in Europe is that of Fastweb, a
Milan-based new entrant which, IDATE estimates had passed more than two million
homes with fibre connections by the end of the 2007. Its original operations involved
building a new, overlay fibre network in municipal ducts, initially in Milan and
subsequently extending to other northern Italian cities. The Milan municipality was an
original partner in the Fastweb consortium, and subsequently the infrastructure and civil
works were split off into a separate entity, Metroweb, in which the City of Milan retained
a controlling interest up to a sale to private equity investors in 2007.
In contrast to the French experience, Fastweb did not enter the market as an unbundler
and then upgrade to providing its own fibre connections, but the exact opposite – with
the availability since 2004 of a fit for purpose LLU product in Italy, Fastweb’s business
expansion has been increasingly based on selling LLU-based DSL services, and of its
circa 1m customers, only around a quarter are believed to be using fibre-based products.
Nonetheless, the competitive pressure from Fastweb has prompted a competitive
response from the incumbent Telecom Italia, which in 2007 announced a plan to
upgrade its network using principally FTTC technology, with an initial target of making
the new platform available to around 5 percent of Italian households by the end of 2009,
and a target to cover 65 percent of the population within 10 years. 65
In Italy too the regulator has required the incumbent to open its civil access
infrastructure to competitors.
A.7 Germany
In Germany, Deutsche Telekom has been engaged in a debate over regulatory
forbearance. In 2005 it announced a strategy to deploy FTTC and VDSL in Germany’s
50 largest cities covering 10.6m households at a cost of EUR3bn. 66 The German
regulator BNetzA has removed the obligation on DT to unbundle fibre, but has
proposed new obligations to share ducting. The European Commission has reacted to
this by launching a legal challenge. The resultant uncertainty has led to DT scaling back
its investment plans.
The regulator has, meanwhile, required DT to provide access to fibre ducting and dark
fibre.
65 Source: http://www.telecomsitaly.com/2007/03/telecom_italias_ngn2_ultrabroa.html
66 Information on Germany drawn from Analysys (see http://www.analysys.com/pdfs/FTTx_product_pack.pdf) and
McKinsey
69

A.8 Sweden
Sweden has one of the highest rates of broadband penetration in the world, based on a
highly diverse and competitive market featuring incumbent DSL offerings, alternative
operators using LLU and bitstream access and cable broadband offerings.
The Swedish market has the highest total number of fibre subscribers of any EU country,
estimated as around 300,000 by IDATE at the end of 2007. The European Commission’s
13th Implementation Report puts the number of fibre connections higher, at 475,000 in
total as of January 2008. 67
Much of this high rate of fibre connections in Sweden can be attributed to the existence
of municipal fibre schemes. The Commission notes that 150 such companies or schemes
are currently in existence, but also highlighted concerns of the Swedish regulator, PTS,
that there was no consistent business model in these schemes and less than half offered
wholesale access to third party providers, thus reducing the scope for effective
competition.
67 http://ec.europa.eu/information_society/policy/ecomm/doc/library/annualreports/13th/SEC(200)356DTSVol1fi
nal.pdf
70

Appendix B: Understanding the Benefits and Costs
from Public Investment in High Speed
Broadband
Policies to promote high speed broadband will have a range of impacts, both positive
and negative. In this Appendix, we discuss the types of benefits and costs that could arise
from subsidising high speed broadband. The way in which we define and categorise the
benefits and costs here draws heavily on Williamson and Marks (2008) 68 .
B.1 Possible benefits
The benefits of broadband technology come from the ability for users to transmit data
between locations quickly, enabling them to use applications effectively. Thus broadband
only delivers real benefits to the extent that people use broadband to assist them in doing
the activities they want to do.
Private benefits
Ultimately the benefits from increased usage of broadband come from:
• Faster, more reliable, and/or better quality access to the applications people
already use, and
• The ability for people to access and use applications that they don’t currently
use (either because their existing connection does not support existing
applications or because the applications are not yet available).
Williamson and Marks break these private benefits from high speed broadband into three
categories:
• Saving time—By doing what they do now, but in less time, users would
benefit personally from having more time to spend on other things
• Doing more on line—Reduced time required to upload and download data
may attract users towards applications that already exist, but that are “too
hard” or “too slow” to access without a high speed broadband connection.
Some New Zealanders currently do access “bandwidth hungry” applications
(such as video conferencing, or sharing and viewing multimedia content) over
existing infrastructure. However, with access to faster, more reliable,
connections is likely that usage of this type of application would increase
• Doing new things—Commentators widely recognize that, in the long run,
the capability provided by high speed broadband will transform the way that
we do things, including the way in which we create, share, and distribute
information. As high speed broadband becomes more widely available
internationally, new applications are likely to emerge to take advantage of this
development. To the extent that users access such applications in order to do
new things, this will deliver benefits. (This category of benefits is not available
in the short term, as it depends on innovations that have not yet occurred)
The above three categories of benefit are generally private benefits. That is the benefit
accrues to the person using high speed broadband to access particular applications. We
68 Williamson, M. & Marks, P. (2008) “A Framework for Evaluating the Value of Next Generation Broadband: A Report to the
Broadband Stakeholder Group” PLUM Consulting
71

would therefore expect people’s willingness to pay for high speed broadband services to
reflect the value of these private benefits.
Wider economic and social benefits
In addition to the private benefits that users themselves could gain, greater take up of
high speed broadband services could deliver wider economic benefits for New Zealand.
For example, greater availability of high speed broadband services may:
• Enable network effects—Network effects occur where the value of a service
grows with the number of people using it. For example the value to a local
business of having in-house videoconferencing capability will depend on
whether the people it wishes to communicate with (for example customers
and suppliers) have access to the same capability. The more businesses are
able to use videoconferencing, the greater the value of this application to
everybody who uses it
• Drive greater competition—Deployment of high speed broadband is part of
an evolution in the telecommunications sector that has the potential to
significantly change the competitive environment for the sector. 69 In addition,
it is possible that wider deployment high speed broadband may enable
businesses to operate more efficiently, and to access wider markets, leading to
greater competition in other sectors of the economy as well, and
• Improve productivity—To the extent that individuals and businesses take up
high speed broadband services, this should lead to better information flows
and more effective collaboration (including non-local collaboration), thereby
improving productivity.
B.2 Possible costs
Williamson and Marks (2008) usefully categorise the costs associated deploying high
speed broadband into:
• Costs for users and companies, and
• Wider economic costs.
Costs for users and companies
Apart from paying for the service itself, users are likely to face additional costs in order
to use high speed broadband. This may include purchasing new in home equipment and
upgrading wiring in their homes, in particular in the case of older homes. Companies too
will need to upgrade the main elements of their core networks to support the delivery of
high speed broadband. Without addressing these limitations, users would not be able to
enjoy the benefits of high speed broadband.
Where public investment accelerates the adoption of high speed broadband to the point
where it displaces the ability to utilise current technologies, consumers will be forced to
pay these costs if they want to use online applications. 70 For example, if an FTTH
69 The Commerce Commission has recognized the potential significance of the transition to “next generation
networks” for the sector, and has launched a study into next generation network issues to investigate the
commercial and competitive implications of these developments (see
http://www.comcom.govt.nz/IndustryRegulation/Telecommunications/Inquiries,ReviewsandStudies/DecisionsLis
t.aspx#916).
70 A precedent for this occurring can be drawn with the proposed switch off of the analogue television network. The
New Zealand has mandated that the analogue television network will be “switched off” once 75 per cent of
households have digital television or by 2012, whichever is sooner. (New Zealand Government media release, 29
72

network was built using existing trenches, and replacing the current copper
infrastructure, market participants will no longer be able to provide low cost dial up or
DSL services, as it is not possible to provide these services over fibre technology.
Wider economic costs
There are a number of wider economic costs associated with public investment
subsidising the deployment of high speed broadband which we must consider:
• Stranding sunk investments: Where public investment leads to the
construction and purchase of new infrastructure and equipment that displaces
existing assets prior to the end of their economic life, those existing assets
become redundant. The value of these existing assets is lost as a result. This
outcome, often referred to as “asset stranding”, is a cost for all New
Zealanders, not just for the shareholders of companies that own the
infrastructure and equipment. The value of existing infrastructure and
equipment to New Zealanders is in the benefits they would forego if these
assets were no longer available to use.
• Displacing of private investment: Public investment which subsidises
outcomes that would have otherwise been delivered commercially, effectively
displace private investment and therefore reduce economic activity. This
represents a transfer of cost from the private sector to the taxpayer. As public
funds are scarce, allocating public funds to outcomes that could be delivered
commercially also would also come at the opportunity cost of not funding—
or funding to a lesser extent—other public policy priorities. 71
Raising taxes imposes “deadweight costs” on the economy. For example, if
the policy makers were forced to increase taxes (or were unable to reduce
taxes) because of the need to fund subsidies, New Zealanders would have less
incentive to participate in the workforce or work to increase their income.
• Negative externalities: Public investment in bringing forward the
deployment of high speed broadband will also impact upon users and
businesses in indirect ways. For example, the laying of buried fibre may
require roads to be closed and new trenches to be dug, causing road traffic
congestion and disruption to people and businesses.
Policy makers must therefore carefully consider the potential impacts and distortions of
market outcomes which could occur because of public intervention, and look for ways to
minimize these costs. We examine options for structuring public investments in high
speed broadband in section 5.
November 2007) This means that at least 25 percent of households, and possibly more, will have to purchase a new
digital television set earlier than they otherwise would have, or stop watching television.
71 Economists refer to this as “opportunity cost”
73

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