Vodafone proposes broadband alternative

Vodafone has tabled its alternative proposal for broadband, suggesting a co-investment model under which multiple firms invest, perhaps alongside the government, in the development of a single next generation network.

Under its proposal, providers would compete with each other in the downstream retail market and cooperate on the infrastructure build.

"One way to think about this is as an attempt to reconcile the needs of competition and investment by internalising them -- competitors become investors and investors become competitors," the company explains in a white paper releaased today.

"The co-investment model has often been used for capital intensive investment projects in the telecommunications sector all around the world. For example, submarine cable systems have often been built by consortia of investors who secure rights and obligations to exploit capacity on the cable and who then compete with each other in downstream markets."

However, IDC telecommunications analyst Rosalie Nelson says that while the proposal goes a long way to meeting the government's objectives, it also poses a series of challenges.

Not least among these is where Telecom fits in. Under Vodafone's proposal, no provider would have a majority shareholding in the co-investment entity, but that would be needed to adequately reflect the value of the assets Telecom would bring to the table, Nelson says.

If Telecom chose not to participate, the proposal as it stands would effectively overbuild its network. It could also usher in a stand-off similar to that seen in Australia with Telstra.

Vodafone says the Southern Cross Cable should be a good example of co-investment, however, the only shareholder with material retail presence in New Zealand is Telecom.

The rationale for co-investment in next generation networks is similar.

"It is an attempt to optimise the economics by eliminating duplication and minimising the risk by distributing it amongst several different firms. The result will be that limited capital is used more efficiently and that more extensive network deployment is achieved than in the duplicate network scenario," Vodafone argues.

Vodafone says new thinking is essential for what is likely to be "the most significant contribution to New Zealand's growth in the next 20 years".

"We fully support government's vision that the economic and social benefits of a national fibre infrastructure will be significant. Vodafone shares that excitement but knows from its own experience that without a carefully constructed delivery plan, it could remain only a vision," says the company's GM corporate affairs Tom Chignell.

Chignell argues that simply contracting to build the network with parties who have no retail skin in the game manages only one of the three main risks -- cost to build.

A partnership with a set of investors who have an end-to-end business plan, including building, achieving penetration, and deriving retail revenue, is a safer route to follow, the company says.

Nelson says the proposal is "interesting and pragmatic" and meets many of the needs of infrastructure investors as well as those of the government. However, while asking for regulatory certainty, it takes the market into new and somewhat unpredictable territory that could restrict access to new players except on commercial terms.

Under Vodafone's schem, those who do not invest have no automatic rights to participate.

"Those who do not invest will have no assured or regulated access to the network infrastructure, although it will be open to owners of capacity to wholesale this to third parties," the white paper says.

"It is critical to understand that the co-investment model will not and is not intended to produce a perfectly competitive market with minimal barriers to entry and hundreds of competitors: it is intended to resolve the tension inherent in the pursuit of both competition and investment."

Nelson says if the government is one of the investors, it could be the wholesaler of access.

Co-investment can take a number of different forms, Vodafone says:

1. Firms can jointly own and build a single network infrastructure and share access to the capacity on that infrastructure. The network would be commissioned by a company with no controlling shareholders

2. Firms can separately build network infrastructures in different geographical areas, and then exchange or "swap" access to their respective investments.

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