Casting a new net: Canada's Axia bids for NZ broadband

The fibre-optic rollout process will have a big impact on this country's infrastructure and on the fortunes of Telecom

The Canadian is relaxed, engaging, dipping periodically into a tin of tiny mints at his side. What does the best fibre optic network for New Zealand look like, he is asked.

"It looks like exactly what we proposed," he answers smoothly.

Art Price, the avuncular grey-haired chairman and CEO of Calgary-based Axia Netmedia, is here because he wants the contract to build and run a new fibre network for the government.

The details of his company's proposal are secret, as are those of his competitors such as Telecom and Vector, but it's clear that whatever Axia is bringing to the table, it isn't money or fibre. Axia's net profit last year was just C$6 million and its net assets were C$101 million. It has no fibre in New Zealand at all.

Price has two things to say about that.

Firstly, "Don't think anybody's coming to New Zealand with $1.5 billion to throw at this — it's always going to come from the capital markets."

Secondly, "We've never had a network anywhere we've won [a contract]. We just take the bits of the network we want from the people who don't win."

Sounds straightforward. To some local competitors, however, Price is "exceptionally naive" and his bid is "a bit of an irritation".

"I personally don't think they'll get anywhere," said one source. "Because the issue is, have you got the balls to step up and put your cash in? Can you put in $200-$300 million and say `I'm building Auckland'? The Canadians aren't willing to do that."

Despite such scorn, it seems likely the government hasn't dismissed Axia so lightly. In January, 18 parties submitted proposals to Crown Fibre Holdings, the organisation managing the government's $1.5 billion planned investment. A shortlist was due to be drawn from those 18 by last week, although Crown Fibre now says it will bypass the shortlist stage and pick its preferred partners by June — hence, perhaps, Price's presence in the country.

The project is big. Ultimately it aims to deliver a fibre optic cable to almost every home and business in New Zealand, enabling data speeds of at least 100megabits/second — around five times the fastest speed currently available using the existing copper wire connections.

The cost could be $4-$5 billion. The benefits? Unknown, but it is widely believed that fibre will be essential infrastructure in decades to come, allowing greater productivity and new services to flourish.

That's the big picture. The issue being dealt with now is how to get there — and it's a thorny one.

Telecom, for example, has a whole lot of copper in the ground continuing to make money and will therefore be a potential competitor to Crown Fibre. The more it retains customers on copper, the more arduous the path to profit for the new regional fibre companies the government is setting up.

Axia's Price reckons he has the answer. "Say Telecom charges $90-$100 a month [for its phone and data package]. You can build a whole new fibre grid for that."

The key, he says, is securing the whole market. The ideal model is a single regulated monopoly selling lit fibre connections, known as layer two in the jargon, to retail companies who compete to provide service packages to homes and businesses. With 80-100 percent of the market, he argues, fibre access could cost the same as copper costs now, so Telecom would have no incentive to continue using copper.

He cites Singapore to support his case. There, the government's Infocomm Development Authority awarded a contract in 2008 to OpenNet, a consortium of telcos led by Axia, to install fibre to every home. The way Price tells it, incumbent telco SingTel joined the consortium at the eleventh hour as it was forced to recognise the commercial logic. Although it already had extensive ducting in place for installing its own fibre, SingTel brought those assets to OpenNet in exchange for a share of the action.

The outcome in Singapore is free installation and a 1Gbit/s network access price for homes of S$15 ($15) a month. Retail providers then build their service bundles on top.

"In any fibre to the premise build," says Price, "the existing fibre is irrelevant."

New Zealand is a much tougher proposition, however, and the role of Telecom — owner of the most fibre in the country — remains unclear.

In January it said it had made two proposals to Crown Fibre Holdings, one compliant with government's preferred model, the other not.

Because it is a telco retailer, the government's rules say the only way Telecom can submit a compliant proposal is to accept a minority position on the board of the regional fibre company.

Last September this appeared to be a stumbling block, with Telecom CEO Paul Reynolds saying the rules "appear to preclude Telecom's involvement in the government's process"

Whatever Telecom's compliant solution, it seems likely to be some way from the government's ideal, but some sources close to the company think its alternative proposal is being actively considered.

Vector, meanwhile, has been busy with an advertising campaign to whip up enthusiasm for the big fibre idea. CEO Simon MacKenzie has been a consistent enthusiast for fibre and appears in the driving seat to win a regional fibre contract — indeed, the Crown Fibre scheme seems tailor-made for companies like Vector.

Despite the hostility of some industry players, Mackenzie has no problem with Axia. "We found the engagement with them has been really good, we share common views and perspectives," he says. "We see them as having a lot to offer."

Significantly, the government idea is to develop local networks of layer one, dark fibre only, and Vector clearly sees the regional collection of lines companies, known as the Regional Fibre Group, as ideally placed to build and own layer one networks.

"In the construct we're operating in now, which is layer one, there is no better solution than New Zealand-owned, regionally operated networks that understand their communities, both urban and rural, and are owned by the communities so the profitability sits with their communities. They can easily deliver this physical network layer, while the common, unshackled layer two service could be provided by the Regional Fibre Group, or in conjunction with Axia, or even with Vodafone for example."

Whether or not events turn out to match Mackenzie's vision, the Crown Fibre process will have a big impact on this country's infrastructure and on the fortunes of Telecom.

Price, born and raised in faraway Alberta, could yet be the one to tip the balance.

AXIA NETMEDIA

Founded 1995

Based Calgary, Alberta Listed on Toronto Stock Exchange

Revenue: C$69.8 million

Net profit: C$6 million

Market capitalisation: C$108 million

(C$1=$1.38)

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