Fibre Broadband Shares

[Snoopy]

ROIC is the 'Winner' yardstick on the the efficient use of capital (from whatever source).

ROIC = EBIT(1-T) / (Equity + Borrowings)

where T is the company tax rate.

If a company is earning more than its cost of capital, then it is creating value. A two year old PWC report lists the cost of capital of Contact Energy as 7.4% and Chorus as 6.3%.

https://www.pwc.co.nz/pdfs/2019pdfs/...l-report-1.pdf

I have retrospectively incorporated the results of my own calculations in the table above (my post 13). But here are the calculations.

Contact Energy

ROIC = $231m(1-0.28) / [($2,631m - 0.5333 x $2,066m) +($978m+$220m-$44m)] = 6.23%

Chorus

ROIC = $246m(1-0.28) / [$294m + ($430m+$1,892m-$0m)] = 5.45%

Enable

ROIC = $28.399m(1-0.28) / [($311.323m - $91.278m) + ($294.400m+$0m-$5.974m)] = 4.02%

Notes

1/ Equity in Contact Energy reduced by a 'balance sheet equity adjustment factor' multiplied by the revalued asset balance ($2,066m) that is incorporated into the balance sheet. ( Look at my posts 1822 and 1823 on the CEN thread to see how this is derived.}

2/ By contrast the revalued asset balance ( $91.278m) is actually listed in the Enable balance sheet. So I have simply removed it.

SNOOPY

[Snoopy]

Unlike Chorus, the 'other' companies (Northpower, Ultrafastfibre and Enable) chosen to roll out fibre broadband in specific areas all over New Zealand had no established telecommunications network from which to earn money. The government funding, at least initially took a slightly different form than that used by Chorus.

From note 14 in the FY2013 'Crown Fibre Holdings Limited' Annual Report

https://www.crowninfrastructure.govt...eport-2013.pdf

Agreements set out the key commercial terms of the relationships between Crown Fibre Holdings (CFH) and the Local Fibre Companies (LFCs) and their partners. This includes CFH having a shareholding in each of the LFCs that reflects the level of CFH’s investment, in conjunction with its partner, in the deployment of the UFB network in the Candidate Area(s).

Under this model, the Crown’s investment funds the communal infrastructure and the partners’ investments fund the build past each premises. CFH recovers the investment in the LFCs either by dividends received after the concession period or through the sale of shares. (In the case of 'Enable' the Crown was bought out of the Christchurch LFC in FY2016.)

The deployment plans drive CFH’s level of investment in the LFCs. As each stage of a plan is completed by the partner, the LFC purchases the UFB network from the installing partner by paying it an agreed 'cost per premises passed' (CPPP) for the number of premises that have successfully completed user acceptance testing (UAT) for the stage.

In turn, that purchase is funded by CFH subscribing to A shares (these shares carry full voting rights, with no dividend rights until 10 years from establishment) in the LFC, the price for which is the agreed CPPP. In respect of Christchurch based ENL, the local partner (ESL) funds a portion of the purchase by also subscribing to A shares.

The local partner is required to fund the cost to connect a premises and the end customer (essentially fibre optic lead-in from the street), the electronics necessary to light the fibre and the lFC operational costs. The partner generally receives B shares for funding these obligations (B shares carry full dividend rights, but no voting rights until year 10), although some prudent level of debt is permitted in each LFC.

All A and B shares in each LFC convert to ordinary voting dividend entitlement shares 10 years from establishment date (wlFC and Ultrafastfibre: December 2010, ENL: May 2011). The partners also provide management and operational services to the LFCs, which are included in the 'management fees to partners' line in surplus/(deficit) in the income statement..

SNOOPY

[Lola]

The roll out of fibre broadband in New Zealand has been on a public/private partnership model. Details of the oversight regime can be found here:

https://www.crowninfrastructure.govt.nz/ufb/what/

The resulting fibre broadband network is a natural monopoly that will require ongoing government oversight.

There are four fibre broadband companies in New Zealand.

1/ 'Chorus', a listed public company on the NZX , that in May 2011 was engaged to build out 24 of the 33 designated Ultra Fast Broadband build out areas at the time. It also had the job of filling in any regional gaps not covered by companies 2,3 and 4 as listed below. Chorus is also the operator of the legacy copper wire network all over New Zealand.
2/ 'Northpower', a power network company that has also taken on the task of rolling out fibre broadband to the following Northland communities: Kaipara, Whangarei, However there are certain outlying areas in these regional centres and 'the far north' that are instead built by Chorus.
3/ 'Ultrafast Fibre' that has covered the Central North Island: Hamilton, Cambridge, Te Awamutu, Kihikihi, Hautapu, Tirau, Tokaroa, Putaruru, Ngaruwahia, Te Kowhai, Tauwhare, Huntly, Raglan, Tauranga, Katikati, Omokoroa, Te Puke, Aongetete, New Plymouth, Hawera, Normanby, Eltham, Stratford, and .Whanganui
4/ 'Enable' that has built fibre broadband all over Christchurch. Lyttelton, Lincoln, Prebbleton, Rolleston, Tai Tapu, Kaiapoi, Mandeville, Tuahiwi, and Woodend

Chorus has its own thread that is busy enough. The other three companies are not publicly listed in NZ as I write this. There are certain discussion topics in relation to funding (via the Crown Infrastructure Partnership) and other 'market' issues that are not unique to Chorus, and are of interest to the other fibre network building companies as well. But it is also clear that these legislated monopoly networks are very different and have an entirely separate place in the market to the retail telecommunications companies in NZ: Spark, Vodaphone NZ (jointly owned by Infratil and Brookfield Asset Management) and Two Degrees (controlled by Trilogy International). So I think there is need for a space to discuss issues relating to fibre broadband that are not necessarily related to Chorus, but are not relevant to the retail telecommunications players. This thread is that space.

SNOOPY

Does Vital fit into this group somewhere?

[Snoopy]

Does Vital fit into this group somewhere?

You mean 'Vital' in the sense of the entity that was the old 'Teamtalk' and 'Citylink'? Yes there is a 'fibre' component in what Vital owns. But it isn't part of the network funded by Crown Infrastructure Partners. The Vital network is a private network built where Vital wanted to build it. Their fibre networks are in downtown Auckland and Wellington. I am not a student of Vital, so I am prepared to be corrected on what comes next. But my impression is that Vital supplies intracompany fibre not intercompany fibre. This may include external lines linking different business units in different buildings. But generally a customer of Vital buys fibre for their own use rather than with an intention to sell utility to third parties (*). Vital is not unique in doing this. I think Spark have their own in house built fibre network, for example. But this is how I see Vital fitting into the picture.

As to whether Vital belongs on this thread: They operate a fibre business unit, so of course they do! Thanks for bringing the topic of 'Vital' up.

SNOOPY

(*) I think the downtown Vital Wellington Fibre Network, for example, can service more than one customer of Vital. But generally Vital is 'private network' that Vital manages for their own selected customers. There does not exist a right to join the Vital Network if Vital do not want you to join. There is no guaranteed network access price for allcomers as you might find with the Chorus network in Wellington, (as a comparison). I hope I explained that right. No doubt someone will emerge to correct the picture if I didn't!

[Snoopy]

Does Vital fit into this group somewhere?

Hi Lola,

You have piqued my interest in Vital now, and in particular their 'wired network' business in Wellington. I see back before the nationwide fibre roll out, Teamtalk, as Vital was called then, put in a bid with Fulton Hogan to build fibre broadband throughout Wellington. Ultimately that partnership didn't get the gig and Chorus did the job. Then Spark had a go at taking out Teamtalk back in 2017. But they walked away after the 'Vital' Farmside rural division got divested to Vodaphone. So I guess Spark didn't see the value in taking over what was left?

There were some sobering words on Vital's Wellington 'wired network' in the Vital Chief Executives address at the last AGM:

"There was a clear gap on what we could offer verses what customers could get elsewhere with UFB. Our previous network design limited us as to what we could offer in terms of different types of services and associated pricing plans. Our services could not be compared to UFB offerings, they were too expensive and had limited capability. being only offered at 100Mbps , 1Gbps and some limited 10Gbps ports. I am pleased to announce that we now have our new products and pricing plans for our wholesale partners ready to launch, following board approval earlier today. We have moved to meet the market and we now have 74 different wholesale products compared to our legacy 14. Our old pricing and products were a major impediment to new business."

That all sounds very well, but it still looks like Teamtalk are only just ahead of the Chorus freight train, with Chorus rolling out 8Gbps hyperfibre. So Vital have outlaid heaps of capital to upgrade their Wellington network, but will now be charging less money for their services, the services that haven't been usurped by Chorus, than before. Have I got that right?

SNOOPY

[Snoopy]

There were some words on Vital's Wellington 'wired network' in the Vital Chief Executives address at the last AGM:

"We can now offer services utilising our new PE nodes with MPLS as the underlying technology which will provide greater scale and flexibility. Our services will be MEF compliant, UFB comparable along with faster delivery times and priced to compete."

Now I don't mind admitting I have no idea what the CE has just said in that sentence. So using Google to take that sentence apart 'byte by byte'....

1/ PE stands for 'Provider Edge' that I take to mean an exit gateway to the fixed Wellington network. A 'PE router' is a router between one network service provider's area and areas administered by other network providers. So the 'PE node' is where Vital's wholesale customers connect.

2/ MPLS stands for 'Multi Protocol Label Switching'. MPLS is a routing technique in telecommunications networks that directs data from one node to the next based on assigned short path labels rather than long network addresses, thus avoiding complex 'look ups' in a routing table and speeding traffic flows. MPLS can be used to deliver many different categories of traffic.

3/ MEF stands for 'Metro Ethernet Forum', a global alliance of more than 220 organizations including telecommunications service providers, cable TV Multi System Operators, network equipment/software manufacturers, semiconductors vendors and testing organizations. Vital are just embracing common industry standards by saying this.

4/ UFB Comparable means Ultra Fast Broadband comparable which is an interesting thing to say because it implies even the new subterranean Vital city network might not be using the current best practice 'dark fibre' that Chorus have laid as competition?

Phew! I don't see any enduring competitive advantage with any of this though. Is there anything in the above that Chorus cannot replicate?

SNOOPY

[Snoopy]

The roll out of fibre broadband in New Zealand has been on a public/private partnership model. Details of the oversight regime can be found here:

https://www.crowninfrastructure.govt.nz/ufb/what/

From the above reference....

------------------

What is UFB?

Ultra Fast Broadband fibre provides a reliable, consistent experience even at the busiest time of day.

It delivers speeds in excess of 25 Megabits per second (Mbps), using optical fibre technology rather than the slower copper technology (ADSL or VDSL).

Not only does this make your online experience faster, it allows multiple people in your household or business to be online at the same time. You will experience faster download and upload speeds, more reliable connectivity, the speeds will be consistent and you won’t have to deal with buffering.

-------------------

This is a pretty good sales pitch for Fibre Broadband. But have a look at pages 19 and 20 in the FY2019 NBN Annual Report

https://www.nbnco.com.au/content/dam...eport_2019.pdf

I was particularly interested to read about 'G-fast' which is the latest evolution of VDSL technology.

"G.fast provides greater bandwidth and improved noise mitigation on the copper pair network, and is able to achieve speeds up to 1Gbps over the shorter copper distances in typical FTTC deployments. As G.fast can be deployed on existing copper networks, it is a viable alternative where fibre into the premises is too costly or difficult to deploy."

Yes you did read that right. 1Gbps over copper! 1 Gigabit is 1000 Megabits. So we are talking about a transfer speed forty times higher than the crown fibre broadband minimum performance target! Of course fibre can do 1Gbps as well, if appropriately set up. But I had been under the impression that copper was 'down and out' as data transmission conduit of the future, when this is not so - for the last little bit of delivery to the household anyway. While still experimental, the next generation of G-fast is even more impressive with speeds of 5Gbps over a line length of 70m. Perhaps copper isn't dead yet?

Next we learn more about potential upgrades to HFC (Hybrid Fibre Co-axial; the co-axial bit being copper). This is the network owned by Vodaphone that services customers in Wellington, Kapiti and Christchurch. Vodaphone inherited this network, installed lines which date back some 20 years, when it was acquired from TelstraCkear in 2012.

"Emerging HFC technologies like Full Duplex DOCSIS 3.1®, Extended Spectrum DOCSIS (ESD), and the recently announced DOCSIS 4.0® which may offer upgrade paths capable of delivering low latency services and 10Gbps download speeds (and beyond) into the future."

Reading Crown Infrastructure information here in NZ leaves the impression that HFC technology is a dead end. Yet here we are talking about download speeds over four hundred times faster than 'basic fibre'! Is this or is this not serious competition for 'fibre broadband' in Wellington, Kapiti and Christchurch?

SNOOPY

[Doug]

From the above reference....
Is this or is this not serious competition for 'fibre broadband' in Wellington, Kapiti and Christchurch?

SNOOPY

https://company.chorus.co.nz/first-c...d-service-live

Available right now!

[Snoopy]

https://company.chorus.co.nz/first-c...d-service-live

Available right now!

Thanks for that Doug. It looks like Orcon is the first retailer out of the blocks with 8Gbps. It comes at a price though:

https://www.orcon.net.nz/broadband/sign-up

Plan	Orcon Price
Fibre 100Mbps	$89.95/month
Fibre 950Mbps	$99.95/month
Hyperfibre 2000Mbps	$149.95/month
Hyperfibre 4000Mbps	$184.95/month
Hyperfibre 8000Mbps	$274.95/month

The accompanying table in the Chorus news release. cast an interesting light on the utility of such higher speeds

Plan	Time taken to download a 5GB Movie
Fibre 100Mbps	6min 40s
Fibre 950Mbps	42s
Hyperfibre 2000Mbps	20s
Hyperfibre 4000Mbps	10s
Hyperfibre 8000Mbps	5s

Maybe I am just lacking imagination. But I would have thought rustling up the family to watch a movie and get everyone settled on the sofa would take six minutes and forty seconds. I wonder what the potential take up of hyperfibre speeds is? Anyone out there signed up with such speeds? What do you do with such download power?

SNOOPY

[Snoopy]

Thanks for that Doug. It looks like Orcon is the first retailer out of the blocks with 8Gbps. It comes at a price though:

https://www.orcon.net.nz/broadband/sign-up

With Vocus a trans-tasman company, I thought it might be interesting to compare costs and plans between the Vocus owned retailers

Plan	Orcon Price	Dodo Price	iPrimus Price	'Aussie Broadband' Price
Fibre 100Mbps	$NZ89.95/month	$A85/month	$A90/month	$A99/month
Fibre 950Mbps	$NZ99.95/month			$A119/month
Hyperfibre 2000Mbps	$NZ149.95/month
Hyperfibre 4000Mbps	$NZ184.95/month
Hyperfibre 8000Mbps	$NZ274.95/month

Notes

1/ Prices quoted are standard without any limited time promotional offers.
2/ iPrimus offers a 'Home Superfast' plan for $115 per month. They say it is suitable for 8k streaming verses 4k streaming for their Premium service. However, no uprated access speed is guaranteed.
3/ Both Dodo and iPrimus say that their 100Mbps download speeds may fall to 92Mbps and 95Mbps respectively at peak times.
4/ 'Aussie Broadband' (not Vocus owned) Gigabit plan may only work at 600Mbps at peak times.

I can't find any reference to plans faster than 1Gbps available in Australia. I think 1Gbps was the maximum design speed it was conceived the NBN would operate at. But I guess that doesn't preclude faster speeds being available in certain areas?

http://tektel.com.au/wp-content/uplo...is-the-NBN.pdf

Summary (from Feb 2014)

"NBNCo proposes peak rates of up to 1 Gbps. The NBN Fibre to the Premises (FTTP) architecture is based on the GPON (Gigabit Passive Optical Network) standard, which provides 2.488 Gbps shared amongst 32 users. This supports the 1 Gbps NBNCo peak rates (downstream and upstream). XG-PON, the next version of the GPON standard, will provide 10 Gbps downstream, shared among 32 subscribers, allowing multi Gbps subscriber services. However, actual NBN data rates will be constrained by back haul and Connectivity Virtual Circuit capacity."

SNOOPY