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Bridging The NZ Digital Divide Aug09

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An analysis of the options for international connectivity for New Zealand. Reviews the current situation with only one monopoly cable (Southern Cross) and presents options for new cables to Australia, Guam or the US. Info as of August 2009.

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Bridging The NZ Digital Divide Aug09

  1. 1. Bridging the New Zealand International Digital Divide A New Connection to the World A Discussion Document Prepared by John Humphrey and TelOptix International Inc., August 2009 John Humphrey and TelOptix International Inc. (c) 2009 1
  2. 2. New Zealand’s Digital Needs • NZ’s reliance on primary produce sees the economy slipping in OECD rankings • NZ is a small, physically remote economy and must access global markets in order to achieve scale • Expansion into global markets is difficult and costly • Direction is to establish industries that have “weightless” products that transport using telecommunications • Internet usage and video content in particular are increasing rapidly • The market, especially the traditional Telco model, has not provided a solution, but the technology opportunity is there to jumpstart NZ John Humphrey and TelOptix International Inc. (c) 2009
  3. 3. Explosive Internet Growth Happening • Global IP traffic will app. double every 2 years through 2012 • The Internet in 2012 will be 75 times larger than in 2002 • Growth primarily driven by video traffic: • Internet video is now app. 30% of all consumer Internet traffic • Video (all forms) will be app. 90% of consumer Internet traffic by 2012 • In 2012 Internet video app. 400 x the US Internet backbone in 2000 • Online video will experience three waves of growth • 1. Internet video to PC. 2. Internet video to TV. 3. Video communications • Video will shift the topology of IP traffic • Huge volume changes between 2007 to 2012; core x 5, metro x 7 Cisco Systems in their “Approaching the Zettabyte Era” report June, 16, 2008: http://www.cisco.com/en/US/solutions/collateral/ns341/ns525/ns537/ns705/ns827/white_paper_c11-481374.pdf John Humphrey and TelOptix International Inc. (c) 2009
  4. 4. Current NZ Broadband Initiatives • Government funding a Fibre To The Home network, $1.5 billion over next 10 years • 100 Mbit/s Ethernet at homes and businesses • Planned FTTH network will connect 75% of NZ population in 25 cities • Telecom also installing 3,800+ VDSL/ADSL2+ cabinets using Fibre To The Node • ADSL2+ up to 24 Mbit/s, VDSL up to 50 Mbit/s • Commerce Commission has regulated backhaul networks John Humphrey and TelOptix International Inc. (c) 2009
  5. 5. The International Capacity Gap • The planned FTTH and VDSL networks will increase Internet usage and increase international capacity requirements • International connectivity from NZ is limited and expensive • One system connects NZ to the world – Southern Cross (SX) • Monopolistic bottleneck on the growth of NZ, discourages innovation • SX has no commercial pressure to lower prices, paid $80m dividend to Telecom ($160m total dividend), similar dividend expected next year • SX may reach capacity in 3 to 6 years; SX states can be upgraded • Estimated that SX international data charges add $9 per month a household’s $30 monthly broadband bill • Estimated the SX stranglehold would cost NZ businesses $1 billion over next 10 years - Covec John Humphrey and TelOptix International Inc. (c) 2009
  6. 6. International Connectivity Requirement • 90% of websites and online content used by New Zealanders is hosted overseas - Kordia • It takes twice the time to access international websites as it does to access national websites - Commerce Commission • New Zealand needs independent access to the major global traffic hubs • Relying on the existing SX system is limiting • A second cable would produce $1b in economic benefits and a 24% cut in broadband costs - Covec • Other countries have a greater competitive situation with several cable landings • Australia, Guam & Hawaii are the closest global traffic hubs John Humphrey and TelOptix International Inc. (c) 2009
  7. 7. The Lack of Connectivity Options Problem • The sole cable connecting NZ is Southern Cross, owned by Telecom NZ, SingTel Optus and Verizon • Due to the lack of competition, NZ has one of the highest bandwidth costs of any developed country • In 2007 it was 20 times more expensive to buy capacity from NZ-US than Japan-US • NZ has no direct submarine cable path between NZ and Asia • Traffic on SX to Asia travels via US adding latency • NZ service providers struggle to offer good value services to end-users due to high bandwidth costs • Export businesses want: overseas phone numbers, video conferencing, web demo’s, online collaboration, content rich websites, large file sharing John Humphrey and TelOptix International Inc. (c) 2009
  8. 8. The Opportunity • Lack of competition and monopoly rents has driven a competitive move to break the SX stranglehold on capacity • Explosion of broadband penetration and low-definition video (e.g. YouTube) drove an 80%+ compounded annual growth rate in Internet traffic in 2006 and 2007. • Growth expected to continue in 2009/10, perhaps at slightly reduced levels with the global financial crisis • SX may be aggressively valued by shareholders wanting to maintain pricing levels to avoid [downward] asset revaluations • SX has a design life to 2020 (11 years remaining) therefore without ‘extending’ system life past design life it cannot offer 15 year IRUs • Other cable systems landing in Guam and Hawaii may want to leverage their underutilised assets by selling wavelengths at attractive prices John Humphrey and TelOptix International Inc. (c) 2009
  9. 9. The Problem • The SX system has paid for itself and providing more capacity on SX costs less than a new system • SX could drop prices to match competition but would only do so if the competition was real and obtained large capacity orders or started building – e.g. When Telstra announced a 2nd cable • SX could announce a new cable to deter competition financing • Difficult to finance a new cable in the traditional manner (pre-orders driving equity investment) • Lack of sizeable players in NZ that could pre-order capacity (assume not Telecom & TelstraClear) - Vodafone & Kordia main possibles • Lack of IRU sales means reliance on leases and small players John Humphrey and TelOptix International Inc. (c) 2009
  10. 10. How Could a New Cable Differentiate Itself • Promote as a “not-for-profit social cable” owned by the public of New Zealand • Price capacity at cost + a cost recovery % versus the profit based SX cable (and Kordia proposal) • Longer life and greater capacity than SX • Offer leased term capacity as well as IRUs • Offer Ethernet connectivity as well as SDH • Offer connectivity at a number of CBD data centres – connect with provincial Open Access initiatives • Offer low prices for unprotected capacity • Add kiwishare component to help fund uneconomic rural broadband • Arrange diversity packages with other cable systems • eg PPC-1, SPIN etc John Humphrey and TelOptix International Inc. (c) 2009
  11. 11. What are the Options? 1. Build new cable to US a. NZ –– Hawaii – US. Option to add landing in Fiji, Tonga or Samoa. b. NZ – Guam – US 2. Build new cable to traffic hub and buy onward wavelengths (resell λ at cost+) a. NZ – Hawaii + buy λ to US b. NZ – Guam + buy λ to Asia/US c. NZ – Australia + buy λ to Asia/US (the Kordia proposal) + Lease “meet me” data centre space in Auckland and at key international end-points The following slides are in USD & based on actual quotations from cable supplier - without financing costs or costs of wavelengths on other cables John Humphrey and TelOptix International Inc. (c) 2009
  12. 12. Build to US Options – 1a NZ – Guam – US • 2 fibre pairs, design capacity 640 Gbit/s per fp (design capacity can be up to 1.28 Tbit/s) • Initial capacity 100 Gbit/s • Route distance 17,100 km (7,000 NZ-Guam) • Build Cost USD 535M • Annual Opex USD 17M John Humphrey and TelOptix International Inc. (c) 2009
  13. 13. Build to US Options – 1b NZ – Hawaii – US • Route distance 11,600 km (NZ-Hawaii 7,600) • 2 fibre pairs, design capacity 640 Gbit/s per fp (or up to 1.28 Tbit/s), initial capacity 100 Gbit/s • Build Cost USD 385M • Opex USD 14.5M pa • Option via Fiji, Tonga or Samoa • Create opportunities for cyber businesses in Tonga / Samoa • Adds $5M capex, $2.5M opex John Humphrey and TelOptix International Inc. (c) 2009
  14. 14. Build new cable to traffic hub + buy onward wavelengths – Options 2 a, b, c a. NZ – Guam, buy λ to Asia/US • Route distance 7,100 Km • Build cost USD 240M, annual Opex USD 10M b. NZ – Hawaii, buy λ to US • Route distance 7,600 Km • Build cost USD 260M, annual Opex USD 13M c. NZ – Australia, buy λ to Asia/US (the Kordia proposal) • Route Distance 2,350 Km • Build cost USD 92M, annual Opex USD 7.6M • Could save costs if combine with Pipe Networks PPC-1 Design capacity 640 Gbit/s per fp (or up to 1.28 Tbit/s), initial capacity 100 Gbit/s. No onward wavelength costs are included in the above. John Humphrey and TelOptix International Inc. (c) 2009
  15. 15. Build Options Summary – Capex vs. Design Capacity Alternatives (USD M) Route Capex vs. Design Capacity per Fibre Pair Opex Auckland to: 640 Gbit/s 960 Gbit/s 1.28 Tbit/s pa 1a. Guam - US 535 555 565 17 1b. Hawaii - US 385 400 410 14.5 2a. Guam 240 250 255 10 2b. Hawaii 260 270 275 13 2c. Sydney 92 94 95 7.6 Sydney (Pipe Est.) 85 87 88 7.3 John Humphrey and TelOptix International Inc. (c) 2009
  16. 16. The Kordia Proposal • Government allocated REANNZ NZD15m - transtasman cable • REANNZ/KAREN largest user of international bandwidth in NZ with large Australia data needs (grid computing, astronomy, genomics) • Still underused due to lack of fibre to schools – but directly connects to Google (fast access to Google apps may substantially reduce school software licencing costs) • Kordia responded to REANNZ RFI (October 2008) • Proposed cable to Sydney (RFS 2011) to link to Pipe Networks PPC-1 • Cost of NZD 200m with Pipe Networks (building PPC-1 to Guam) • REANNZ cancelled RFP (7 May 2009) • Kordia say still planning new cable with business case going to Board in September 2009 • Will be a “for profit” cable • NZ/Guam & NZ/US pricing is dependant on price of capacity on PPC-1 to Guam and on Pipe partner(s) from Guam to US John Humphrey and TelOptix International Inc. (c) 2009
  17. 17. Fibreco proposal • NZ investors used to 5-9% investment have few local bond products • NZ Superfund has few scale investments • Fibreco raises (say) $1B bond – annual finance costs = $80m • Fibreco has strong governance board and issues contract to supply Open Access International Network • Existing providers could supply (SX), or a new cable created on a cost+ basis • Fibreco supplies open access network to regional POPs • Cost model • Interest on Bond (say $80m pa) • Network management fee (say $20m pa) • Kiwi Share – to extend network to non-economic areas (say $100m pa) • Total cost = $200m pa. • Less than $10 per month for 2m connections • c.f. 400k small businesses, 2m mobiles, 1,000 large businesses, 1.4m households, Government departments, 85 councils John Humphrey and TelOptix International Inc. (c) 2009
  18. 18. Next Steps Discuss information presented • Route, cost, project structure options Brainstorm financing options • Equity/Debt finance? • Government underwriting? Decide whether worth pursuing and if so, how • Positioning versus Kordia trans-Tasman proposal Needs credible project organisation and team in order to obtain wavelength pricing from other cable systems that transit Guam and Hawaii John Humphrey and TelOptix International Inc. (c) 2009
  19. 19. Appendices John Humphrey and TelOptix International Inc. (c) 2009
  20. 20. Author Credentials John Humphrey • John has worked with leading edge telecommunications technologies for many years, pioneering the markets for satellite, fibre optic, wireline and wireless products and services. His experience has included leadership in major projects in the undersea cable, satellite, fibre optic, wireless, Internet & managed services markets. • His current involvements include being Founder/Director of IP Broadband Satellite Services Pte. Ltd which is developing new Direct to Home satellite TV service providers in Indonesia and the Philippines. John also consults widely, in such areas as broadband wireless, wireless LANs, Ethernet networks, as well as planning and strategy development for telecommunications service providers (local and international) and a number of New Zealand airports. John established IPSTAR New Zealand Ltd with Thaicom Plc of Thailand, building a large satellite gateway in Albany as part of this. • He was founder CEO of the USD 650M Nava Networks project, established to build a 9,500 km multi-Terabit fibre optic submarine and terrestrial cable network from Singapore to Sydney (via Indonesia and Perth). Raised substantial venture capital and led team. Prior to this, John was the New Zealand Country Manager for Optus of Australia for six years, and was previously a senior manager with Telecom New Zealand. TelOptix International • A Canadian consultancy specialising in deploying and operating telecommunication networks, particularly undersea cable networks. Laurent Duplantie is President of TelOptix and has 30+ years experience in telecommunications and has overseen several fibre optic and wireless network development projects. He was involved in the creation of an international telecommunications carrier based in Bermuda, TeleBermuda International. Previously, he was responsible for the design, implementation and operation of several submarine cable systems (Atlantica, BUS-1, CANTAT-3, CANUS-1). http://www.teloptix.com John Humphrey and TelOptix International Inc. (c) 2009
  21. 21. Alternative Route Possibilities • Dual NZ landings, Auckland and Wellington • Lower costs for Wellington and South Island users • Could include additional fibre pairs just for Auckland to Wellington for “domestic” use • Fiji / Tonga / Samoa on way to Hawaii • Could be considered “aid” for Tonga / Samoa to kick start the local economy with potential for call centres, data storage, web hosting, software development etc • Interconnect with SPIN John Humphrey and TelOptix International Inc. (c) 2009
  22. 22. Route Maps Auckland to Guam, Sydney and Hawaii John Humphrey and TelOptix International Inc. (c) 2009
  23. 23. Australia’s International Connectivity Existing cables from Australia • Southern Cross • Endeavour (Telstra: Sydney – Hawaii) • AJC (Australia – Japan) • Sea-Me-We-3 (Singapore – Indonesia - Perth) Under construction • PCC-1 (Pipe Networks: RFS Sept 09) Possible • T3 (Telstra: Sydney to NZ. Unknown status) • PPC-2 (Kordia - business case?) John Humphrey and TelOptix International Inc. (c) 2009
  24. 24. PPC-1 • Sydney to Guam with connection to PNG • Future drops to NZ, Brisbane and Port Moresby • Initial design capability of 1.92 Tb/s • Route length approx 6,900 kms • Cost of app. NZD $250m • RFS September 2009 John Humphrey and TelOptix International Inc. (c) 2009
  25. 25. Southern Cross • Figure 8 cable between NZ, Australia, Hawaii & US • Owned Telecom 50%, SingTel Optus 40%, Verizon 10%; Bermuda Co. • Capacity recently increased to 720 Gbit/s and just announced increase to 1.24 Tbit/s • NZ-US rates reportedly pegged to Australia-US pricing • 2.5 Gbit/s (protected) 2020 IRU USD 16m or USD 3.6m per annum • Rates cut by 44% in 2008 • Transtasman rates reportedly pegged to 25% of NZ-US rates • Reportedly plans to lay new cable in 2015 John Humphrey and TelOptix International Inc. (c) 2009
  26. 26. Possible Hub 1 - Guam • One of two major interconnection points in the Pacific Ocean • Most direct route between NZ and North Asia • Guam offers a lot of connectivity to the rest of the world, especially Asia • Numerous new and proposed cables connecting to Guam for onward connectivity (AAG, Unity South) to Philippines, Japan, China and the US • Potential mutual restoration agreement with PPC-1 • Auckland to Sydney cable required to close the ring John Humphrey and TelOptix International Inc. (c) 2009
  27. 27. Guam Cables John Humphrey and TelOptix International Inc. (c) 2009
  28. 28. Possible Hub 2 - Hawaii Cables landing in Hawaii and connected to US • Asia-America Gateway • TPC-2 • VSNL Transpacific • China – US • SX John Humphrey and TelOptix International Inc. (c) 2009
  29. 29. South Pacific Island Network (SPIN) • New USD 210m cable (publicly stated for the red cable shown) • Hawaii to Australia via several French Polynesia islands • Limited to 600 Gbit/s • Could be redundancy option John Humphrey and TelOptix International Inc. (c) 2009
  30. 30. Possible Extension of SPIN to NZ John Humphrey and TelOptix International Inc. (c) 2009
  31. 31. Contact John Humphrey john.humphrey@xtra.co.nz +64 9 522-2138 +64 21 555-933 John Humphrey and TelOptix International Inc. (c) 2009

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