Metro Fibre: Changing Times and Consolidation Opportunities

Eighteen years ago Wellingtonian Richard Naylor started a revolution in metropolitan area networks. Legend has it that under the cover of night he strung fibre optic cables along overhead trolley bus lines, linking City Council buildings with inexpensive Ethernet technology in order to break free of reliance on Telecom New Zealand. The resulting business, CityLink, became one of the world’s first “Open Access” fibre networks, offering Ethernet services not tied to any particular telecommunications provider. By its tenth birthday CityLink hit its stride, earning international recognition.

The CityLink model worked for Wellington, so around the time of that tenth birthday other non-telcos had decided to give it a go. Network Tasman built a fibre loop in Nelson, later expanding it to a regional network. Vector built a network in Auckland (where CityLink tried but failed to gain traction). And the list goes on:

These companies started facing a market where the incumbents were so expensive that competing with them was easy. They kicked in to high gear with the arrival of the Fifth National Government, and its promises of funding for metro and regional fibre networks right across the country. The upstarts built and lobbied and spent money on consultants and waged war in the media.

And then by 2011 it had all changed. The government engaged only three alternative networks to participate, along with Telecom and Vodafone, albeit with the condition that Telecom split out its infrastructure division into Chorus, an entirely separate company. The rest were left without a future.

UFB Business Fibre products are more consistent and far less expensive than incumbent products offered by these alternative providers – and they’re backed by large companies with real scale and support networks. Across the country Chorus has re-priced its existing business fibre at UFB pricing, meaning extra competition in the cities where an alternative provider is the UFB partner. And with Vodafone’s acquisition of TelstraClear and its extensive metro fibre holdings, the stage is set for fierce competition. By 2015 no rational corporate customer will be using fibre from alternative providers.

Is there hope for these alternative networks?

If you’re a service provider like CallPlus or FX Networks and owning your own fibre would reduce your OpEx, then some of these networks might look attractive to you. CityLink, for example, connects 450 buildings in Wellington. Over ten years you might spend $20M on access fees to those buildings. If you could acquire and operate CityLink over ten years for less than that, you’ve got a bargain.

If you’re 2Degrees, you have nearly 400 cellular towers in Vector’s coverage footprint. It would be reasonable to expect that number to treble with infill requirements. If you could acquire and operate Vector Fibre over ten years for less than $50M, it’s time to get out the chequebook.

While some of the smaller networks may never find suitors, and some like Inspire are already owned by vertically integrated service providers, expect to see consolidation in the market as existing networks fail to compete on their own but can provide value when bundled with larger operators.

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