ihug’s LLU Strategy (based on iiNet DSLAM Strategy and Results) David Diprose: ihug GM Regulatory

Who is ihug? ihug is part of the iiNet group… 3 rd largest ISP in Australasia  Approx 680,000 customers, approx 185,000 broadband  Over 800 staff in 4 offices, 2 countries iiNet has the 2 nd largest DSL network in Australia  Over 85,000 customers connected to it  On target for 90% metro coverage by Jan 2007 ihug is the 2 nd largest DSL provider in NZ  Over 25,000 UBS customers Also major voice business in both countries

Local Loop Unbundling Allows ISPs to install DSLAMs on existing copper wires to provide better value broadband.  ULL is “Unconditioned Local Loop” meaning full access to the copper wire that connects a customer’s house to Telecom’s suburban exchange  There are two mechanisms for a Carrier to obtain direct access to the copper:  LSS ( Line Sharing). Competitor has partial access to the copper line and able to insert broadband ADSL only, running on a different frequency to voice. Telecom retains the voice component.  ULL (Full Unbundling). Competitor has full access to the copper line. Competitor physically terminates line from customers premises to their own equipment located in Telecom’s exchanges.  For both methods, Telecom would charge a monthly fee per line to cover maintenance and overhead costs. The rate that Telecom can charge is likely to be subject to regulation.

 ihug buys wholesale ADSL port (UBS) from Telecom  Price based on speed, from $24.50* (256k) to $30.40* (2.0M)  All the equipment in the exchange belongs to Telecom  Customer purchases telephony from Telecom. * Figures from Current Residential Telecom UBS High Volume Pricing

 ihug owns its ADSL port and rents it to the customer  ihug pays Telecom for spectrum share (LSS) $9.00* per month to use the broadband part of the copper wire to the house  Customer purchases telephony from Telecom or elsewhere * Figures from Australian LSS Pricing dispute – Assume similar figure for NZ

 ihug owns its exchange ADSL equipment (as per previous slide)  ihug pays Telecom $9.00 for LSS (spectrum share)  ihug resells a voice service entirely provided by Telecom  ihug pays Telecom line rental of (retail less 5%) per month*  Total monthly payment to Telecom approx $45 * Proposed 1 April wholesale rate from Telecom

 ihug owns the ADSL and voice equipment at the exchange  ihug rents the whole copper line to the house (ULL) and pays Telecom $12.00 per month*  ihug delivers ADSL broadband (same as slide 2)  ihug provides dial tone for telephony as well  ihug saves $33 per month, per customer, compared with slide 3 * Subject to regulatory pricing of Telecom’s unbundled services)

iiNet - why DSLAMs?  Need to differentiate on product  Reduce cost base  Provide protection from wholesale squeeze  Cheapest way to deploy broadband  Leverages large scale copper network It fits in with corporate strategy to build volume and then use infrastructure to reduce cost / develop product It is a myth that fibre is needed to provide acceptable broadband – existing copper still has a big future

The Business Case There are different models for deployment (inside an exchange, or adjacent), the viability is simply based on customer density (retail or wholesale) Note 1 : These are example costs only Note 2 : Upper limit of ACCC recommendation

Current iiNet DSLAM network  210 exchanges built  85,000 customers on iiNet DSLAMs  120,000 ports deployed  All states covered  Ericsson are our HW partner

Performance vs. Speed On iiNet’s network, customers can choose from four profiles with varying levels of stability in a dynamic web-based interface.  Safe (for ADSL1 modems. Limited to 8Mbps)  Controlled (for where line quality is low)  Standard (default)  Thrill-seeker (pushing the limit)

Actual Speed Statistics Opportunity to look at max attainable DL speeds in different product segments.  All iiNet DSLAM customers  All iiNet DSLAM customers that have high speed plans (BB2+)  All iiNet DSLAM customers that have high speed plans and Sync at ADSL2+

Sample Exchange – Riverton (Perth)

First – The picture before DSLAMs (These are the speeds available via Telstra ADSL)

Customers on DSLAMs (1013) Total iiNet Customers – all plans, all modems

Speed Distribution These customers are on the iiNet DSLAM but have not moved to high-speed products – they are still on 1500, 512 and 256 plans

Customers on BB2+ Product (545) Plans permit up to 24Mbps, but many ADSL1 modems in use.)

Customers synching at ADSL2+ (215) Customers on both ADSL2+ plans & using ADSL2+ modems)

Speed vs Distance (LoS)

Speed Distribution

Lessons Learnt  Do not expect things have been done before (need to develop new processes)  Minimal visibility of the build process (before and during)  Need collaborative partnership with vendor  Need to broaden skill base, especially PM and technical What would we do differently?  Build more capacity per exchange  Build faster (where possible, go harder)  Develop “self service” tools for customers before launch

Summary – DSLAM Deployment has:  Allowed us to differentiate on product  Reduced Cost Base  Reduced reliance on Wholesale Suppliers  Provided a building block for Voice (MSAN)  Mitigate QoS issues for VoIP iiNet has the second largest ADSL network in Australia, we will continue to develop and build on this base

Investment Plans LLU “Assuming sensible LLU regulation, ihug is committed to investing $20 + million CAPEX over 2 years*.”  This will provide the needed network infrastructure (DSLAMs) to cover over 100,000 kiwi households.  For example in Auckland, the deployment plan will provide service for approx 48,000 homes fed from 39 exchanges at a CAPEX of $11.2M.  ADSL2+ DSLAMs capable of 24Mbps. * Initial investment for Stage one.

Key Investment Assumptions (*Subject to regulatory pricing of Telecom’s component services) CAPEX per Exchange: approx. $77000  $50000 DSLAM  $10000 backhaul circuit install charges  $16000 Broadband Access Server  $1000 Exchange cabinet install CAPEX per Customer: $ $50 (Line move charge) = $ OPEX per Exchange: approx. $9000 / month  $8000 / month for backhaul  $1000 / month for Exchange cabinet and power OPEX per Customer: $ $12 (LLU Charge)* = $26.50 / month

HOWICK CBD MT ALBERT MT EDEN REMUERA PONSONBY DEVONPORT GLENFIELD ST HELIERS TODAY 10 Exchanges $1.0m CAPEX

HOWICK CBD MT ALBERT MT EDEN REMUERA PONSONBY DEVONPORT GLENFIELD ST HELIERS HENDERSON BIRKENHEAD BROWNS BAY AVONDALE MANUREWA PAPAKURA TITIRANGI MASSEY ELLERSLIE WHENUAPAI ONEHUNGA PAPATOETOE BIRKDALE FORREST HILL TORBAY PAKURANGANEW LYNN GLENDOWIE TAMAKI GLEN EDEN THREE KINGS PHASE TWO 31 Exchanges $5.7m CAPEX

HOWICK CBD MT ALBERT MT EDEN REMUERA PONSONBY DEVONPORT GLENFIELD ST HELIERS HENDERSON BIRKENHEAD BROWNS BAY AVONDALE MANUREWA PAPAKURA TITIRANGI MASSEY ELLERSLIE WHENUAPAI THREE KINGS ONEHUNGA PAPATOETOE BIRKDALE FORREST HILL TORBAY PAKURANGANEW LYNN GLENDOWIE TAMAKI GLEN EDEN TE ATATU ALBANY OTAHUHU MANUKAU CITY MT ROSKIL AUCKLAND HAMILTON WELLINGTON CHRISTCHURCH DUNEDIN PHASE THREE 39 Exchanges $11.2m CAPEX