Certain Uncertainty

This is a repost of an article from Internet NZ CEO Jordan Carter that ran in NBR last week:

18 Sep 2014

Things often come in threes - last week was no exception. One of our team members spoke with an international investment group keen to understand the current telco regulatory environment in NZ, read the submissions made on the Commerce Commission Final Pricing Principle (FPP) determination along with a letter from the Commission about the FPP process and finally there was the Appeal Court's judgement and associated media regarding the Chorus appeal on the Commission's Initial Pricing Principle (IPP) determination.

The discussion with international investors was incredibly enlightening despite how it sounds. It revolved around the topic of regulatory certainty. They are already investors here, and they want to invest more. However they also expressed concern with how the regulatory environment will play out in both the short term and the long term, causing them to review their investment intentions in New Zealand.

What they wanted, and this is echoed in a couple of the FPP submissions, is regulatory certainty. As do we.

Did this mean they wanted a guaranteed return on their investment? As all investors know, that is unlikely to happen as investment is in a sense like gambling: you could never absolutely guarantee anything. They said no, what they actually wanted, like any professional gambler, was to know the odds of any bet they were making. They were happy to take risks as long as those risks were understood and commensurate with the returns - but in the absence of any certainty about the odds, the risks become untenable.

This brings us to the third item - the Appeal Court's rejection of the Chorus appeal against the Commerce Commission's IPP pricing decision. From our perspective, this regulatory issue played out in a way that was so full of certainty that any sensible bookmaker would refuse to give odds - it was as certain as the result of the All Blacks playing Canada or Japan in the 2011 Rugby World Cup. 

As soon as the legislation was drafted and before Telecom was separated, we knew that the regulated price of copper would come down (the monopoly rents inherent in the price would be removed by that legislation). Most believed they understood what process the Commission would follow and within a reasonably narrow margin had some idea about what price the Commission would derive from that process - i.e. there was little regulatory uncertainty. 

All through the two year consultation process the only ones who expressed any surprise at the Commission's decisions were Chorus and its investors. Corporate uncertainty, not regulatory uncertainty. So it came as no surprise that when the Commission made its final IPP pricing decision Chorus, as is their right, challenged it in the High Court. The judge was unequivocal in finding for the Commission and awarding costs. Chorus immediately sought leave to appeal and now the Court of Appeal has unsurprisingly confirmed the High Court decision. The Chorus response was "We’re clearly disappointed by today’s decision to maintain the status quo, but it is not entirely unexpected.”

This does beg a question: if Chorus was expecting the decision, why did it go down a path that seems, on the face of it, to create more uncertainty - when their investors have been saying they want certainty? 

The answer to that is relatively simple Chorus has little to lose - if it can get the regulated price of its copper services increased by 1 cent that would cover all the court costs and legal fees and a lot more besides - that really is a risk worth taking. But there may be more to it than that.

The Chorus media release went on to say "Today’s regulatory environment is completely out of kilter with the industry’s structure and the effective delivery of the Government’s policy. We felt it necessary to appeal the High Court’s decision to try to get some further clarification on the fundamental issues around pricing UBA in New Zealand."

This is a surprising statement. The most recent major change to the regulatory environment was as a result of the Government changing the Telecommunications Act legislation in 2011 so that Chorus could separate from Telecom thereby bringing about the industry structure we have today. The changes were designedspecifically to suit today’s industry structure and today’s Government policy.  

Chorus/Telecom was well aware of the legislative changes and was heavily involved throughout the legislative process. Being so close to the process we would expect them to be better informed than nearly anyone else in the sector. They should have been able to forecast the impact of what those changes would be and also they signed up to the changes willingly, negotiated a raft of legislatively imposed regulatory moratoria to prepare them for the change and, not unrelatedly, got around $980m in a government UFB contract out of it. 

Which brings us to the present. The Appeal Court has provided another layer of certainty. Does this mean we’re at the end of the stoush? That’s unlikely. There was an expectation that once the Commerce Commission determined the IPP price , this would stay in place for at least a couple of years - not least because calculating the alternative FPP price is a complex and pretty much untested process in New Zealand and so should take the Commission at least two years to conclude. 

However, under pressure (mostly from Chorus and investors) the Commission is attempting to undertake the FPP determination quickly and in the opinion of many is doing so in undue haste. The mantra for this haste is certainty for investors, even though it may actually be contributing to uncertainty for investors. 

Based on their approach to date, we can expect a repeat of the appeal strategy from Chorus if the Commission's FPP process arrives at a decision below the IPP price (a not unlikely scenario). If the Commission's FPP price is to the liking of Chorus it will almost certainly not be to the liking of anyone else and we can expect a legal challenge from the other side. Perhaps in an effort to head off legal challenges from either side last week the Commission wrote to all the affected parties attempting to allay concerns that have been consistently expressed about the rushed process. Good as the Commission's intentions are, it’s unlikely the letter will carry much weight when there is so much to gain and so little to lose by challenging any decision.

If Chorus wanted to provide certainty to investors it has one clear option to hand. It could simply accept the Appeal Court's ruling, withdraw its application for an FPP final price and accept the IPP price will stay in place for two years.  The remainder of the industry would quickly follow suit and the Commission could undertake its investigations in a realistic time frame. 

All of this is business as usual: a stable, predictable regulatory framework operating precisely as intended, and precisely as expected. 

In the meantime the Government has strongly signalled that should it be re-elected not only will it pump a further ~ $350 million into the UFB and RBI projects’ but has also said that it does not intend to overturn any decision made by the Commission. The Government at least is providing as much certainty as it can.

Next year’s going to see an important conversation about the post-2020 regulatory environment. Getting that right will take time, but it has to be done. Focusing on that would be a much more savvy use of everyone’s time – including Chorus’s time – than fruitless court action or complaining about the framework in place today. To the extent any market player is doing the latter, they are simply seeking to get changes made that suit themselves, and at the expense of regulatory certainty and broadband users.



    What to park beside your 'Gigahome' - a 2015 BMW

    No sooner had I stopped dreaming about having a Primowireless UFB connected, smart 'gigahome' in Taranaki when this arrived in my inbox:

    Media Release
    23 September 2014

    Vodafone powers a new era of connected car innovation

    Vodafone is driving a new suite of vehicle innovation in New Zealand, with the launch of BMW’s interactive mobile technology, ConnectedDrive – enabled by Vodafone’s global machine-to-machine (M2M) platform.

    From today, most new 2015 BMW vehicles in the New Zealand market will be fitted with a special Vodafone Global SIM that connects BMW to its vehicle fleet.

    The SIM, embedded in the vehicle during manufacture, satisfies the tough requirements of the automotive sector. It has a lifespan of more than ten years and can withstand temperatures of between minus 40 and 85 degrees centigrade. It also has special protection against corrosion and was specifically designed for production line manufacturing operations. The SIM allows BMW to offer its online ConnectedDrive services and apps including:

    - Automatic emergency call in the case of an accident, with the transmission of important information to a dedicated emergency response centre
    - Smartphone app allowing remote vehicle functionality, including features such as remote locking and unlocking, remote ventilation control and vehicle locator
    - A dedicated 24/7 Concierge Service, allowing voice contact with a BMW agent who can send directions and addresses directly to your car’s navigation system
    - TeleService calls, which allow your car to communicate directly with BMW when it requires service or maintenance, and additionally allows remote diagnosis by technicians in the event of a vehicle malfunction

    In 2012, Vodafone Group signed a five-year connected car deal with BMW to supply connectivity to its vehicles – and now has 17.5 million Global SIMs and a footprint of 27 global networks.

    Vodafone New Zealand Director of Enterprise, Grant Hopkins says the partnership with BMW is among the world’s most successful and prominent M2M deployments.

    “Our network connectivity essentially transforms the vehicle dashboard into a sophisticated smart device, and delivers a driving experience that goes far beyond the conventional.

    “We’re delighted that the New Zealand market can experience this next level of mobile technology services from BMW – and believe we are on the cusp of some exciting future developments in the automotive M2M market.”

    For more than 20 years, Vodafone Group has connected M2M customers globally – and now tops the rankings in the 2014 Analysys Mason’s independent M2M annual scorecard.

    Vodafone New Zealand has more than one million M2M connections on its local network.

    — Vodafone Press Release 23 Sep

    That's pretty cool and very soon you won't even need a beemer to get smart car benefits, it does explain the Government's desire to fix those pesky 'black spots' on the state highway network, the next round of crown limo's will need the connectivity.

    My 'when I win Lotto' wish list just got longer.

    Gigatown - GigaCity New Plymouth

    If you live in a UFB area in Taranaki, your world has just got a lot faster, Primowireless have now launched their new residential UFB services and a new look website.

    Primowireless res UFB


    The big news is that they have released the first residential gigabit UFB service in New Zealand (that I know of) and it looks pretty good. Prices start at $109 per month for a 50GB plan (I'd inhale that in seconds) going up to $169 per month for a 1000GB plan, not too bad and I can understand their reticence at running an unlimited gigabit plan. It would be too tempting to try and back up the whole internet or try and download Hollywood.

    I'm impressed for several reasons, the first is that in the legendary spirit of Taranaki Hardcore, they've just 'done it' the second is that aspirational UFB doesn't look unaffordable and its only taken about two and a half months from when UFF turned on the 'Giganet'.

    This is the kind of innovation New Zealand needs more of and I'm rapt to see it coming out of the provinces. What we now need is more competitive products like this available in more places.

    The TCF is looking at a gigabit spec for UFB, but lets see how this goes in the Naki.

    If I was lucky enough to be using this, my next trip would be to Dick Smith for one of these and I'd need a plan to upgrade all my WiFi devices to 802.11 ac.

    Then it would be time to get serious about have a hyper connected smart house.

    Ah dreams are free...

    2014 - The cyber election?

    As we get ready to face the polling booth tomorrow, I've been reflecting on the campaign and how it impacts on the ICT sector in New Zealand.

    I was hoping that we would get some serious discussion going on how ICT is going to shape our countries future. The Government is now 6 years into the biggest program of ICT infrastructure investment in New Zealands history: how's that going? Are we going to be able to use that as a base for building a prosperous and sustainable future? 

    We're also becoming acutely aware of the impact of the digital world and our place in it, our notions of sovereignty, security and safety are all being challenged. We have been offered alternatives during the campaign but again this is an area that gained little to no media traction. 

    Despite all of this I think its fair to say that this has been a cyber election in many ways, we've got a dedicated Internet Party, hacking, blogging and cyber surveillance have dominated the headlines and sadly drowned out the policy debates. 

    Interestingly its been National that have opened the chequebook for both urban and rural Kiwi's in New Zealand's heartland with over $300 million of new spending on extending the UFB from 75 to 80% of NZ towns and money for filling in mobile blackspots and extending rural broadband.

    The idea I hope survives from other ICT policies is the need for more vision and leadership driven by a CTO for New Zealand - we do need one. 

    And I think a digital bill of rights is inevitable, but we need to understand just what is at stake. 

    Vote well tomorrow.