Commerce Commission ruling on copper

This morning’s announcements from the Commerce Commission suggest we need a major rethink on the way we price regulated services in the telecommunications industry.

We’ve had two recommendations handed down today – the first around the price of unbundled local loop lines and the second around the wholesale price of the product most ISPs resell – UBA (unbundled bitstream access).

It’s important we step back a little and compare the two product sets. On the one hand, wholesale isn’t really wholesale – it’s resale. In effect, every ISP that sells the Chorus UBA product sells a virtually identical product to every other ISP. You can change the colour of your advertising campaign, but the product is basically the same. There are some variations – enhanced UBA versus basic UBA – but in essence it’s one size fits all. It’s what we’ve always had – a re-badged product based on a standard set of inputs.

On the other hand, unbundled services leave far more up to the individual ISP or telco. They can define parameters like contention rates, committed information rates and so on. They also get to pay less money to Chorus, meaning they can invest more in the hardware or offer these differentiated products at a competitive rate.

All of the competition we’ve seen in the fixed line broadband market in the past five years has come from the unbundled players and it’s precisely because of this competition that any changes to the pricing structure need to be closely examined. I want a competitive market that has energy and which delivers products and services that customers want. I don’t want a government-mandated product offered at a government-mandated price because that’s not going to deliver the drive we so badly need.

Let’s look at the prices. Unbundled access was de-averaged – that is, urban folk paid less than rural. Actually, that’s not quite true – customers in urban areas cost the telcos less than customers in rural areas – the customers themselves all paid the same price, assuming they could get unbundled service.

The Commission was told to average the prices and come up with a new price point for all services, rural and urban. Chorus argued that the existing prices should simply be added together and divided by two – the competitors argued that the Commission needed to compare our figures with services offered overseas and that the price should come down considerably. Given this is the only opportunity to review prices for the foreseeable future (once they have been introduced the Commission will stop its annual price assessment regime), the ISPs and telcos are very keen to make sure the price is right for the remainder of the decade.

Chorus argued that we need to consider uptake of UFB and that too low a price-point for copper would mean customers have no incentive to move to fibre. TUANZ believes the opposite is true – that if customers are to be encouraged to take up fibre they need a reason and that reason will be found in the kinds of products and services that will be developed firstly on a faster copper network and then (once it’s available) on fibre. Without those drivers, the only way we’ll see mass uptake of fibre is if customers are forced to migrate. There should be no need for that if the incentives are set correctly.

The Commerce Commission draft decision set the price at $19.75 per line, but in the final report it sets the price at $23.53 a month per line – a reduction of 3.85% on the average price set in 2007.

This is clearly a huge win for Chorus and could potentially cause problems for those telcos and ISPs that have unbundled and wanted a lower price to extend their unbundled offers further into the network.

It’s not much of a change, however, so taken in isolation we must shrug our shoulders and move on.

Let us turn to the wholesale pricing and what’s going on there. Instead of continuing with the current “retail minus” approach, the Commission has moved to a cost-based model, something TUANZ heartily agrees with. Retail minus means we never really see the real price for a wholesale service on the grounds that it’s relatively easy to game. Prior to separation, all Telecom had to do was maintain a couple of high-end products that nobody in their right minds would buy and the retail-minus approach meant competitors were forced to pay more for wholesale service .

Of course, now Telecom is separated, Chorus doesn’t have a retail service to consider and so the move to cost-based services is entirely appropriate.

Here the Commission has dropped the price from $21.46 to $8.93 for the basic service (basic UBA) . Enhanced UBA services receive a similar price drop.

This will be great news for ISPs reselling Chorus’s wholesale product and means we should see more aggressive pricing in the wholesale market from the various ISPs assuming the price point is introduced in two years’ time as expected (there’s plenty of debate on the wholesale price yet to come I’m afraid and the Minister’s press release makes it clear we may need to develop a uniquely New Zealand methodology for wholesale pricing).

What’s not to like about that, you say? Well, again, taken in isolation it’s a great outcome. Prices will fall for UBA-based services in two years’ time when it’s introduced. But this isn’t an isolated market – instead we have to consider what will happen with both wholesale and unbundled products.

On the one hand we’ll hopefully see a huge fall in prices for wholesale service while unbundling will continue for those that have it but not be extended out any further.  Instead, we will likely see those plans for increasing the number of unbundled exchanges and cabinets come under threat as the business case for unbundling becomes squeezed by better pricing in wholesale.

There is still plenty of life left in unbundling as we know it. Not only are there more lines yet to be served in existing exchanges (I’m told unbundling accounts for only a relatively small percentage of the total lines running through those exchanges) but there is still revenue upside to the service in terms of offering VOIP services instead of the plain old telephone service.

But it does smack of the end of unbundling’s brief but glorious day in the sun and as customers we should be unhappy about that. Unbundling offers a leg-up to those companies that do make the effort to install their own equipment and has done tremendous things for the customers of New Zealand who have been able to get it. I’d like to have seen that run extended, but it’s not to be.

Most residential customers won’t be getting connected to the fibre network for the next four years, which means these prices are going to be our guiding light until 2016 or so.  If that’s the case, we’ll need to look very closely at the VDSL product set and work out whether that will be an acceptable substitute for the time being. Currently Chorus charges a premium for the service (around $20 extra per line per month) which discourages ISPs from offering it. If that’s the case that may well be the next job for the Commerce Commission.