Unbundling - the elephant in the room

Ten years ago I wrote dozens of stories about unbundling.

Unbundling was seen by everyone (except Telecom and some of its financial industry chums) as the panacea to the problem of competition in the New Zealand landline market.

Basically, wholesale access just wasn’t working and without the added pressure of unbundling, there was little chance of bringing the price of broadband down.

Financial advisors were aghast at the idea. How dare you tinker with the country’s leading stock, they said. I got into a heated argument with the head of the Shareholders Association who couldn’t see the impact that high broadband prices were having on every other business in the land.

Eventually we got unbundling. Competitors were welcome to put their equipment in Telecom’s exchanges and offer their own services over Telecom’s lines.

I attended the launch at the Ponsonby exchange and it felt good after discussing it for so long. Finally, we would see the market open up to competition at its most basic. Finally, we would see differentiated products and services  and ISPs would be able to sell me a symmetrical service, or a VDSL service, or one with a terabyte of data if they wanted. No more “any colour so long as it’s Telecom approved”.

I’m using an unbundled connection to deliver this copy today. It’s markedly faster than the wholesale equivalent I had before and its variability is a lot less random. Instead of micro-outages and slowdowns all day long I get a consistent, quality connection – albeit at ADSL2+ speeds.

However, I’m one of very few customers. Within days of the launch at the Ponsonby exchange, Telecom announced the closure of most of its exchanges and the deployment of cabinets deep into the network. It was a cold and cynical move extremely well played which simultaneously offered some customers with better speeds (Point Chevalier in Auckland, for example) while strangling competition in its infancy.

The economics of unbundling dozens of lines in a cabinet are a lot harder than unbundling thousands of lines in an exchange. Telecom knew this and by cabinetising its network it denied roughly half of the market to its ISP rivals.

All of which should be ancient history but is suddenly extremely important again.

Post de-merger Telecom is now on the countdown to being able to unbundle that same network, now owned by Chorus and that’s proving to be a major bargaining chip in the fight over Chorus’s wholesale pricing.

As part of the Telco Act introduced in 2011, Telecom isn’t allowed to unbundle until the end of next year. Not coincidentally, that’s in the same time frame that Chorus will be required to move from “retail minus” pricing to “cost plus” pricing for its wholesale service.

Chorus has had warning that this was coming since before it was incorporated.  It’s had a three year delay built in to this change to allow it time to prepare itself, according to the regulatory impact statement prepared by officials on the Telco Act. Even its own prospectus signals the problem that the move will present for the company.

Chorus is, however, hell bent on making sure the price doesn’t drop precipitously.  This is entirely proper – Chorus is an incorporated company and has shareholders to consider. It must by law maximise their return on investment and if that means standing up at a Commerce Commission hearing and saying with a straight face that it doesn’t see why a move to cost based pricing will result in much of a change to its price, then so be it.

Unbundling is, however, the elephant in the room.

If Chorus convinces the Commerce Commission or indeed the Minister that the move to cost-based pricing is absurd and that the price of wholesale broadband should remain high, then that gives Telecom the trigger it needs to unbundle the network.

Telecom has roughly 55% market share of all broadband services and if it jumped into the unbundling market, it would significantly impact on Chorus’s revenue stream.

At the Commission’s conference, Telecom said it doesn’t want to unbundle. That wouldn’t be its first choice because the cost would be quite high and that money should be better spent on fibre services. But, if Chorus keeps its wholesale price where it is today, Telecom will have no choice but to consider it.

That should make Chorus’s blood run cold. If Telecom unbundles, it joins Vodafone, CallPlus and Orcon as both the largest buyers of wholesale service and largest unbundlers of the copper network.

Ten years ago I’d have thought that was a good thing. Today, staring as we are down the barrel of a fibre deployment, it’s a complete waste of everyone’s money.

Ten years ago it would have made a world of difference to the competitive landscape. Today, it’s throwing money away on an outdated technology. Yet that’s precisely what will happen if Chorus is successful in its mission to keep the wholesale rate high. Ultimately it will be counter-productive and result in less money being spent on fibre services and an entrenched ISP market that has invested heavily in copper. That may well delay the retail ISPs’ move into the fibre world at a time when it will be critical that we all move as quickly as possible.

Looking back on unbundling it hasn’t delivered the hoped for benefits. The old Telecom did a tremendous job of keeping competition at bay for as long as possible and then hacking it off at the knees once it was allowed in. If we’d had access to unbundled capability when we should have the landscape would be quite different today. It was an opportunity that we missed because of a world view that said we have one strong telco and that’s all we need.

If that sounds familiar, it should.