Having your cake and eating it too (and creating a monopoly along the way)

Lost in the noise of the Telecommunications Act Review discussion document is a rather alarming paragraph about Chorus’s copper lines.

The review usurps the Commerce Commission’s role as regulator and gives the job to the minister on the basis that the minister wants the fibre uptake to be successful.

In order for the fibre rollout to be successful it has to have lots of users signing up for it. Fair enough – I agree entirely with the outcome, just not with the process by which we’re being pushed down that path.

The minister argues that in order for customers to move to fibre the price of copper lines can’t be dramatically lower than the price of fibre, otherwise nobody will move.

I disagree – fibre and copper aren’t the same product and while my copper line might be adequate for my use today, by the end of this year it’ll be straining at the edges and by the end of next year it’ll be intolerably slow.

That’s because my kids are now both of an age where they have serious homework and that homework is delivered online. As soon as they get home from school they want to use the computer. My wife uses that downtime to catch up on last night’s Shortland Street and so she too is using my internet connection.

Copper barely copes with this. As it always has been, user migration is dependent on there being a reason to move and content is that reason. Fibre is not the same product as copper.

But let’s put that aside for the moment. Let’s assume the minister’s goal is to have as many customers as possible moving to fibre and that in order to do this we must artificially mark up the price of a copper line.

The discussion document lays it out in just these terms. It describes the fibre roll out as a “once-in-a-generation” upgrade and says the real benefits to New Zealand come from those applications that use UFB speeds. It goes so far as to quote the Alcatel-Lucent report that suggests economic benefits of nearly $33bn over a 20-year period.

Clearly then, we need to usher users over to the fibre world as quickly as possible for the benefit of the economy as a whole.

All of which makes me wonder why the minister is so keen to stop that happening in those parts of the country where Chorus isn’t building the fibre network.

Chorus has the lion’s share of the network build, but Northpower is rolling out fibre in Northland, UltraFast Fibre is doing it in the Waikato, Bay of Plenty region and Enable is doing its work in Christchurch.

All three Local Fibre Companies (LFCs) are ahead of schedule. All three expect to finish sooner rather than later and all three are signing up more customers than the average sign-up rate would suggest.

Yet the minister makes it clear in her discussion document that Chorus will be allowed to pocket price its copper wholesale service to compete for those customers who live outside its fibre region.

“Chorus can set wholesale prices below the regulated price cap to match competition from fibre in those areas, if necessary to compete effectively with the LFCs.”

We’ve already seen Chorus overbuild existing fibre networks such as The Loop in Nelson and Inspire.Net in Palmerston North, and now it gets to use its existing network to compete for customers against the government’s fibre network around the country.

Surely if the drive to move to fibre is so great that Chorus must be given a leg-up in terms of its copper pricing, the same rule should apply in favour of the LFCs and Chorus not be allowed to compete by reducing its copper prices?

And conversely, if it’s OK for Chorus to reduce its price in these areas, why is it not OK for the rest of the country as well?

Don’t forget, the Telecommunications Act explicitly allows Chorus to buy up the three smaller LFCs without triggering the Commerce Commission’s anti-monopoly alarm. The Commission is barred from investigating any such purchase on the grounds of lessening competition by law.

I can picture a scenario whereby Chorus depresses the market for fibre in the three LFCs’ home territories while keeping copper prices high for the rest of us. Once the LFCs start to struggle, Chorus can buy them up for a song and before you know it we’ll have one network operator for the country as a whole.

As we said during the ten-year regulatory holiday debate, we’ve just spent a decade ensuring that one network operator play nicely with the rest of the market, do we really want to create another monopoly asset with no regulatory oversight?