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.