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Consultation

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Consultation is critically important whenever governments want to intervene in a business or market. Everyone involved needs to fully understand what’s happening, why and what the outcomes will be. 

Take the Commerce Commission process for example. I describe it as “tediously transparent” because the Commission is scrupulously fair about its interactions with all parties. 

For any determination process there will be a formulaic approach to consultation. The Commission will release a discussion document, will ask for submissions, which are made public by default, put out a draft determination and hold a conference, accept cross submissions, ask follow up questions and then publish a final determination..

Submitters are encouraged to mark commercially sensitive passages as just that and they are redacted from the public documents, but generally speaking we all know exactly where we stand at all times.

The Government’s telco review failed to deliver any such transparency.

To begin with, the discussion document listed three options, all of which resulted in the same outcome – an increase in price for copper broadband. Secondly, no attempt was made to outline what the actual problem was or why regulation was needed to resolve it. Thirdly, the status quo was rejected out of hand again, with no reason given.

We’re told the government received economic advice on the matter but that wasn’t made public at any stage. We’re told several government departments submitted on the discussion document, but we we still aren’t allowed to see the advice. Submissions were only made available after TUANZ and others put in Official Information Requests and even now we are waiting for a number of documents which have been delayed by MBIE.

Worst of all, the outcome of the discussion document was pre-determined and that is, I believe, why CallPlus has made the decision to seek a judicial review of the process. This was little more than consultation theatre designed to keep us all busy without producing any unwelcome changes to the government’s desired outcome. 

We still don’t know why Chorus didn’t see this coming. CEO Mark Ratcliffe worked exclusively on the UFB contract for several months before Chorus was spun off from Telecom. Steven Joyce wrote the Act and gave Chorus clear notice that the move to cost-based pricing would involve a dramatic change to its revenue stream by giving the a three-year delay in the introduction of the new regime. You don’t include a three-year moratorium on something you expect will have a minor impact. And quite what the market analysts were doing when analyzing the stock is anyone’s guess. 

We still don’t know what the impact on Chorus’s revenue will actually be. The Coalition has asked Professor Jerry Bowman from the University of Auckland to work out the impact and he says there won’t be one, but Chorus claims the company will all but go under if we all pay it $10 a month less. TUANZ welcomes the decision to independently review Chorus’s books to see what is really going on and looks forward to that report being made public. 

This is exactly what the government should have done before launching the consultation round because we’ve now wasted six months talking about a problem that may not actually exist.

 

ComCom decision a win for Government

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The Commerce Commission has released its final determination
on UBA pricing and the figure comes in at the high end of the range at $10.92 per
line per month.

That means the total any ISP will pay for wholesale service
is $34.44 per line per month, down from $44.98.

Chorus is very unhappy about this and will no doubt call for
a FPP (a Final Pricing Principle) review. That won’t stop this figure coming
into effect from December next year, but could result in a change to that
number by the end of the following year. An FPP process requires the Commerce
Commission to build an economic model to consider the actual costs to Chorus of
providing this service. Chorus will hope the number will be substantially
higher, but given we know how much it actually costs CallPlus to deliver the
same service in the market today, it’s just as likely to be much lower.

The government  has
said it will consider its options before making a decision on what to do next,
and that’s a sensible call to make. We’re coming into an election year and
trying to justify hiking the price of broadband from $34.44 a month to its
preferred range ($37.50 to $42.50) is going to take some explaining.

The good news is, it doesn’t have to. The Commission has
already given them exactly what they asked for.

UBA isn’t a single product – it’s a suite of products, and
the basic UBA service (BUBA) has indeed been priced at $10.92 per line per month.

BUBA has no contention ratio to speak of. It’s a low-cost,
entry level product that simply won’t do in this day and age for anything
beyond a basic service.

Enhanced UBA (EUBA, rhymes with tuba) offers a less
contended service. The CIR (Committed Information Rate) ranges from 40kbit/s
through to 180kbit/s for the aptly named EUBA180 product.

That level of CIR might seem woeful – and it is – but it
puts EUBA180 somewhat closer to the entry level 30/10 fibre product which the
government is using as its benchmark in the fibre world. Entry level fibre has
a CIR of 2.5Mbit/s which is a lot better than copper UBA provides.

The argument goes like this – if copper and fibre are
similar in terms of service they should be similar in terms of price, that way
customers will be able to migrate smoothly to fibre without any problem. You
won’t stay on copper because it’s just as good but cheaper – you’ll migrate as
and when you can.

EUBA180 is the closest UBA product to entry level fibre and
EUBA180’s price, as determined by the Commerce Commission today, is $14.85 per
line per month – well within the government’s price range.

The solution to both Chorus and the government’s problem is
simple – encourage all customers on to EUBA180 and the discrepancy is resolved.
Chorus will get its money, the government will get its fibre network, customers
have the pricing and capability they deserve and, most importantly in my view,
the Commerce Commission retains its independence and oversight.

Copper and fibre aren’t the same product any more than black
and white television is the same as colour. We all know that, and the service
specifications spell it out. But if we are comparing one with the other it’s
important we compare not just headline rates, but what’s actually being sold to
customers.

You could argue that EUBA180 is still less than a tenth of the CIR
of entry level fibre and that it should be one tenth the price – we’ll argue
that another day, but for now the government can claim victory and leave the
market to get on with providing better services at better prices.

 

Kiwis gain half a billion dollars

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KIWIS GAIN HALF A BILLION DOLLARS FROM COPPER DECISION

MEDIA RELEASE:

Kiwi households and businesses will pay $104 million a year less for copper broadband and voice services from November 2014 as a result of this morning’s decision by independent regulator the Commerce Commission, the Coalition for Fair Internet Pricing said today.

The total gain through to the end of 2019 is an estimated $522 million.

The Commission announced this morning that the fair price for copper broadband and voice services was $34.44 per line per month, down 23% from the current $44.98.  The Commission’s decision was made under rules legislated for by Steven Joyce in 2011.

 “This is a fantastic, early Christmas present from the Commerce Commission, which, from next November, will give Kiwi households and businesses over $100 million a year more to be pumped back into the economy through everything from new school shoes for the kids to new technologies to help companies become more productive,” a spokesman for the coalition, Paul Brislen, also chief executive of the Telecommunications Users Association of New Zealand (TUANZ), said today.

“Our view is that the Commerce Commission has applied Steven Joyce’s 2011 telecommunications legislation correctly and, at $34.44 per month, has come up with a fair price.”

Mr Brislen urged the government to let the benefits of the Commerce Commission ruling flow through to Kiwi households and businesses.

“Any price the government might now propose above $34.44 per month would represent an obvious tax on Kiwi households and businesses in order to subsidise Chorus, an already highly profitable monopolist.  Even $35.50 would transfer over a million dollars a month from Kiwi households and businesses to Chorus shareholders, to no benefit to anyone else.”

Mr Brislen said any suggestion today’s price decision could have an impact on the rollout of the government’s ultra-fast broadband initiative (UFB) was “plain wrong”.

“The government has contracts with Chorus and others to build the new world-class fibre broadband network. Ministers should tell them to just get on and do it.

“The 30% of New Zealanders who are expected to want UFB by 2020 and the 75% of Kiwis who will eventually have access to it want it built to contract, while those who will never access to it obviously don’t want to pay a copper tax,” he said.

Mr Brislen said it would be wrong for there to be further confidential calls between Chorus chair Sue Sheldon and the prime minister on the matter.

“There must be transparency in the dealings between regulated monopolists and the government.”

The Coalition for Fair Internet Pricing was founded by Consumer NZ, InternetNZ, and the Telecommunication Users Association of New Zealand (TUANZ) and is supported by CallPlus and Slingshot, the Federation of Maori Authorities, Greypower, Hautaki Trust, KiwiBlog, KLR Holdings, National Urban Maori Authorities, New Zealand Union of Students’ Associations, Orcon, Rural Women, Te Huarahi Tika Trust and the Unite Union.

A Covec study for the coalition, which has been peer reviewed by Network Strategies and found to be conservative, concluded that the government’s proposed copper tax would cost Kiwi households and businesses between $390 million and $449 million between 1 January 2015 and 31 December 2019 over the price for copper broadband and voice services that Commerce Commission work indicates is fair.  More recent demands by Chorus would take this cost to Kiwi households and businesses to $979 million.

 

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Bonfire night

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So what’s it to be – a sky rocket or a damp squib?

Tomorrow is November 5 and for most people of UK decent that
means Guy Fawkes, gunpowder, treason and plot and, of course, the burning in effigy of a 400 year old terrorist.

This year, November 5 is also the day the Commerce
Commission comes out with its final price for the regulated UBA service – that
is, the price ISPs pay for part of the wholesale service they buy to sell us
broadband.

The draft determination knocked almost 25% off Chorus’s UBA
price and that apparently was a surprise to all concerned. It wasn’t, of course
– we were expecting more than that given how much CallPlus can sell its
wholesale service for – but both Chorus and the Prime Minister were apparently
gobsmacked by it.

Chorus says the reduction will take $160m off its annual
revenue and will require a major rethink in terms of how it operates. Well, yes
– that’s probably why the Telco Act included a three year moratorium on the in
introduction of the new regime in order to give Chorus time to do just that.

The Prime Minister says Chorus will go broke, although
Chorus was quick to deny this and the stock markets in both Australia and New
Zealand were happy enough with Chorus’s comments about its ability to function
as a business.

The Minister pulled the review of the Telco Act forward from
2019 to now and decided rather than reviewing the entire piece of legislation
she would focus with laser-like precision on one problem: how to make sure
Chorus doesn’t have to reduce its income from copper lines.

Tomorrow the Commission will announce its final price and,
if it’s high enough, the government will put its review away and we can go on
about our business. If it’s not high enough, then Chorus will call for a Final
Pricing Principle (FPP) review of the Commission’s workings which will take a
couple of years and will likely result in the price falling even further, so
I’m told by the economists who look at this kind of thing. The government will
declare that it has consulted broadly with all interested parties and that
given the choice of three options (all of which see the price of copper
wholesale rise well above the draft determination) it will pick one and
introduce new legislation before the next election.

How on earth did we get to such a stupid point? It really is
quite remarkable – we spent the better part of the 1990s with no regulation at
all and as a result fared quite poorly on all counts. Even when regulation was
introduced in 2001 it was so weak we managed to avoid doing anything useful for
five years and it wasn’t until 2006 that the Commission was given the teeth it
needed to do the job properly.

Now, after what must be seen as a brief but golden era, we
are back to the position of the minister trying to set prices in closed-door
meetings with providers with no transparency, no independence and no thought
given to the ramifications of these decisions on the broader market.

It all boils down to Section 18 of the Telecommunications
Act.

S18 is short but quite incomprehensible.

To avoid doubt, in
determining whether or not, or the extent to which, competition in
telecommunications markets for the long-term benefit of end-users of
telecommunications services within New Zealand is promoted, consideration must
be given to the incentives to innovate that exist for, and the risks faced by,
investors in new telecommunications services that involve significant capital
investment and that offer capabilities not available from established services.

In essence, so far as I can tell, what it says is that while
the Commerce Commission must act in the long term best interests of the
consumer, it must also give consideration to the risks faced by investors in
new technology. Quite what “consideration” must be given isn’t spelled out, nor
does the Act describe how the Commission must decide what is a new technology
and what isn’t.

How would the Commission differentiate, for example, between
fibre as a new technology (it isn’t) versus LTE as a new technology (it is).
We’ve had fibre for years, but LTE is brand new and clearly can compete with
copper lines if not with fibre itself.

The Commission has left LTE out of its determinations but
has been told to include fibre because the government is investing heavily in
UFB and therefore we should consider it. Let’s not worry about Telecom,
2Degrees or Vodafone’s billion dollar investments in LTE because that’s
different, somehow.

It’s all rather vexing.

The Commission did the only thing it could really do in the
circumstances – point out that S18 doesn’t really seem to have any real bearing
on the UBA determination, which is entirely about copper lines don’t forget,
and move on.

The government would like the Commission to benchmark the
UBA costs against the UFB deployment costs on the basis that it’s a “modern
equivalent asset”. Today, they argue, you wouldn’t deploy a copper network,
you’d deploy a fibre network and we know exactly how much that costs because
we’ve just run a tender process for one so that’s the price you should use.

Even the Europeans have backed away from this view. The
government’s discussion document hinges in large part on a draft policy
decision from Europe that does indeed say you should rely on the price of a
fibre to the home rollout, but the final version changes that to a comparison
with a fibre to the cabinet rollout – in effect, the network that Telecom
completed before it was structurally separated.

When the Telco Act was being introduced in 2010 I met with
the minister responsible for its creation, Steven Joyce. He joked that so far
we had changed the governing legislation three times in a decade and that was
no way to run an industry. I couldn’t agree more, but now we’re up to four
times in a decade and that’s just hopeless.

Tomorrow the Commission will either move the price enough to
satisfy the government, but in doing so betray the consumers of New Zealand, or
it will stick to its guns and face being regulated by the government of the
day.

Either way the industry loses, and the country as a whole
will continue to look at telecommunications as some kind of high farce,
although from where I sit it’s more like a tragedy than anything else.

 

Fibre to the country

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On Friday I spent the day in Whangarei, visiting NorthPower and having a look at the UFB rollout in the city.

It’s nearly done.

When I say that, I mean the entire city will soon be completely fibred up. Every home and office, school and hospital, everything.

This is an extraordinary achievement, particularly when I look at the Chorus map for my home and see I’m not slated to even see a fibre network for two years or more. It really does mean Whangarei and other regional centres will have stolen a march on the big cities and, as Northpower FIbre CEO Darren Mason says, it gives people a reason to move out of the main centres.

Mason believes Whangarei can become an exemplar of what a fibre-rich city can truly be. Not just an offshoot of the big city but an alternative.

He says families will move to the regions if they can find work, can be assured of good schooling and that employers will find staff more willing to stay for the long term because they have what they need locally.

Whangarei is bustling along if my brief visit is anything to go by. The region’s attractiveness will only increase once the motorway goes through (you can forget the “holiday highway” nonsense – it’s a vital road link that should have been upgraded years ago) and as a place to do business you’d be hard pressed to better it.

This is one of the major advantages of a fibre deployment that runs faster in the regions than it does in the two main centres. Uptake is higher than in Auckland or Wellington (Enable in Christchurch is pushing 6%, Northpower close to 7% and Mason expects to see that hit double figures before too much longer) as residential and business customers feed off each other’s experiences.

We went out on a site visit to see a team in action. Northpower has pioneered a new approach to connecting properties to the network. Instead of digging a trench and putting all the equipment under ground, they put everything in a box on the pole outside the customer’s house. Overhead fibre lines are impossible to tell apart from the power lines and Northpower has designed and built a splitter box that sits on the pole making it both quick to deploy and easy to revisit should the need arise.

Each box serves four households (with another four splitters in place for any future unbundling move) and as a plug and play unit is so simple even I could connect each house, although I’m happy to say I wasn’t allowed to have a go.

The time to connect each property is reduced – on average it takes a couple of hours but the record is just over an hour from the time the team of two arrived on site to fully connected to the house. Mason says the advantage is twofold – a faster deployment and a cheaper one. Much cheaper than digging trenches and laying cable and much less invasive.

I wonder why Chorus doesn’t do this where it’s able – given its cost blowout (the last news story I saw quoted a figure close to $300m) surely this is a viable alternative?

Northpower does trench where it needs to but where it doesn’t the savings are tremendous.

So what’s next for Whangarei and Northpower? Mason would like to see the company deploy fibre further into the surrounding areas, but one thing is holding them up – access.

Access is the 900lb gorilla in the room when it comes to fibre deployment. Costs balloon out of all proportion when the lawyers get involved and working out access rights to drive ways, right of ways and multi-dwelling units makes it almost uneconomic to deploy fibre without a government level investment.

Much better to change the rules to allow fibre deployments along existing utility corridors and to give the network companies the right to connect customers up by default. Opt out if you must but most people adopt the line of least resistance and we would see a much faster, cheaper deployment if we turned the rules around.

Mason has volunteered Whangarei as a test bed. Try it out in Northland, he suggests, and if it works roll it out nationwide. If not, no harm done.

I like that idea. I think we should change the rules and make it easier to deploy networks without having to pay lawyers a fortune to say it’s all OK, and if it works in Northland we should move swiftly to do it for the rest of New Zealand because that would mean phase two of the UFB could be really quite powerful – fibre to the country.

Northpower sees no reason why a combination of cost savings through using overhead lines and having access to properties guaranteed shouldn’t lead to us become a Giga-country, and that’s something TUANZ wholeheartedly supports.

Imagine that – every home and property in the land connected to a fibre network in much the way they are connected today via the power lines.

Now that’s something worth changing the law for.

The fastest auction in the west

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What must surely be the government’s fastest ever auction is over.

In just on a day, Telecom and Vodafone bought the maximum amount of 700MHz spectrum they are allowed currently – two pairs of 15MHz each – and 2Degrees bought two pairs of 10MHz each.

That leaves an additional two pairs of 5MHz unsold.

TUANZ has argued that having an auction is counter productive. We think it would be much better to give the licences for the spectrum to the telcos in exchange for building something we want – rural broadband, for example.

This is the model the government controversially chose for its Sky City convention centre deal. Rather than taking the money for an extension to its gaming licence, the government got Sky City to agree to build infrastructure (a conference centre) in exchange for an extension of its licence.

The parallels are obvious, although the government didn’t like the suggestion, so went ahead with an auction anyway.

Instead of investing money in the networks, the telcos have paid for pieces of paper that give them the right to build in certain 700MHz spectrum ranges. Telecom and Vodafone have each paid $66m while 2Degrees has paid $44m. That means the remaining lot is worth $22m on the same scale.

The government now has to figure out what to do next. Both Telecom and Vodafone have bought as much as they’re allowed, but the government has built in something of a back door. It has asked if they’d like to buy more than they’re allowed on the basis that it hasn’t been sold.

That must be quite tempting for both telcos and for the government, but I’d argue that this would be a very bad outcome for customers. I’d like to see all three telcos with the same amount of spectrum each. That way we can avoid the game playing around “my network is better than your network” and all the rest of the noise that goes with one player having more spectrum than the others.

In Australia, Telstra has bought two lots of 20MHz, Optus has bought two lots of 10MHz and nobody else bothered to bid because the price was so high.

This means Telstra can either offer double the speed that Optus can offer, or keep the speed the same but service double the customer base.

The 4G war in Australia is over before anyone has built a 4G tower. Telstra won.

We would do well to avoid that here. By ensuring all three players have the same amount we can ensure a level playing field when it comes to spectrum at the least.

There are a couple of ways to do that. First, the government can sit on the spectrum until 2Degrees has some funding available.

Given the spectrum can’t be deployed for a couple of years, there’s no rush to hand out the licences right now, so why not wait it out?

The second way would be to give the spectrum to the Hautaki Spectrum Trust. The Trust, you may recall, launched a bid to see the whole auction process and the government’s right to sell off radio waves taken before the Waitangi Tribunal.

That bid failed but the government has agreed to give Maori interests $30m worth of funding for ICT related activities.

If it handed over $20m worth of spectrum instead, the Trust could take that to 2Degrees and increase its shareholding in the company in exchange for the use of that spectrum.

It’s what the Trust did in the first place to get 2Degrees into the market and it makes a lot of sense for all players.

What the government shouldn’t do is rush into a sale to the highest bidder.

Telecom has already come out and said it thinks the spectrum should be shelved – as has 2Degrees, funnily enough – but of course if the government moves to sell it off, Telecom will have to compete for it or see the extra spectrum go to Vodafone for a song.

When you look at 700MHz spectrum in isolation it’s clear we want to see all three telcos on a level playing field. When you look at the sub-1000MHz range in its entirety, it’s clear 2Degrees is well behind the others in terms of spectrum resources. It needs the spectrum so it can compete in terms of pure bandwidth in the 4G world.

We need a strong third player in the market. The changes we’ve seen since 2Degrees launched have been tremendous and to the betterment of the customers. TUANZ wants to see that continue in the 4G world.

More, Better, Faster but at what cost?

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Chorus is to launch discussions with interested parties
regarding re-working the UFB fibre plans and prices.

The entry level 30Mbit/s down, 10Mbit/s up plan costs $37.50
per line per month (increasing to $42.50 by 2019) at a wholesale level.

That doesn’t include national backhaul, international
backhaul or any of the other stuff – it’s just the Chorus bit, so don’t expect
to pay $50/month for fibre services any time soon.

What’s interesting is the range of new products – from a
50/20 plan through to 200/200.

Most of the current plans have a committed information rate
(CIR) of 2.5Mbit/s – that is, if your line is utterly saturated with use, that’s
the minimum you’ll get.

That sounds awful, until you consider the CIR on copper
wholesale, which at the basic level gives you 45kbit/s, which is dial-up speed.

See the full line-up of prices and speeds here.


 

You’ll see the biggest mover is in the business space with a
doubling of the high-end plan’s speed from 100/100 for $175 to 200/200. Now
that’s a plan to get excited about.

But what will the costs be like for the retail service
providers? Don’t forget, if you as a customer want to see these speeds
throughout your entire network, your ISP is going to have to buy a lot more
backhaul.

An anonymous ISP source has done some numbers for TUANZ on
the Gigatown promotion that Chorus is running. Gigatown, you’ll remember, is
the plan to offer 1000Mbit/s service for the 30/10 price. However, Chorus is
unable to sell directly to users, so it has to bring in a retail ISP to do that
side of things.

Let’s assume a town of 40,000 people is chosen for Gigatown.
Chorus will provide the ports at entry-level price, so 40,000 customers x
$37.50 = $1.5M/month

Upfront costs are not cheap:

First you’ll need equipment at the exchange to handle
the traffic.  A fully-loaded chassis will
handle around  7,000 ports, so that’s six
chassis and 100x10Gbit/s backhaul.  Roughly a $6 million cost for exchange
equipment.

The absolute minimum price for a box that can handle a
10Gbit/s backhaul is $1200 for a Mikrotik CCR, so the RSP has at least $120,000
capex spend to get in the game.

Then there are the recurring monthly charges:

Either co-locate the equipment at the exchange or get
100x10Gbps backhaul to premises, either way it’s roughly $30,000 per month.

The RSP needs to provision bandwidth for the
customer.  Let’s assume a generous $1/Mbit/s
for national, provision – 100Gbit/s will cost $100,000 each month.

Then there’s international capacity at $17/Mbit/s
equivalent (ISPs don’t buy international bandwidth in these terms so this is a
bit of a translation), so to provision 20Gbit/s assume a cost of $340,000 a
month.

“With no other costs, the RSP would be at $2M/month,
with over $1.5M of that going to Chorus, assuming 100% penetration.”

At today’s rate of about 5% penetration (current UFB
stats), your costs would come down but so too would your earning potential.

Five percent uptake means 2,000 households, so only
one chassis is needed, 14x 10Gbit/s backhaul and an upfront cost of only $1
million capex at the exchange, and $20K capex for the RSP.

Backhaul or colocation costs would come in at $10,000
a month,  national backhaul would be
another $20,000/month and then your international would add another
$100,000/month.

Those 2,000 customers would earn $75,000 a month
(assuming no calls to the call centre etc)  but the costs per month would be around
$205,000, so you’d have to bill customers around $102.50 a month to break even –
no profit for you.

I’d pay $102.50 a month for gigabit speeds without a
second thought, but would you get 100% uptake at that price? I don’t know.

What does all this mean? If the sums are right (and do
let me know if you think they don’t stack up and we can discuss tweaking the
model) then selling UFB is going to be a big chore for RSPs. They’re going to
need faster speeds (but that comes at a cost) and will need to give customers a
reason to move (content, for example, which also isn’t cheap) and they’re going
to need help with the marketing to get the general population excited about it.

These really are interesting times.

 

Unintended Consequences

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Content is king, and
will be the driving force behind any significant uptake of the UFB.

It’s a given – certainly among users – that without the
content there can be no success story for UFB. Why would mums and dads in
middle New Zealand bother upgrading given the current state of access to
content?

Certainly in the UK the pressure for content has seen some
remarkable changes to the telco landscape.

BskyB, the UK’s leading cable TV provider, has bought
its way to number two in the ISP market and is now growing at an astonishing
rate.

To compete, BT has acquired rights to major sporting events
and given them away to fibre customers for free.  In less than a year it has added 1 million
customers to its subscriber base.

Clearly, content is what will drive demand and if buying
rights to the footy (or local variant thereof) brings in the punters, that’s
the way to go about business.

But the flip side of this story is quite sobering.

I was at a Commerce Commission conference on Friday on a
panel with Telecom CEO Simon Moutter when this issue came up. Moutter pointed
out the big difference between BT and any telco in New Zealand – we have
dis-integrated the telcos and in the UK they have not.

BT is a fully integrated player. It owns networks, it
wholesales and it retails directly to customers, in competition with its own
customer ISPs.

No telco in New Zealand in the fixed-line space can lay
claim to that.

Moutter pointed out that BT offset the cost of buying the
content against the profits it makes from the sunk-cost network, and that New
Zealand telcos don’t have the same ability. Profitability in the fixed-line
broadband market in New Zealand (let’s talk fibre as that’s the direct
comparison with the UK) amount to only a couple of dollars per line, after you
take into account call centre staff, buying backhaul and international capacity
and so on.

But these are high value customers, right? They’re the
future of the network, and BT was right to entice them over.

BT spent GBP1 billion on the rights to various sporting
events and has given those rights away for free to its retail customers. Sure,
it won 1 million new subscribers as a result, but that’s a purchase price of
GBP1000 per customer. The payback period at even $10 a month is not
insubstantial, let alone at the lower profit margins the telcos in New Zealand expect
to make.

If we look at the landscape in New Zealand there isn’t a
single fixed-line operator that could do to our market what BT has done in the
UK. Instead, all our telcos can do really is look to partnerships with content
providers in order to offer more to customers, and even then it’s more likely
that the ‘over the top’ (OTT) providers will sweep in with a more comprehensive
offer and scoop up most of the revenue that might be on offer.

This is one of those unintended consequences of market
intervention. By splitting Telecom into two parts, we secured a more level
playing field for the future, but the downside is a lack of cross-subsidisation
for the telcos.

On the plus side, that’s probably a good thing for
customers. I don’t want to find my content locked to a particular provider, and
I’m ever hopeful that the whole model of distribution that the content makers
are forcing on is eventually goes away. I don’t want to have to sign up to
Telecom in order to get rugby but Vodafone in order to get rugby league, for
example. Much better to sign up to the internet and get whatever sport or other
entertainment I require when I require it.

But his does pose a problem for New Zealand UFB retailers.
How will they entice customers to the shiny new network if sports and
entertainment content are out of reach?

It could well be that the only telco able to deliver the
content needed is already in the market today. It’s Chorus, the owner of the
copper network.

It’s an interesting old world, isn’t it?

 

Coalition stands by claims Chorus is at no risk of insolvency

/2 Comments/in /by

COALITION FOR FAIR INTERNET PRICING

MEDIA RELEASE

FRIDAY 11 OCTOBER 2013

COALITION STANDS BY CLAIMS CHORUS IS AT NO RISK OF INSOLVENCY

The Coalition for Fair Internet Pricing stands by its opinion that the communications it has received from the Australian Stock Exchange (ASX) and New Zealand Stock Exchange (NZX) indicate than neither exchange holds evidence to support New Zealand prime minister John Key’s assertion that Chorus Ltd (CNU) could become insolvent if a December 2012 Commerce Commission recommendation on copper broadband and voice services pricing is implemented.

The coalition also accepts that NZX does not directly comment on individual issuers or their financial positions.  The NZX has made an announcement to this effect today.  The ASX has made no comment at this time.

Yesterday the coalition released communications from both the NZX and the ASX on whether or not Chorus was in breach of its continuous disclosure obligations.

The coalition had asked the exchanges to investigate Chorus’s continuous disclosure compliance after Mr Key told national television on Friday 13 September that the copper network monopolist could go broke were the Commerce Commission draft determination implemented.

The ASX advised the coalition that it had reviewed the matter but “has not formed the view … that there is, or is likely to be, a false market in [Chorus]’s securities”.  It advised: “If you do not see a market announcement about the issues you have raised, you should assume either that our investigation has concluded that there was no breach of the Listing Rules or, if there was, it has been dealt with to our satisfaction on a confidential basis.”

The NZX advised that it “has no reason to challenge [Chorus]’s view that it remains in compliance with its continuous disclosure obligations under the NZSX Listing Rules”.

The coalition acknowledges that Chorus made a disclosure to the market on 3 December 2012 in which it said “the collective impact of these two changes [the UBA decision becoming final] … could require Chorus to fundamentally rethink its business model, capital structure and approach to dividends”.

However, the coalition does not believe this represents a disclosure of a risk that Chorus could become insolvent.  This is confirmed by the fact the monopolist’s share price fell only about 15% to NZ$2.91 after the Commerce Commission report was released, which is not an indication the market believed it had been advised of an insolvency risk.

Moreover, the following day, on 4 December 2012, Chorus announced that Standard & Poor’s had made no change to the company’s credit rating.  

Since then, the chief executive of Chorus, Mark Ratcliffe, has consistently refused to agree that his company could go broke or that the roll-out of ultra-fast broadand (UFB) is at any risk, including in interviews with Radio New Zealand and TV3’s The Nation.

 A spokeswoman for the coalition, Sue Chetwin, also chief executive of Consumer NZ, said the prime minister and other opinion leaders should desist from claiming Chorus was at risk of insolvency.

“Chorus is an important part of our economy,” she said.  “It is part of the NZX15 index, has a market capitalisation of over NZ$1 billion, is rolling out ultra-fast broadband (UFB), made a profit of NZ$171 million last year and paid NZ$95 million in dividends to its shareholders.  It will remain profitable under all pricing scenarios and any suggestion it is at risk of going broke is absurd.”

The Coalition for Fair Internet Pricing was founded by Consumer NZ, InternetNZ, and the Telecommunication Users Association of New Zealand (TUANZ) and is supported by CallPlus and Slingshot, the Federation of Maori Authorities, Greypower, Hautaki Trust, KiwiBlog, KLR Holdings, National Urban Maori Authorities, New Zealand Union of Students’ Associations, Orcon, Rural Women, Te Huarahi Tika Trust and the Unite Union.

A Covec study for the coalition, which has been peer reviewed by Network Strategies and found to be conservative, concluded that the government’s proposed copper tax would cost Kiwi households and businesses between $390 million and $449 million between 1 January 2015 and 31 December 2019 over the price for copper broadband and voice services that Commerce Commission work indicates is fair.  The latest demands by Chorus would take this cost to Kiwi households and businesses to $979 million.

ENDS

No evidence Chorus could become insolvent

/3 Comments/in /by

COALITION FOR FAIR INTERNET PRICING

MEDIA RELEASE

THURSDAY 10 OCTOBER 2013 

ASX & NZX FIND NO EVIDENCE CHORUS COULD BECOME INSOLVENT

The Australian and New Zealand stock exchanges (ASX and NZX) have reported to the Coalition for Fair Internet Pricing indicating that they have found no evidence to support New Zealand prime minister John Key’s assertion that Chorus Ltd could become insolvent if his government’s proposed copper tax is not introduced.

“We are pleased with the ASX and NZX conclusions because they confirm that there is absolutely no risk of insolvency under any of the copper pricing scenarios put forward by the Commerce Commission as the independent regulator.  This means that the roll-out of the Ultra-Fast broadband can proceed as planned,” a spokeswoman for the coalition, Sue Chetwin, also chief executive of Consumer NZ, said today.

Chorus is part of the NZX15 index, has a market capitalisation of over NZ$1 billion, made a profit of NZ$171 million last year and paid NZ$95 million in dividends to its shareholders.

“Given Chorus’ financial security, we call on the government to withdraw its proposal to over-ride the Commerce Commission and impose a copper tax on Kiwi households and businesses – a tax which will benefit no one except support the profits of the copper lines monopoly,” Ms Chetwin said.

“There is no reason at all for Kiwi households and businesses to pay a dollar more for copper broadband and voice services than the Commerce Commission says is fair.

“There is no threat to Chorus’s solvency and no threat to the roll-out of Ultra-Fast Broadband.  Chorus should simply be told to get on with the job.”

Mr Key made his insolvency claims on national television on Friday 13 September, saying: “If the Commerce Commision ruling stands there’s a chance Chorus will go broke, in which case the Ultra Fast Broadband (UFB) won’t be rolled out.”  He later advised media and the New Zealand Parliament that he stood by these comments.

Asked whether his view that Chorus could become insolvent was based on information not in the public domain, Mr Key told Parliament it was “based on commercial-in-confidence discussions between Chorus and Ministry of Business, Innovation and Employment (MBIE) officials” and a private telephone conservation he had with the chair of Chorus, Sue Sheldon, in December 2012.

Following the prime minister’s comments, the coalition asked the ASX and the NZX to investigate why Chorus had made no disclosure to the market about any insolvency risk as it would be required to do under both exchange’s listing rules.

On Friday 4 October, the ASX advised the coalition it had reviewed the matter but “has not formed the view … that there is, or is likely to be, a false market in [Chorus]’s securities”.  It advised: “If you do not see a market announcement about the issues you have raised, you should assume either that our investigation has concluded that there was no breach of the Listing Rules or, if there was, it has been dealt with to our satisfaction on a confidential basis.”

Yesterday, Wednesday 9 October, the NZX also advised that it “has no reason to challenge [Chorus]’s view that it remains in compliance with its continuous disclosure obligations under the NZSX Listing Rules”.

The ASX and NZX communications are available to media on request.

The Coalition for Fair Internet Pricing was founded by Consumer NZ, InternetNZ, and the Telecommunication Users Association of New Zealand (TUANZ) and is supported by CallPlus and Slingshot, the Federation of Maori Authorities, Greypower, Hautaki Trust, KiwiBlog, KLR Holdings, National Urban Maori Authorities, New Zealand Union of Students’ Associations, Orcon, Rural Women, Te Huarahi Tika Trust and the Unite Union.

A Covec study for the coalition, which has been peer reviewed by Network Strategies and found to be conservative, concluded that the government’s proposed copper tax would cost Kiwi households and businesses between $390 million and $449 million between 1 January 2015 and 31 December 2019 over the price for copper broadband and voice services that Commerce Commission work indicates is fair.  The latest demands by Chorus would take this cost to Kiwi households and businesses to $979 million.