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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

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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

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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.

 

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Why don’t you still have a black and white TV?

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In the UK there are still 13,000 homes with black and white TV sets even after the digital switch over. You can still buy them and they’re ludicrously cheap – only $10 on eBay, plus shipping.

So why don’t you own one?

Because the experience with a colour TV is so much better. You can do more, you can see more, the TV sets are now the kind of science fiction experience we used to talk about in hushed tones. Flat TVs that look like windows rather than boxes, that could double for pieces of art in some cases (looking at you, Samsung, with that gorgeous $55,000 4k screen). Coupled with thousands of channels, access to Netflix and Hulu, connectivity with your mobile phone or tablet and suddenly the
TV is so much more.

The fact that you can buy a black and white TV and get perfectly good reception and perfectly good television on it at a crazy low price doesn’t stop you going out and buying the more expensive product because the more expensive product provides a better experience.

You can see where I’m going with this, I’m sure.

But what if that new flat panel LCD screen only showed the same three channels as the black and white TV and only showed them in black and white as well. Would you then spend your money on the newer set or stick with the old?
Then you’d probably have to stop and think about it. Is having a shiny new flat panel telly really that important? The difference is minimal and sure, there are some whizzy bits with it (it uses less power, it’s cooler to look at) but overall the experience is about the same.

At that point I’d probably see the wife acceptance factor kick in and find myself wilting in the face of children’s orthondonture, vet fees and a new kitchen.

We face exactly this dilemma with the move from copper to fibre.

Fibre’s entry level price is being touted as about the same as copper, but the speed is only as good as you get from VDSL2 and nowhere near as good as you get from LTE, neither of which require anyone to come to my house and drill holes in the living room wall.

Sure, it’s fibre, and there are plenty of advantages to making the leap, but you have to put up with your drive way being dug up and your garden being trampled (Enable’s before and after shots say they’ll do a good job and from what I’ve seen they do, but still…) and even then it may not work well I’ve seen failure rates of 80% reported, and frankly, I can do without having to explain to the family why we have no phone or internet for a third day running.

The selling point of fibre is that you can do more with it, so why are we throttling it back to 30Mbit/s down and 10Mbit/s up? There’s really no reason from a technical point of view. Fibre is fibre and can scream along at far more than that. Yes, this will be a contended network and yes, telcos like to differentiate so they can upsell, but when the difference between one service and the other is so close and yet the ‘cost’ of implementation is so high, you can understand why customers aren’t beating down the doors of their fibre companies demanding to be connected immediately.

Keeping the cost of copper artificially high will do nothing to push customers towards fibre. The cost of copper simply isn’t the driver toward fibre that the government thinks it is. People will move to fibre when you give them a reason to and without any promotional work, without readily available content, without a speed bump that makes people sit up and take notice, why on earth would anyone sign up?

Uptake rates are woefully low. Costs are woefully high for Chorus (we haven’t seen the costs per connection for the local fibre companies), install times are long and wait times are growing. Customers in rented property can’t get Chorus to install, customers in multi-dwelling units or down right of ways are in the too hard basket.

The problem isn’t the cost of copper. The problem is the lousy selling job we’re doing on fibre. Fix that and then we can talk about whether copper prices should go up.

 

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Discuss

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The telecommunications review discussion document has lead to quite a bit of, shall we say “discussion” about the review and what it all means. 

As you’ll have seen, TUANZ is part of the “Axe the Tax” campaign as we strongly believe that taking money that was long promised to customers and giving it to Chorus shareholders is simply wrong.

But what do others think? What submissions were received? 

If this was a Commerce Commission process, we’d have a full list of submissions (and cross-submissions) to look at and pick through. We’d see the economic analysis, the legal justifications and the rhetoric from all parties.

Sadly, MBIE tells me they haven’t decided yet on when or even if they’ll put those submissions online.  Given we’re still waiting for the TSO submissions to go public, we could be waiting a long time.

It’s good to have all the submissions in one place and it’s good to have them out there in public. We need to have access to them so we can work out what rationale is being used and why for each position.

So on that score, I invite any and all submitters on the telco review discussion document to send me a copy of their submissions and we’ll make them all public here at TUANZ. 

I’ll email all those I can think of directly seeking a copy but there are bound to be some who have submitted that I don’t know about. It’s a shame – I would have thought the ultimate outcome of calling for submissions on a discussion document would be to have a discussion. 

It seems to be something of an old-fashioned approach these days. 

If you’ve got a submission you want included, send it to: paul@tuanz.org.nz and I’ll add it to the list. If it’s already online, send me the URL (or add it in the comments below) and we’ll save on bandwidth.

 

Is our telecommunications industry really competitive?

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 One of the
main goals of TUANZ is to encourage competition in the market place. Why?
Because more competition means more choice, a better range of products and
services and better prices.

So how do we
measure competition? The Commerce Commission measures it by looking at the
number of customers each provider has.

That’s OK
but doesn’t really tell the whole story. Better to look at the revenue share
each company has to determine just how the market is shaking out.

In mobile,
that means we have two giants (Vodafone and Telecom) and a minnow (2Degrees)
and a raft of also ran virtual operators that have a minute market share.

In landline
broadband, that means we have two giants (Vodafone and Telecom) a small number
of minnows (Orcon, CallPlus and Snap) and then the rest, mostly niche players
and resellers of service.

IDC Research
has released its annual telco report (oddly not available online in any form
that I can find) which shows a flat to slightly declining market across the
board with no sign of relief for many years to come.

In addition,
despite increased demand for broadband services, revenue shrank slightly and
looks set to continue on that path for some time.

In the
mobile space there’s little better news for telcos. Telecom’s shut down of the
CDMA network, says IDC, means it is now the third place mobile operator by
number of customers, but still number two in terms of revenue.

Yet the
telco market is as vibrant as we’ve seen in many years. Multiple players,
differentiation, all the things that appeal to a wider range of customers and
prices to match.

So is the
market working or isn’t it?

In mobile we
are starting to see competition at its finest. Infrastructure-based competition
is the best we, as customers, can ask for and we have two national networks and
a third on the way.

What’s
important in this space is that we make sure we continue to have three viable
networks, which is why the idea that the government can settle for only two
players in the 700MHz auction is unacceptable to us. We need three or we settle
back into a cosy duopoly with all that entails.

Currently
the mobile market isn’t working quite as well as we’d like. New entrant
2Degrees is still fighting for revenue market share and the dominant players are
learning to respond more rapidly to the changing nature of the market. The new
$19 price point is a great example of this – unthinkable a few years ago and
now hotly contested.

In the
fixed-line market we really do see very little differentiation between ISPs.
Certainly there is some – mostly relating to the thorny issue of content
provision – but for the most part we have monthly plans with an “all your line
can handle” speed and a relatively low data cap. You can find some competition
at a structural level with Vodafone’s recently purchased cable network and from
the fixed-wireless providers and unbundlers, but for the most part it’s any
colour you like so long as it’s black.

That’s only
going to get worse as we move to the UFB, where all inputs are more or less
identical, unless the retail service providers recognise the problem and go out
of their way to shake things up.

As we’ve
said before, telcos spend a huge amount of money on central city offices, on
marketing teams and sales managers and on retail outlets. You’d think they were
selling high-end cars, yet their business model will shortly be closer to that
of the electricity companies and their business costs should move in that
direction as well.

The trick for
customers will be to shop around. I know that sounds easy but the inertia that
we see all too often in the market is an ugly and pervasive thing.

Don’t just
settle for what’s familiar, really consider your needs and what you want from a
telco and see what else there is in the market.

We need to
support and encourage those players that are dynamic, that are offering new and
interesting choices and are really trying to win our business. They tend to be
the smaller players (they’re far more willing to try something new in this industry)
and oddly, they’re the very ones that are most at risk from the copper tax.
They’ve invested in new technology, they’ve tried to shake things up and now
they’re facing increased input costs at a time when they’re yet to reap the
rewards of increased revenue.

Without them
in the industry we’ll all be worse off.