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Don’t cry for MEA – why modern equivalent assets are so important

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There’s a term we’re going to hear a lot this year as the arguments about wholesale price of access to Chorus’s network reach fever pitch – modern equivalent asset (MEA).

Before you can decide what ISPs and telcos should pay for a service, you have to work out what it costs to deliver that service.

The Commerce Commission has already done that, based on benchmarking against other similar countries. It considers a raft of appropriate measures and issues, thins down the list of potential countries to those with similar regulatory regimes (among other things) and produces an “Initial Pricing Principle” (IPP).

It’s a quick way of working out what the local price should be; quick being relative of course. This is the Commerce Commission so it takes about 12 months. It involves picking a range and then, in years gone by, choosing the 50th percentile mark on that range. That’s moved somewhat and recent decisions have moved to the 75th for a variety of reasons.

But it is just a compare/contrast exercise and when there’s enough unhappiness, the Commission can be asked to conduct a Final Pricing Principle (FPP) wherein it’s supposed to work out what the service actually costs to deliver.

However, the Commission is run by lawyers and economists, not engineers, so don’t get too excited about the phrase “actual cost” because it’s not. Instead of pricing up network build costs and determining what the actual “actual cost” is, the Commission must build an economic model that takes into account how much it costs to raise the money to build a network (sigh), efficient costs but not inefficient costs and so on. As part of that, the Commission must determine the MEA of a new network and use that for the basis of its pricing.

If that seems a little odd (“I have based the sale price of my 1978 Triumph TR7 on the current equivalent which is of course the Aston Martin DB9…”) that’s because it is. It’s very odd to consider building an economic model for the price of one product built over the past century by looking at the price of a similar asset that would be built today. Not every country considers MEA to be appropriate and there’s a good outline of the various issues and complexities associated with this kind of exercise on the Ofcom website, “Alternative methodologies for the valuation of BT’s duct assets” which is as thrilling a read as you’d expect from a title like that.

So what would a modern network look like? The government, in its long tarnished discussion document, suggests that the obvious MEA is a fibre to the home network such as the UFB. It even points to the European Commission where the regulator says as much in a press release:

“the appropriate ‘modern equivalent asset’ for calculating copper access costs seems to be a fibre network: after all, no operator would today build a copper network”

But there is a lot of disquiet about that position. BEREC (the Body of European Regulators for Electronic Communication) suggests that using a UFB network as the MEA adds new problems, not least of which is a high price for copper services for those that are left on copper and will never see fibre deployed.

If we are to go down this MEA model route, and we are because those are the FPP rules, then we need to very carefully consider the question of the technology itself.

First you need to consider what the asset was built for, as well as what a modern asset would be designed to do, which brings us to Murray Milner’s mushroom model.

Milner, a long-time Telecom stalwart who has since moved on to board roles with Crown Fibre, among other luminaries, described the mushroom model to me many years ago. Telcos will build high density capacity in areas of high customer density, medium capacity in areas of medium demand and so on.

That means in CBDs you get fibre, the suburbs get copper and rural New Zealand gets wireless.

That still holds true today: compare, for example, our UFB and RBI projects.

Any MEA used to price copper must use a technology-neutral approach to working out what a modern asset looks like. It’s not as simple as declaring fibre to be the winner. The MEA for a 1978 Triumph isn’t an Aston Martin at all, it’s a small car or a bus pass or a scooter or any of the modern choices we have available.

A modern asset model must consider the modern world and modern uses, in all their various options. Anything else simply doesn’t stack up

Hotel wifi

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The summer is good for catching up with old friends and this year has been no different. Oddly, I’ve heard from two former journo colleagues both complaining about the same thing – hotel wifi charges.

Everyone, it seems, has a “you won’t believe this” story about hotels and the way they charge for wireless internet access.

Peter Nowak, formerly a New Zealand Herald tech journalist and now safely back home in the winterless north (Canada) has a nice blog post about the costs of wifi around the world (avoid Australia, he suggests) and points out that fast internet access competes with the hotel’s own revenue stream from phone calls, movies and of course every politician’s nightmare, the porn channel (hint to all MPs: if you knew more about the internet you wouldn’t have this kind of problem).

That’s fine, in so far as it goes, but the damage such exorbitant costs incur on the tourism industry are large and growing. Tourists these days don’t plan a six-week jaunt down to the minutest detail – instead, they travel point-to-point, planning as they go. Hit a rough patch with no realistic internet pricing and word will get around: avoid.

My second catch-up, with a man who wishes to remain anonymous, includes a list of Six Things You Should Never Do At a Hotel:

·         Buy wifi

·         Make phone calls using the room phone

·         Buy anything from the minibar

·         Watch pay-per-view TV (even the non R18 stuff)

·         Exchange currency.

And I fear he’s quite right. It’s all part of the round of “nickel and diming” that goes on at hotels, and it leaves visitors with a nasty taste in their mouths I suspect.

So how do we fare locally? I don’t stay in hotels often enough to claim to be a connoisseur of hotel internet connectivity, but if my experience at conference venues is anything to go by, New Zealand still has a long way to go.

My mystery contact was charged $5.10 (why not just $5?) for half an hour’s internet access at one location, and was so incensed by the pricing at another that he went to the local café where the “free wifi” was so well shielded by process and security (an eight-digit password but they handed out ten-digit numbers on slips of paper) that he gave up entirely.

“I got internet access in one hotel by sitting in the lobby, which is bad enough, but when you have to buy access in two hourly blocks, it’s contiguous time. You can’t spend 20 minutes in the morning then come back in the afternoon to use the rest, you have to buy another two hours’ worth. It’s a rort,” he rants.

It’s nowhere near as bad as Australia though, and I can add my own worst tale – a hotel that billed itself as a “business hub” and offered wifi in the rooms. Great – I’ll take that, I said. Great, they said – here’s your wifi cable.

Erm. Wifi doesn’t need cables, said I, to much confusion. Apparently nobody else had ever complained. I suspect the owner thought “wifi” was a new marketing term for broadband.

Peter points to a lovely website that lets you rate your hotel’s wifi speed. There are no New Zealand entries so next time you’re travelling, why not test it out and we’ll build up a picture of the New Zealand hotel scene and we can compare notes.

On the plus side, the mobile phone companies are now fighting for your dollar, so you can get decent rates for mobile broadband ranging from casual use right up to 2Degrees’ fabulous 12GB for $99 that lasts for up to six months. If the phone world has taught me anything, it’s that customers like simple pricing that doesn’t involve being stung with extra charges all the time. The phone companies are slowly learning that – it’s time the tourist industry followed suit.

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Spectrum

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Telecom has won the second 700MHz spectrum auction with a bid of $83 million for a block of 2x5MHz spectrum.

I’m sure nobody at Telecom HQ is celebrating, however, because it’s paid around four times as much as it had for the 2x15MHz block it bought last year.

Paying $66m for 2x15MHz was a reasonable amount. It wasn’t cheap, but it certainly wasn’t up there with the kinds of stupidity we saw in the UK and Europe during the 3G spectrum craze of the early 2000s.

All three mobile operators were happy enough with the $22m they paid per block.  I can’t imagine how Simon Moutter and co are feeling right now, but probably they look a bit green. $22m was OK, but $83m? That’s another matter entirely.

Telecom didn’t even want to bid on the remaining block. They argued that the last 5MHz pair should be left on the table for another round of bidding in a few years’ time when 2Degrees could, presumably, afford to buy it.

That made a lot of sense. TUANZ argued against having an auction at all – each of the three network operators should have been given 2x15MHz so as to preserve the competitive market in the 700MHz space, but if we had to have one, any excess spectrum left over shouldn’t be flogged off just to raise cash. Sadly, that’s just what the government has done. Telecom was forced to take part even though it wasn’t keen because it couldn’t allow Vodafone to simply walk away with the extra spectrum. Vodafone, likewise, couldn’t let Telecom have it cheaply either, and unfortunately we’ve seen the telco equivalent of the Cold War end in a huge cost.

Worse, when you look at the overall spectrum holdings you’ll find that 2Degrees has just on 100MHz of spectrum, Telecom has double that and Vodafone has nearly 300MHz of spectrum available to it right across the managed spectrum range.

That imbalance means Vodafone and Telecom already have a huge advantage over 2Degrees when it comes to the total spectrum market and that’s going to be a problem if we want a truly competitive landscape.

Should we care that Telecom has paid a fortune for the spectrum? Surely that’s its problem and good on the government for getting the best dollar for the tax payer? Well yes and no. Telecom will have to find that money somewhere and I’m guessing it wasn’t down the back of a couch. It probably will have to come either from the existing capex budget, which means something else will go by the board, or it’ll be raised from the customers.

That much money would have paid for (by my calculation) an additional 160 cellsites around the country, which would have been very nice to see in rural New Zealand. Instead, Telecom will have a nice piece of paper that says yes, it can build a cellphone network in the 700MHz range.

The good news is this isn’t a done deal. The Commerce Commission still has to assess whether or not the extra spectrum breaches the Commerce Act in terms of market dominance. We’d argue that yes, it does and I’d go further and say that both the telcos and the customers would be better off if we set aside this auction and leave the last 5MHz pair on the shelf for the time being.

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The year ahead

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Looking ahead, this year is going to be quite a busy one in terms of telecommunications, so I hope you all had a good rest of the new year break.

Normally I head off to the Coromandel to a secret location where I pitch a tent, make do without running water or electricity and where my phone (and everyone else’s) simply fails to find a signal.

This is fantastic because it means I am completely cut off from my normal life and rest is guaranteed. We kayak, we swim, we eat well, and while the kids can run around all night if they want, I go to bed and rise with the sun.

It’s a chance to switch off, to renew my batteries (as it were) and to do something completely removed from my normal existence and I love it.

But if I had to live like that every day, I’d go nuts. Running water and electricity are pretty key, but as the owners of the farm where I stay have pointed out, the need for decent telecommunications is critical.

They have a 15 year old son who can’t call his friends, can’t play games, can’t do any homework, can’t read newspapers or go online in any way shape or form for the entire time he’s at home. The exchange is too far away for DSL to work well and besides, the cabinet is full. There’s no cellphone signal from any provider and oddly not a single wireless ISP operates on the north eastern side of the Coromandel. Why? I have no idea.

This summer has been the last straw for him and he’s declared that as soon as he’s able he’ll be off to the city or at least to an internet café that can let him connect to the world.

It’s not just him – all of rural New Zealand faces this challenge and we urbanites face it with them. If we lose the rural communities we lose so much of what makes New Zealand unique. It’s not just a cultural thing, it’s the basis for our entire economy as well. Boost our farmers’ productivity by a couple of percent and we’ll all be better off.  Reduce their ability to compete (as we’re surely doing for those that don’t have access) and the inverse will also be true.

Rural broadband must be a key priority for the year ahead. However, the key component of delivering such connectivity – spectrum – is already being sorely tested.

Both Vodafone and Telecom are fighting over the remaining pair of 5MHz spectrum in the 700MHz range and, if the rumours are to be believed, are already bidding more for that pair than both bid for the 15MHz blocks they’ve already bought. Why? Because the government has decreed that the remaining block must be sold off and neither company can afford to allow the other to win, hence the price war.

This is ridiculous.

Both companies already have more than enough 700MHz spectrum and neither particularly wanted to bid for the last block.

Both companies have plenty of spectrum in the sub-1000MHz range that can be re-purposed for future network technologies and which could be readily deployed in rural New Zealand but because of the government’s greed and short-sightedness (there’s really no other way to look at it), they’re forced to spend money on a piece of paper instead of on rural cellsites.

The Commerce Commission has to grant permission for the winner to have so much spectrum so I have high hopes it’ll do the right thing and refuse to give the go-ahead.  All three telcos will be relieved if that’s the outcome – Telecom, 2Degrees and Vodafone – because the alternative is one player wins the 4G battle but at such a huge cost.

Which brings us to the question of government and the upcoming election. I’m told the likely date is November but it’s up to the Prime Minister to decide, which means it could be earlier if he sees an advantage to going sooner rather than later.

And there may well be an advantage in that. Currently Labour have yet to announce many of its policies and are lagging behind in the polls. The Greens have always had a strong ICT policy (its views on cellphones and cellsites notwithstanding) and the other minor parties are starting to display a keen interest, possibly as a result of the Chorus debacle.

And then there’s Kim Dot Com and the Internet Party.

Putting aside personality for a moment, I’ve long wondered why we don’t have a tech-focused party. MMP lends itself to such issue-led parties and I’m surprised we haven’t seen more of them. The Greens are a perfect example: why not ICT as well?

The question of course making the numbers will be determined by the policies of the Internet Party and we have yet to see those, but I am heartened by any party that raises the profile of ICT issues and if nothing else, the other politicians will have to improve their understanding of ICT to compete and that’s no bad thing.

The final issue on the table must be our lack of international connectivity. I have high hopes that 2014 will see an end to this idea that we are fine and that another cable isn’t needed. One of the various projects has to get off the ground this year and I hope it will see us connected to the US rather than Australia. If we’re to build an ICT industry in New Zealand to rival dairy farming we need to have that connection to the US – anything less will see us become an offshoot of Australia and we might as well give up our sovereignty at that point and become a second Tasmania.

What are the other issues you’d like to see on the agenda this year? You’ll note I haven’t included Chorus and there’s a reason for that. The problem and the resolution lie within Chorus itself and it’s up to the company now to figure out how to complete its contractual obligations. If it can’t, then no doubt we’ll talk more but for now the ball is firmly in Chorus’s court and I trust there it will remain until the company comes to its senses.

MEDIA RELEASE TUANZ to seek NZX, FMA and SSC Inquiries

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TUANZ TO SEEK NZX, FMA & SSC INQUIRIES

The Telecommunications Users Association of New Zealand (TUANZ) will write tomorrow to the New Zealand Stock Exchange (NZX), the Financial Markets Authority (FMA) and the State Services Commission (SSC) asking them to investigate unusual movements in the share price of Chorus Ltd (NZX: CNU).

On Friday, when a report by EY Australia into the financial viability of Chorus was received by the government but not released publicly, shares in Chorus Ltd jumped by over 7%.  Today, after the report was rushed out on Saturday by Communications & IT Minister Amy Adams, the shares have remained broadly stable.

A similar trading pattern has been observed other times that Ms Adams has made major announcements, such as when she issued a Discussion Document on pricing for copper broadband and voice services in August.

“Looking at the graphs, it seems when Ms Adams makes a market-sensitive announcement, shares in Chorus move significantly beforehand but not after,” TUANZ chief executive Paul Brislen said today.

“While TUANZ is not making any accusations against anyone, many hundreds of millions of dollars are at stake.  The strange price movements in Chorus shares over the last year merit investigation by the NZX and FMA in order to assure everyone that no insider trading has occurred.  

“Given the strange price changes all seem connected with government announcements, it also makes sense for the SSC to investigate the matter, as it did over the leaks about MFAT restructuring.

“Assurances are needed that people who may be privy to forthcoming government announcements are neither trading on that information themselves nor providing it to third parties.”

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MEDIA RELEASE: EY report shows no need for copper tax

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COALITION FOR FAIR INTERNET PRICING

MEDIA RELEASE

14 DECEMBER 2013

EY REPORT SHOWS NO NEED FOR COPPER TAX OR GOVT BAILOUT

Today’s EY Australia report vindicates the Coalition for Fair Internet Pricing’s view that neither a copper tax nor a taxpayer bailout is necessary to resolve the ultra-fast broadband (UFB) issue.

“This report is good news,” a spokesman for the coalition, Paul Brislen, also chief executive of the Telecommunications Users Association of New Zealand (TUANZ), said today.

“It proves that the government’s flagship UFB initiative can be built on time and within budget with a straightforward capital raising – and without a copper tax, barmy ideas like slowing broadband speeds to dial up, or any other old-fashioned state interventions or taxpayer bailouts.

“The report indicates that a capital raising by Chorus Ltd of around $500 million would solve all alleged problems with building the UFB after new fair prices for copper broadband and voice services come into force on 1 December 2014.

“Ms Adams is to be commended for commissioning this report and releasing it with plenty of time before the NZX and ASX open on Monday.

“It is the first solid, independent information on Chorus’s financial situation to be made available since the Commerce Commission announced last December the new fair prices it had determined under Steven Joyce’s Telecommunications Amendment Act 2011.”

Mr Brislen said the coalition would accept for the time being Chorus’s claims that the new fair copper prices would reduce its monopoly revenue by $1.07 billion through to 2020, although it remained sceptical the impact was so high.

He noted that Prime Minister John Key had previously rubbished early estimates the impact could be as high as $600 million and economists Covec had calculated the value of the copper tax to be no more than $449 million between 1 January 2015 and 31 December 2019.

EY Australia makes clear in its report it simply accepted Chorus’s claims of a $1.07 billion funding gap.

“The coalition will be studying these numbers more carefully in the days ahead, but even if the shortfall is as much as Chorus now claims, EY Australia says that much of it can be addressed through changes to dividend policies and debt headroom,” he said.

“Our initial view is that were Chorus to raise around $500 million in new equity, it could fill its alleged funding gap without recourse to the more barmy ideas to enhance revenue, such as reducing broadband speeds to that of the old dial-up services.

“Especially in the context of the booming New Zealand economy next year, raising $500 million in new equity for what is a growth stock is undoubtedly doable.”

Mr Brislen said the report not only vindicated the coalition’s arguments that a copper tax was unnecessary but also Mr Joyce’s landmark Telecommunications Amendment Act 2011, the Commerce Commission’s implementation of that Act and Ms Adams’ decision to commission EY Australia to review Chorus.

“The government has no stronger supporter of its UFB initiative than the Coalition for Fair Internet Pricing,” Mr Brislen said.

“We look forward to working with the government to play whatever constructive role we can in fast-tracking both the building and take up of the new UFB.”

Guest post: Researcher evaluating the UFB deployment

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Marlies Van der Wee is a student at the Ghent University in Belgium and she’s here studying with the University of Auckland School of Business looking at fibre deployments to compare the New Zealand approach with similar but different European models.

Marlies needs input from those in the industry who are involved in the UFB project to better understand the characteristics that surround the deployment.

More information on the project can be found here and contact details for Marlies are at the bottom of the post.

 

Evaluating the UFB deployment?

In New Zealand the government is investing $1.5 billion in the Ultra-Fast Broadband deployment, giving the possibility to 75% of New Zealanders to have a Fibre-to-the-Home (FTTH) connection by 2019. This nationwide project however contrasts sharply with the local and regional initiatives taken in Europe. Most FTTH deployments there are managed on a town or city-level, and frequently steered by local stakeholders, such as utility companies, municipalities, housing organizations, etc. 

Good examples of European cases include Stokab, a publicly-owned company that deployed dark fibre in Stockholm, Sweden, and leases this passive infrastructure to all interested parties (telecom operators, but also large businesses, media companies, health institutions, etc.). Another successful deployment can be found in The Netherlands, where third party operator Reggefiber (established by the private equity firm Reggeborgh) deploys FTTH in all areas where sufficient demand is guaranteed. Private initiatives are mostly driven by competitive networks, as is the case of Portugal, where the national incumbent is deploying FTTH in order to compete with the TV offer of ZON Multimedia, and stimulated by the regulator, who did not introduce any unbundling obligation.

Although all initiatives are striving towards the same goals in the end, the paths taken differ strongly and lead to varying degrees of influence on the performance of the different deployments. The question now arises if a relationship can be found between the characteristics of these different initiatives and their performance in terms of speed of deployment, coverage and uptake.

Evaluating and comparing FTTH deployments in New Zealand and Europe is exactly the topic of the research project performed by two researchers: Fernando Beltran (University of Auckland, Business School) and Marlies Van der Wee (Techno-Economic Research Unit at Ghent University, Belgium). Marlies arrived in Auckland last month, and will work at the University of Auckland until the end of February.

The project looks into the interaction between technology, policy and the market, covering a range of issue areas such as the financing structure and economic investment model, the operational business model including open access or unbundling obligations, the wholesale regulation on both copper and fibre, the impact of retail pricing schemes and the development of competition both at the infrastructure level (inter-platform competition) and the retail level (intra-platform competition).

The goal is to analytically compare these different FTTH deployments while linking the analysis to measurable performance criteria such as speed of deployment, coverage and uptake, which will allow the researchers to assess the deployments on the basis of their efficiency and effectiveness. 

In the end, the project aims to draw conclusions on the most important influencing characteristics driving FTTH deployment and uptake. The comparison of New Zealand and Europe furthermore brings the added value of broadening the view into different political, technological and market structure background settings.

Although this project is initiated by the academic community, the best outcome can only be achieved if the major actors in the field are willing to discuss, contribute and share relevant data. 

With this post, we would therefore invite all interested partners (telecom operators, service providers, user organizations, authorities, etc.) to contact us and support this analysis from their own perspective and with the information they can provide.

Contact info:

Fernando Beltrán

DECIDE: University of Auckland Business 

Decision Making Lab, Co-director

PING Research Group, Director

ISOM Department

The University of Auckland Business School 

New Zealand 

+64 09 923 7850

+64 021 3502282

f.beltran@auckland.ac.nz

 

Marlies Van der Wee

Techno-Economic Research Unit

Internet Based Communication Networks and 

Services (IBCN)

Department of Information Technology

Ghent University – iMinds

Belgium

+64 021 2930267 

marlies.vanderwee@intec.ugent.be

m.vanderwee@auckland.ac.nz

A detailed description of our project can be found here. 

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Will Telecom unbundle?

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The Ernst & Young Australia report into Chorus is not a review of Chorus’s financial position, despite some media reports that would suggest that’s what’s happening. Rather it’s a review of the impact the Commerce Commission’s UBA and UCLL determinations will have on “key Chorus financial indicators”.

The short answer is, naturally enough, yes it will.

I know of no business, regulated or otherwise, that wouldn’t have some impact with a reduction in its incoming revenue.

On top of that, the review is explicitly barred from looking at Chorus’s own “strategic choices” especially those that “may have led to higher capital expenditure than initially forecast.”

That’s quite a limiting factor – especially if you think that Chorus’s problem is largely nothing to do with the Commission’s determination but rather is a matter of cost blow-outs in the rollout itself.

So what will the review look at, because without all of that it’s going to be hard to come up with any result beyond “OMG, the ComCom is to blame”.

One of the main factors in the report will have to be the counter-factual Ernst and Young comes up with.

The counter-factual is the “what if?” scenario. What would have happened if the Commerce Commission hadn’t reduced the price? With the counter-factual to hand, we’ll be able to determine the net difference in pricing regimes.

Incidentally, the government isn’t waiting for this and has already directed Crown Fibre and Chorus to sit down together to renegotiate the UFB deal.

That may be the right thing to do at this point. I’m hard pressed to support yet another closed-door secret back room deal (they tend to have severe unintended consequences for the industry and the users, to put it mildly) but given the government isn’t looking to reduce its requirements or increase the money being paid out, I presume the discussions will revolve around payment schedules, bank guarantees and the like.

I trust any such agreement comes with severe caveats around both the Final Pricing Principle review and the high court legal action Chorus is taking, not to mention certain performance criteria and a new dividend policy, but that’s just me.

Let’s look at the counter-factual and the elephant in the room that nobody has mentioned.

On December 14 next year, Telecom will be allowed to unbundle Chorus’s network.

(EDIT: An earlier version of this post said Telecom could unbundle at the end of the year)

As part of the separation agreement, Telecom has been excluded from being able to unbundle Chorus’s network.

Telecom retains the lion’s share of the fixed line broadband market and the belief was that Telecom would be able to sweep in, unbundle on a massive scale and undermine Chorus’s ability to earn any money from the UBA component of its copper network.

The issue of whether Telecom wants to unbundle or not remains a key consideration for both Ernst and Young and Chorus.

If the UBA price is too high, Telecom will spend the money and unbundle, dramatically cutting Chorus’s earnings. Never mind the impact of the Commission’s determination, if Telecom took its 50% market share to an unbundled service, Chorus would lose everything.

Telecom doesn’t necessarily want to blow $50m or more on the copper network when it’s gearing up to fight a fibre war. It would rather spend its money on content and services that drive customers to the fibre network and reap its rewards in the longer run.

The question for Ernst & Young is: how high is too high? At what point would Telecom have moved to unbundle? It will have to work that out to produce a counter-factual that actually makes sense. If it just takes the existing regime and compares that with the new UBA price, it will have failed in its mission to provide a comparable counter-factual because despite the rhetoric from both Chorus and the government, there’s no going back to the old numbers.

The retail-minus model has always produced results that mean New Zealanders pay too much for broadband. Moving to a cost-based model was always going to be a shock to the system but nothing like the shock that could still come from half the market moving to an unbundled provider.

The report is due out shortly and we’ll be able to see what E&Y make of all this. Hopefully the negotiations between Crown Fibre and Chorus will result in an amicable agreement and we can put this sorry year behind us and get on with rolling out the future in a more rational, sober way.

Media release: Adams wrong on retail pricing issue

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ADAMS WRONG ON RETAIL PRICING

The Coalition for Fair Internet Pricing is disappointed Communications & IT Minister is continuing to make inaccurate statements about retail pricing of copper broadband and voice services, and has repeated its commitment to work with her constructively to help fast-track the government’s ultra-fast broadband (UFB) initiative.

Speaking to reporters at parliament today, Ms Adams attacked the coalition and invited retail service providers (RSPs) of copper broadband and voice services to “admit” they won’t pass wholesale price cuts on to consumers.

Ms Adams’ comments follow her extraordinary attack on the telecommunications industry yesterday, in which she denied lower prices for copper broadband and voice services in the monopoly wholesale market would lead to lower prices in the highly competitive retail market.

Last week, she also declared that ‘[a]nybody who believes that the wholesale price drop is going to be passed on in full to consumers probably also believes in the tooth fairy’.

A spokesman for the coalition, Paul Brislen, also chief executive of the Telecommunications Users Association of New Zealand (TUANZ), said Ms Adams’ comments were unfortunate in that they seemed to deny basic economic theory as well as empirical data since the telecommunications industry was regulated in 2001.

“We are surprised that a minister, and a National Party minister in particular, would have such little confidence in the power of competitive markets to reduce prices and improve quality,” Mr Brislen said.

“While the wholesale market for copper broadband and voice services is a monopoly and is therefore regulated by the independent Commerce Commission, the consumer market is highly competitive, with nearly 50 retail service providers, including the two giants, Telecom and Vodafone.

“Anyone with any confidence in competitive markets would accept this means prices will fall in real terms over time, especially with two of the mid-sized market participants already publicly committed to lower prices.

“Those two participants – Orcon and CallPlus/Slinghot – were described by the Commerce Commission as ‘aggressive price leading competitors in the market’ when it approved Vodafone’s purchase of TelstraClear,” Mr Brislen said.

“There can be no doubt that if they drop their prices, as they’ve promised to do, Telecom and Vodafone will be forced to follow suit.”

Mr Brislen said ongoing price cuts were exactly what had happened in the retail telecommunications market since 2001.

“Since the Telecommunications Act 2001, retail telecommunications costs have fallen by a massive 34%.   Most consumers would also agree that the quality of services has likewise dramatically improved over that time,” he said.

“New Zealand telecommunications consumers have had a big win with news last week that parliament will not over-ride or delay wholesale price cuts that will come into force on 1 December 2014.

“As Telecommunications Minister, Ms Adams should be welcoming the lower prices that are on their way and use her influence to drive them down even further.

“There is no bigger supporter of the government’s UFB initiative than the Coalition for Fair Internet Pricing and we would like to work with Ms Adams to help make it happen faster and more efficiently.

“It would be useful for Ms Adams to desist from making gratuitous and inaccurate attacks on the industry she is responsible for. 

“We very much hope she will instead commit to working constructively with the coalition and all participants in the industry to make UFB happen even faster than planned.”

Will Chorus go for the nuclear option?

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How’s your broadband?

If you’re on copper, it’s probably “OK”, if mine is anything to go by.

I get about 12Mbit/s down and 1Mbit/s up, which is tedious but it is a residential area so what can you expect?

Because I’m on an unbundled line I don’t get that dramatic drop off in capability when the kids all arrive home from school and that’s just as well. I do get chucked off the computer by my own kids but that’s another story entirely.

But what if your copper line becomes fully contended and fully utilised all the time? What if your line ran as well as it does (or as poorly as it does depending on your view) when the kids come home from 8am to 8pm every day?

The key to this is contention – how many customers are allowed to use the line at any given time and the minimum rates set by the provider of the service.

With Chorus, the minimum speed for UBA is a handover of 32kbit/s.

That’s not a misprint – it’s kilobits per second. Dial up speed, in other words.

If you’re paying for broadband you might think you have a right to expect broadband speeds constantly, but unfortunately our system in New Zealand doesn’t really work like that. We’re all sharing the line and so when someone uses a lot of capacity, we get cut down to size. Sadly, that size is miniscule.

This is one of the key differences between copper and fibre. The handover speed of UBA is 32kbit/s. On the entry level fibre plan it’s 2.5Mbit/s.

That’s a world of difference and that alone means it’s worthwhile making the change from copper to fibre.

However, I’m not telling you all of this to encourage you to migrate.  No, I’m telling you this because I’m hearing a growing concern from ISPs that Chorus will begin enforcing this handover rate as a way to get more money out of the ISPs.

Currently, Chorus doesn’t enforce the handover at that speed. There’s bags of capacity, and this is a minimum remember. At worst, your service could run as slowly as 32kbit/s and still be called broadband.

Picture this – on the day Chorus switches everyone on UBA over to its bare minimum 30kbit/s, every customer in the land will ring their ISP. The call-centres will melt under the volume, the newspapers and radio will get involved, everyone will want to know where their broadband went. Simple, says the ISPs, Chorus took it off you. Chorus will say but we’re meeting our service level agreements so there’s no problem. If your ISP hasn’t bought a better service off us, that’s its fault. Talk to them.

ISPs would be forced to buy a more expensive product to service the angry customers but would either lose money on every connection or pass that cost on to customers. It’s the copper tax by a different route.

At the UBA conference earlier this year, the issue was raised and caused much alarm. The Commerce Commission directed Chorus and the ISPs to meet to discuss the matter, and they did so in early July. At that meeting, Chorus said it had no plans to introduce such a limit but it couldn’t rule out doing so in future.

One wag called this Chorus’s “nuclear option” because once you’ve done this to the industry and the customers there’s really no going back.

If this is how Chorus intends to solve its funding shortfall, by crippling copper services, then this fight is far from over. I trust saner minds will prevail.