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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.

The Chorus Conundrum

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Common sense has prevailed and we won’t see the government overrule the independence of the Commerce Commission any time soon.

While that’s good news for the long-term interests of both customers and the industry alike, it leaves us with the question of what to do about Chorus.

First, we have to determine whether there is a problem that needs fixing.

So far, we’ve been told that Chorus “could go broke” if the price of copper wholesale comes down.

I don’t buy that, and I’ve seen little evidence of that.

The numbers we’ve run are similar to Chorus’s own pronouncements in this area – that it will reduce profit (profit, not revenue) by about $80m to $100m a year. Coincidentally, Chorus pays out about $100m a year in dividend share.

To my mind, any infrastructure company that is rolling out a once-in-a-generation network wouldn’t expect to also pay a dividend at the same time. That money could and should be ploughed into the network in the interests of long term sustainable dividend payments in the years ahead.

My first preference, in that case, would be for Chorus to concentrate on the job at hand, get on with deploying the network and worry about dividend payments once the network is in place.

But Chorus has hinted darkly that there may be more afoot. If the final determination is allowed to stand, Chorus CEO Mark Ratcliffe says there will be two outcomes:

“We would have much less cash every year to invest and we simply will not be able to borrow the sums of money we need to make up to a $3 billion investment in UFB.”

This is an extraordinary situation. How can Chorus have bet so heavily on little or no change in the regulated price of its copper lines? How can they, and their investors, not have seen the writing on the wall when Minister of Communications Steven Joyce gave them a three-year delay to the introduction in order to get their house in order? That they’ve not used that time wisely is shocking and surely won’t go down well at the next board meeting, let alone the annual general meeting.

If that’s the case, the government must do something because the UFB deployment is too important to New Zealand to allow it to founder at this point.

Option 1: Do nothing.

If we do nothing, Chorus fails to deliver on its contract and defaults.

The Network Infrastructure Project Agreement (NIPA) between Chorus and the Crown is quite clear on this – default and there are penalties in terms of cash and repayments and an agreement that Chorus will relinquish control of the project to Crown Fibre Holdings, the government agency charged with overseeing the UFB deployment.

CFH would take direct control of the company and its contractors in order to see the project through to completion.

Option 2: Give Chorus more money directly.

I would need to see some clear evidence of Chorus’s problem before even countenancing this. Chorus is a private company that has bid for a contract and won. If it’s underbid, if it’s failed to secure adequate funding, if it’s failed to consider the obvious regulatory impact, then that’s it’s problem.

If we are to give Chorus more money we would be rewarding it for poor performance. That money would have to come with serious caveats on spending and should include a radical change in management, dividend policy and possibly the board as well.

Option 3: Go back out to market.

Chorus isn’t the only game in town in the fibre deployment world. If Chorus can’t do the job, perhaps Vector might like another shot at the title.

Vector missed out to Chorus on the Auckland bid – perhaps taking Auckland off Chorus and giving it to another provider might be the answer.

If Vector isn’t keen, what about the other LFCs? They’re cracking on, doing the job quickly and within budget. You don’t see them complaining that they need hundreds of millions of dollars more each year. Maybe Northpower Fibre could extend its network deployment capability down country and run the project for CFH.

Option 4: Provide bank debt assurance.

Probably the easiest thing for the government to do now is to guarantee Chorus’s debt to the bankers. I’m no financial guru, to put it mildly, and have no idea how any of this works but I’m told it’s the simplest thing the government could do with the least risk to the country. If Chorus can’t continue and make things work from there, we own them.

Option 5: Nationalise Chorus.

The share price is at its lowest point – perhaps the government should buy the company and run Chorus’s network as an open access national network, delivering service far and wide and without prejudice.

Potentially we could see one network across most of the country delivering service to ISPs and then on to users without too much overhead and red tape.

What am I saying, governments live for red tape. Much as I would like New Zealand to own its own infrastructure, I just can’t see this working. It’s in the list as a potential option but I suspect it’s unworkable.

Option 6: Cancel the UFB.

It’s all too hard, nobody really wants it, let’s walk away from the commitment. There you are, you “user groups”, you’ve got what you wanted, we’ve canned the UFB. On your head be it.

This would be a catastrophe for the country and is the furthest thing from “what we want” as users.

The UFB is essential to both New Zealand’s economic future and our social well-being. In ten years’ time, when it’s built and we’re looking at extending it into rural areas, the UFB will be a glittering jewel in our national crown and all this discussion will be dismissed as teething troubles and that’s as it should be. To abandon the project now is unthinkable and besides, I’m sure the opposition parties would have a field day and would make building the UFB into an election issue all over again.

 I don’t know what the government will decide from here. Much of it rests on the Ernst and Young report which comes out next month. From there we should get a better picture of whether there is a problem to solve and if so just what that problem is.

There is another option of course. Chorus can stop wailing, get on with the project at hand and cut its costs to be in line with international best practice and the kinds of costs we’re seeing from the other fibre companies. They can get better at digging ditches and stringing fibre from poles and concentrate on driving cost out of the business.

We can help with that – a major part of the rollout cost is eaten up in consents and legal fees, not to mention the delays, inherent in seeking permission to connect the network to each property.

This is a national upgrade programme that replaces an old network. Telecom used to have rights of access to property to deploy and replace network gear – we should make it easier and quicker for all the LFCs to do the same.

Rights of way, driveways, easements, multi-dwelling units, gated communities, new subdivisions, apartment blocks, business parks. All should be accessible by default. That would strip a huge amount of cost out of the business of deploying the UFB and that’s clearly not a bad thing.

Chorus 2.0

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The Terms of Reference (ToR) for the review of Chorus’s financial situation are out and Ernst & Young has been appointed to undertake the review.

The ToR are brief and to the point. The review will focus on the impact of the Commerce Commission’s UBA price determination on Chorus and its ability to take part in the UFB and RBI projects.

The review will also look at Chorus’s financial capability to deliver the TSO and abide by any standard Terms Determination (STD) that has been decided by the Commission.

Then the review will look at what Chorus could do to increase its “financial flexibility” including making changes to its costs, its debt facilities and any change to its dividend policy that may or may not take place.

The second half of this review is the key to this whole issue and to my mind it needs beefing up somewhat.

I don’t for a second believe that reducing the earnings from one part of the wholesale regime will cause the company the kind of trouble it claims. The numbers just don’t stack up and Chorus simply should have known this was coming. If it’s claiming that it didn’t expect the drop, questions must be asked about management’s ability to run the company. We all saw this coming, and by all I do mean all – even the Minister of Communications who introduced the bill knew the impact would be severe, and so built the three-year delay into the Act.

It’s not revenue coming in that’s the problem. If there is a problem,  it’s the costs going out at the other end of the business that is driving Chorus’s actions.

Currently, Chorus is paying more than double the amount it expected to connect each property and that’s after a project to reduce its spend.

Each property costs around $3000 to connect. By contrast, the OECD tells me that in Europe, fibre to the home costs tend to run at around EU1200 each, while B4RN in the north of England (a community-led project running fibre to rural and remote communities) spends around GBP1000 per premise connected.

We’ve all heard the horror stories of UFB connections that take days if not weeks, that involve teams of contractors standing around wondering what to do next. I’ve seen pictures of holes drilled in walls, of drive ways dug up and then re-dug. I’ve heard failure rate figures of up to 80% even after the connection is made, and that all adds up to two things: unhappy customers and huge cost overruns.

This is the problem that needs resolving. Forget about the Commerce Commission’s look at copper pricing, Chorus’s spend on fibre is the problem.

I’ve seen Chorus installations, and I’ve seen Enable and Northpower installations and there’s not a lot of difference on the surface.

Enable was drilling in a line down a drive way when I visited and the team of three were working efficiently and well.

Northpower was connecting via overhead lines and each two-man team can do three properties a day without too much hassle.

So where does the cost difference come from? Why is it that smaller LFCs can complete their builds ahead of schedule and at a reduced cost while Chorus can’t? That’s a question I’d like to see the E&Y review address – perhaps we can compare and contrast Chorus’s build with another company doing the same work here in New Zealand.

One thing all the UFB and RBI contractors would benefit from is a review of the laws regarding access to buildings.

This is a replacement network – it’s a once in a generation upgrade that will result in a new infrastructure for the country. It’s high time we treated it as such and stopped getting in the way of the fibre deployment.

I’d like to see the Telco Act reviewed to make it easier for companies to deploy fibre. Currently roughly half of the costs go towards getting the right stamp on the right piece of paper and that’s just unacceptable. We’re replacing like for like (well, fibre in place of copper) so let’s just treat it as such and stop all this nonsense.

On top of that, I’d like to see some real stats from Crown Fibre on the deployment itself. We get a national average of uptake and how many properties are now able to be connected, but how are the LFCs and Chorus tracking against service level agreements?

I’ve been hearing some shocking stories of delays in getting orders through to the start line (the clock doesn’t start ticking until orders pass through the design phase, apparently, and many of them are delayed at that point for months in some cases) and missed installation dates that are driving ISPs crazy. Remember, the ISPs are the customers here – Chorus and the LFCs don’t work for us, they work for them.

CFH has a major role to play in sorting out the mess at that end of the process and that’s something TUANZ would wholeheartedly support.

Radically changing the regulatory environment to overrule the Commerce Commission to change one price input at the other end of the process is a mistake on many levels, but perhaps most significantly, I don’t think it will get Chorus out of this hole.

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.

 

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

 

Overbuilding networks is not on

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Let’s talk about overbuilding of networks.

Several years ago I visited the telco regulator in Hong
Kong. His biggest challenge was keeping out of the way of telcos, because over
there the market really does rule the roost. Why? Because with six or seven
copper networks, three or four fibre networks, six or seven 3G networks and at
least four proposed LTE networks, there was plenty of competition at the most
basic level.

Overbuilding is good.

However, as he said to me at the time, that’s fine once you’ve
got build out to every customer. Prior to that, overbuild is a waste of time
and resources.

New Zealand is not in that situation. We don’t have a
ubiquitous network built out to cover every building or every customer. We don’t
have competition at the lowest level, and indeed the government’s decision to
fund what are, in effect, four regional monopolies would suggest there’s little
chance we’ll ever have the population to support multiple networks overbuilding
each other. With only four million customers (in a variety of guises) the costs
far outweigh the benefits.

Except that we are already overbuilding.

In central Auckland I have my pick of fibre providers for
business grade, point to point fibre. There’s FX Networks, TelstraClear fibre
(now owned by Vodafone), Vector and of course Chorus to name the first four
that come to mind.

In Wellington there’s CityLink as well, plus there are any
number of other providers.

They’re typically not offering the same kind of fibre
service that the Ultra Fast Broadband (UFB) project will build. It’s very fast,
it’s uncontended (that is, it isn’t shared in the way the UFB’s G-PON network
will be shared) and it’s expensive as a result.

For most CBD dwellers (I’m thinking businesses here, not
residential) the move to UFB will be a cost-reduction move that means more
contention for a lesser charge. They’ll figure out what that looks like in
terms of their own risk profiles and everyone will get along.

However, there are pockets of fibre deployment that are
already in service and which Chorus and the LFCs should be taking into
consideration as they build out the UFB.

Nelson, for example, has had The Loop for around a decade
now, and at the launch of the Chorus UFB deployment the mayors of both Tasman
and Nelson were at great pains to ensure everyone knew about it. It certainly
came as something of a surprise to the Minister whose speech revolved around
bringing the future to a corner of the South Island. We’ve got the future
already, Minister, they told her.

The explanation from Crown Fibre and Chorus at that point
was that the UFB requirements wouldn’t be met by the fibre network in Nelson
but that hopefully the UFB pricing would help reduce the cost of The Loop’s
fibre to its customers as well. Competition is good and healthy, but there’s no
overbuilding going on, I was told.

The Loop tells me its prices are already lower than the UFB
prices, and that yes in fact overbuild is going on.

Inspire.Net is another ISP that’s been laying fibre for many
years in the lower North Island. Because it’s not a national provider,
Inspire.Net wasn’t considered for the UFB or RBI deployments, but it already
has a large tract of the country fibred up and operating today.

Surely there won’t be overbuilding going on there, right?

Sadly, that’s not the case. UFB fibre is being deployed in
Palmerston North right over the top of existing Inspire.Net fibre and alongside
TelstraClear/Vodafone fibre. The UFB and RBI fibre is required to be deployed
to schools in and around the country so they’ve gone so far as to put a pit
outside a school which already has fibre delivered by one of the existing
operators. This despite Chorus telling an audience in Whanganui that fibre won’t
be deployed to the farms because the cost of putting a pit in and breaking out
the fibre is just too expensive, despite promising just that a year ago.

The UFB project is supposed to provide fibre to 75% of the
population. Chorus has won the lion’s share of the project and is claiming to
be overspending to the tune of around $400m. Something’s got to give, and
apparently that pressure means the government will run over the top of the
Commerce Commission decisions around copper pricing so as to make sure Chorus
doesn’t lose any more cash.

I have an idea. How about we not overbuild existing
networks. How about instead of trying to squash these smaller players we
require the UFB fibre network companies to work with existing fibre operators
and so avoid spending money to deliver a second or even third fibre network to
these places where existing services already operate.

Instead, why not lease capacity from these existing network
operators? Why not work with the other network providers, instead of
overbuilding them – at least until we have full coverage.

Chorus, UltraFast, Northpower and Enable could then get on
with building fibre to new parts of the country, places where there is no fibre
today and where new customers will be able to connect up. It will cost less to
deploy and we’ll save Chorus its $400m, or a goodly chunk of it, without having
to favour one operator over another.

Once we have the whole country covered we certainly can look
at overbuilding. In the long run I’d be more than happy for
infrastructure-based competition to take off. But publicly-funded network
deployments should not be used as a way of quashing competition and certainly
not at the expense of operators who have already put in the long hours and hard
yards delivering the service. I don’t want my money being spent on that – quite
the opposite.

 

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Unbundling – the elephant in the room

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Ten years ago I wrote dozens of stories about unbundling.

Unbundling was seen by everyone (except Telecom and some of
its financial industry chums) as the panacea to the problem of competition in
the New Zealand landline market.

Basically, wholesale access just wasn’t working and without
the added pressure of unbundling, there was little chance of bringing the price
of broadband down.

Financial advisors were aghast at the idea. How dare you
tinker with the country’s leading stock, they said. I got into a heated
argument with the head of the Shareholders Association who couldn’t see the impact
that high broadband prices were having on every other business in the land.

Eventually we got unbundling. Competitors were welcome to
put their equipment in Telecom’s exchanges and offer their own services over
Telecom’s lines.

I attended the launch at the Ponsonby exchange and it felt
good after discussing it for so long. Finally, we would see the market open up
to competition at its most basic. Finally, we would see differentiated products
and services  and ISPs would be able to
sell me a symmetrical service, or a VDSL service, or one with a terabyte of
data if they wanted. No more “any colour so long as it’s Telecom approved”.

I’m using an unbundled connection to deliver this copy
today. It’s markedly faster than the wholesale equivalent I had before and its
variability is a lot less random. Instead of micro-outages and slowdowns all
day long I get a consistent, quality connection – albeit at ADSL2+ speeds.

However, I’m one of very few customers. Within days of the
launch at the Ponsonby exchange, Telecom announced the closure of most of its
exchanges and the deployment of cabinets deep into the network. It was a cold
and cynical move extremely well played which simultaneously offered some
customers with better speeds (Point Chevalier in Auckland, for example) while strangling
competition in its infancy.

The economics of unbundling dozens of lines in a cabinet are
a lot harder than unbundling thousands of lines in an exchange. Telecom knew
this and by cabinetising its network it denied roughly half of the market to
its ISP rivals.

All of which should be ancient history but is suddenly
extremely important again.

Post de-merger Telecom is now on the countdown to being able
to unbundle that same network, now owned by Chorus and that’s proving to be a
major bargaining chip in the fight over Chorus’s wholesale pricing.

As part of the Telco Act introduced in 2011, Telecom isn’t
allowed to unbundle until the end of next year. Not coincidentally, that’s in the
same time frame that Chorus will be required to move from “retail minus”
pricing to “cost plus” pricing for its wholesale service.

Chorus has had warning that this was coming since before it
was incorporated.  It’s had a three year
delay built in to this change to allow it time to prepare itself, according to
the regulatory impact statement prepared by officials on the Telco Act. Even
its own prospectus signals the problem that the move will present for the
company.

Chorus is, however, hell bent on making sure the price doesn’t
drop precipitously.  This is entirely
proper – Chorus is an incorporated company and has shareholders to consider. It
must by law maximise their return on investment and if that means standing up
at a Commerce Commission hearing and saying with a straight face that it doesn’t
see why a move to cost based pricing will result in much of a change to its
price, then so be it.

Unbundling is, however, the elephant in the room.

If Chorus convinces the Commerce Commission or indeed the
Minister that the move to cost-based pricing is absurd and that the price of wholesale
broadband should remain high, then that gives Telecom the trigger it needs to
unbundle the network.

Telecom has roughly 55% market share of all broadband
services and if it jumped into the unbundling market, it would significantly
impact on Chorus’s revenue stream.

At the Commission’s conference, Telecom said it doesn’t want
to unbundle. That wouldn’t be its first choice because the cost would be quite
high and that money should be better spent on fibre services. But, if Chorus
keeps its wholesale price where it is today, Telecom will have no choice but to
consider it.

That should make Chorus’s blood run cold. If Telecom
unbundles, it joins Vodafone, CallPlus and Orcon as both the largest buyers of
wholesale service and largest unbundlers of the copper network.

Ten years ago I’d have thought that was a good thing. Today,
staring as we are down the barrel of a fibre deployment, it’s a complete waste
of everyone’s money.

Ten years ago it would have made a world of difference to
the competitive landscape. Today, it’s throwing money away on an outdated
technology. Yet that’s precisely what will happen if Chorus is successful in
its mission to keep the wholesale rate high. Ultimately it will be
counter-productive and result in less money being spent on fibre services and
an entrenched ISP market that has invested heavily in copper. That may well
delay the retail ISPs’ move into the fibre world at a time when it will be
critical that we all move as quickly as possible.

Looking back on unbundling it hasn’t delivered the hoped for
benefits. The old Telecom did a tremendous job of keeping competition at bay
for as long as possible and then hacking it off at the knees once it was
allowed in. If we’d had access to unbundled capability when we should have the
landscape would be quite different today. It was an opportunity that we missed
because of a world view that said we have one strong telco and that’s all we
need.

If that sounds familiar, it should.

 

Cost based modelling

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The Commerce Commission has made the only decision it could
regarding the UBA wholesale price determination process – it will continue to
work towards a final determination due before the end of the year.

Sadly the government has already said the Commission’s work
is irrelevant because it will introduce a review and a new Telco Bill that will
supersede the determination before it comes into effect in 2014. The
Commission’s work, vital as it is, will be completely sidelined in the process.

Chorus has also indicated that it’s likely to ask for a
“final pricing principle” on the UBA price alongside the UCLL (that’s the
unbundled service) FPP it’s already asked for. An FPP is a major piece of work
whereby the Commission works out how much the service actually costs (I know, I
agree it’s a bit odd that it doesn’t do that as standard but when you’ve sat
through as many economists’ presentations on cost models as I have you realise
that the Commission’s true role is to keep economic lecturers employed) and is
likely to take quite some time. The Commission has indicated that it may miss
the December 2014 timeframe and slip into 2015 because of that.

Actually I don’t mind the Commission doing the FPP work. I
think it makes sense to know exactly what we’re dealing with. The problem is,
the government doesn’t want to know what it actually costs to deliver broadband
over copper lines, it wants to make sure Chorus can continue to build the UFB
and as Chorus has said it won’t be able to if the price of copper drops (for
reasons I’ll get to in a minute) the government won’t have a bar of an actual
price point.

This is a shame because the review of the telco act could do
with a dose of facts, to put it mildly.

Currently the government is being led by Chorus’s world view.
Any reduction in wholesale rates will reduce Chorus’s income stream and
therefore jeopardise its ability to pay for the UFB deployment. On top of the
losses to copper line revenue, Chorus also faces a huge blow-out in terms of UFB
deployment costs to the tune of $300m in the first year alone, and so
logically, obviously, you can’t possibly inflict even more of a loss on the
company or it might go out of business/not deploy UFB/all end in tears (delete
where applicable).

There’s only one word for this and as we’re a
family-friendly website I can’t use it, so let me just go for “hornswoggle”
instead.

I know this to be true because Chorus is still talking about
paying out 25 cents per share as a dividend, possibly the largest dividend payout
in New Zealand this year and a rate (given the current share price of $280)
that I haven’t seen since the early years of Telecom’s privatisation where the
US parent consortium took out more money than it paid year after year till the
coffers ran dry.

If Chorus can afford that level of dividend it can cope with
a Commerce Commission determination in the $8-$12/month mark and can spend a
bit of effort on sorting out its installation process so it doesn’t cost $3500
per install.

Several things need to happen and a review of the Telco Act
isn’t one of them.

Firstly, the government needs to step back and let the
market figure out what’s going on. This random intervention model doesn’t work
and just scares the investors (let’s remember, Chorus’s investors aren’t the
only ones in this game).

Secondly, Chorus needs to figure out how to install UFB
without it costing the earth. The other LFCs can do it – so can Chorus.

Thirdly, the Commerce Commission needs to get on and deliver
us a wholesale price that uses actual cost and not retail-minus as it is
supposed to.

Fourth, those government departments that are pushing Chorus
not to do anything useful with VDSL should butt out and let the company offer
the services its customers want – in the interim while we gear up for UFB, that’s
fast fibre. It’s going to be at least another three years before most of us
start to get UFB – that’s three years of training us up to demand UFB speeds
and the best way to do that is with faster copper products.

And if the government insists on pushing ahead with its
review (of an Act it introduced, let’s not forget) then it should use the
Commerce Commission’s work as a benchmark. After all, if we know what it
actually costs Chorus to deliver these services, isn’t that going to be just a
little bit important?