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Fishhooks

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The Commerce Commission’s monitoring report is a tale of two halves.

On the one hand, you have a highly competitive market with prices well below the OECD average and fierce competition. Customers are being offered more for less and new offerings come to the market regularly.

Customers can buy data, voice, TXT, they can go on prepay plans or on account and they’re loving it.

The other market consists of prices up to 190% of the OECD average, limited market energy, little or no competitive pressure and a distinct lack of creativity.

The reason for the difference is clear – 2Degrees.

The first market is the low-end prepay and on account segment where 2Degrees has vigorously burst onto the scene only a handful of years ago. The third entrant has radically changed the dynamic and the other two network incumbents have been forced to respond in kind.

Suddenly we see bundles on offer at $19/month that only months earlier had sold for $70/month. The drop in price has been matched by an increase in value – customers get more TXTs, more minutes, can call more friends and family members in more calling groups and have more data to use on their shiny new smartphones than ever before.

Since it arrived, 2Degrees has fought well in this market and achieved a great deal. It’s customer numbers have long since passed the million user mark and are still rising. It’s very successful, so long as your measure of success doesn’t include “breaking even” because clearly the cost of spending on network deployment (and the impending launch of 4G as well) is not a trivial matter. It will be quite some time before 2Degrees is in the black.

The other market, however, is failing to deliver on that promise. High end business and corporate plans, and larger on account offerings, simply aren’t seeing the same level of movement to 2Degrees and I’m wondering why.

It’s not as though the plans on offer don’t appeal to business or high end customers. The same price points are attractive across the board, and while business customers care less about the costs associated with the service, the CFO certainly does and typically buying decisions are made at that level.

So why is it that 2Degrees isn’t carving the same level of fat out of this market?

I suspect it’s a combination of factors, not least of which is the speed with which customers can disentangle themselves from their contracts.

Prepay customers are free to move quickly and easily between providers. On account customers face many barriers to switching, not least of which is the ever present “early termination fee”, which is often applied even if you’re moving within the same provider to a better suited plan.

These fishhooks mean there is a lag in movement for on account customers. Instead of simply picking up and shifting to a new provider, OA customers must wait until a certain time period has passed, or until they’ve paid off their new “free” handsets (which of course are never free but rather “$0 up front” and which must be paid in full before customers are allowed to move on).

Early termination charges often include an extra fishhook – rather than simply repaying the cost of the device, they attempt to recoup the worth of that contract to the provider. Sign up for two or more years and you’ll find your “worth” is quite a bit and if you want to get away early, the break fee can be quite astonishing.

I think it’s high time we called these zero dollar handset subsidies what they really are: hire purchase agreements. You get to take the phone home with you, but you’re tied to a provider for years and end up paying more for the service than you should.

It’s time, I think, that the Commerce Commission had a closer look at all of this, and I’d go a step further and call on the government’s inquiry into the Telecommunications Act to consider the issue as well.

The numbers are clear for anyone to see – something’s stopping on account customers from migrating to 2Degrees and it’s not the price point.

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IPP vs FPP: What the High Court has to say about it all

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The High Court has ruled against Chorus in its battle to overturn the Commerce Commission determination on UBA pricing. The ruling can be found here.

This possibly won’t be the end of it – it’s unclear yet whether Chorus can or even will appeal the decision further – but for now we have guidance on how Section 18 of the Telco Act should be applied.

I’ve written about s18 and what it means for the industry elsewhere – in brief, due consideration must be made by the Commission to the needs of investors in new technology.

The Commission argued that it couldn’t go beyond the available evidence when considering its responsibilities under s18, that it couldn’t take in all the evidence, discuss the matter with the industry, work up a draft and then a final determination and then throw it all away because one clause of the Act says it should consider the needs of investors in new technology.

Chorus argued that the Commission should apply s18 at every step of the process and that by waiting until the end to apply s18, it had erred in its interpretation of the law.

“[Chorus argued that] s 18 is a mandatory relevant consideration, which must be applied at every point where a material judgment is made that affects the ultimate result. That would include process decisions, decisions of exclusion of eligible benchmarks, investment in further information gathering, decisions on the  range within which a price point would be selected (if there is any narrowing of options at that stage), and selection of the final price point.”

The Judge, the Honourable Justice Stephen Kos, disagreed with Chorus and said:

“In my view the statutory language is not prescriptive that s 18 is a consideration borne into (and interwoven through) the benchmarking analysis to be undertaken by the Commission, at the evidential stage. Indeed, I can see every reason why it would not be. That sort of external consideration does not seem to me to form a relevant part of the evidence-gathering exercise. Rather, it is relevant to what to do with the evidence once it is obtained.”

The Commission’s argument around s18 is that it can’t be used to move the determination outside the process laid down in the Act, and it’s that which swayed the Judge’s decision.

The whole issue has arisen out of the difference between the Initial Pricing Principle (IPP) and the Final Pricing Principle (FPP) and as the Judge points out, the very reason we have an IPP in the first place.

Conducting an FPP is a lengthy, laborious and costly task. It requires the Commission to build an economic cost model for the service being regulated, based on an efficient supplier’s costs.

Typically these things take a very long time to build, involve much shouting and wailing from all parties and are used only once or twice before being discarded, surplus to requirements.

Because of that, the recommendation (originally made way back in the Fletcher Inquiry of 2000) was that the Commission use a cheap and cheerful benchmarking exercise for the easy stuff. That is, instead of building expensive bespoke cost models, it would simply benchmark against countries that use a similar methodology to New Zealand.

In the past this has been enough for the parties involved. Until now, nobody has called on the Commission to conduct the full FPP process. We’ve looked around the world, found similar regimes and compared our price with theirs. It’s not perfect, but it’s supposed to be quicker and cheaper.

In this instance, the IPP found a benchmark set of only two countries, which certainly alarmed both the Commission and the telco industry. However, after conducting its usual tediously transparent process that included input from all the parties, including the users and investors, the Commission ran a cross-check against a wider group of countries that included a set that were excluded from the final group for various reasons. That range ran from $6.56 to $11.45, effectively bracketing both the draft determination and the final $10.92 price determined by the Commission. Nothing the Commission did fell outside the law.

Which raises an interesting question – if the IPP is supposed to be the quick version, how does the Commission think it can conduct a full FPP for not one but two services in ten months, when the IPP process took far longer?

But that’s a question for another time. For now, the High Court has handed down confirmation that the Commission’s process follows the law as it stands and even, at times, exceeds the expectation.

To quote the Judge once more:

“The Commission has exercised a judgment, as it is required to. It has done so following a process probably more extensive than Parliament had in mind. It certainly took longer than Parliament had in mind. It is worth reminding ourselves that the Fletcher Inquiry, the progenitor of this IPP pricing process, had in mind that New Zealand could simply piggy-back international evidence, and that the result would be a “quick and cheap” process compared to the FPP cost-based modelling approach.”

The Commission hopes to have the FPP decision completed and made public in time for the 1 December deadline. I’m no betting man but I think that’s optimistic and we’re more likely to see a result this time next year, if not later.

That final price? I’d say it will fall to below $10 per line per month.

 

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Media release: Cross submission asks ComCom to do the job right

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InternetNZ, TUANZ and Consumer’s submission on UCLL asks Commission to do the job right

InternetNZ (Internet New Zealand Inc), TUANZ and Consumer have today lodged a cross-submission with the Commerce Commission, requesting that parties take a careful and measured approach to setting the price of the Unbundled Copper Local Loop (UCLL) service as part of the Final Pricing Principle process now under way.

In its submission, the group says that getting this phase of the pricing review right is absolutely crucial. The submission states that if the Commerce Commission acts too quickly, “that may be regretted later.”

InternetNZ CEO Jordan Carter says that rushing now could find the sector back where it was last year – mired in confusion and frustrating debates that serve no purpose.

“The Commission needs to take the time to design the FPP process properly, and to minimise the areas of conflict within the industry. Taking the time to do so now will mean the process works better and gets to a faster outcome in the end.

“Everyone wants to see certainty, but that has to be based on reality. The alternative is further industry chaos, and the risk of wrong and higher prices for Kiwi broadband users.

The submissions released by the Commission already show that the industry is a long way from landing on a collective view for an ideal process and design. We need to get that right,” said Mr Carter.

“Our submission also notes that there are serious problems with the suggestion by Chorus that its own professional advisors do the initial modelling process for the FPP. The Commission has to do that work, to avoid the obvious conflict of interest in Chorus modelling a pricing structure it would be later be bound by through the FPP.

“The public interest in fair pricing for broadband is at risk if the regulated party designs its own cost model,” Carter says.

“We look forward to hearing the Commission’s decision on the next steps. We hope that it takes the views in this submission into account as it does so,” Jordan Carter says.

– ENDS – 

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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

ComCom decision a win for Government

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

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

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

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

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

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

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

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

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

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

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

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

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

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

 

Kiwis gain half a billion dollars

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KIWIS GAIN HALF A BILLION DOLLARS FROM COPPER DECISION

MEDIA RELEASE:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

 

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Bonfire night

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

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

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

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

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

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

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

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

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

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

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

S18 is short but quite incomprehensible.

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

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

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

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

It’s all rather vexing.

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

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

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

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

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

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

 

The Copper Tax

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This month’s After Fives saw the Telecommunications
Commissioner tell us about the state of the industry, revenue trends,
investment and what the future could hold for the industry.

Unfortunately, I’m less sure the future of the
Telecommunications Commissioner role itself.

The government’s stunning move to make pricing decisions in
the Beehive means the role of the Commissioner is, to all intents and purposes,
surplus to requirements, at least as far as the government is concerned.
Suddenly it’s the 1990s all over again.

For close to a decade the government of the day dithered
while Telecom (as it was – Chorus now) sent most of its earnings offshore to
its US shareholders, failed to invest in basic infrastructure, blocked
competitors coming into the market (remember Clear taking them to the High
Court?) and generally offered a very poor service to its customers.

The change in government saw regulation introduced for the
first time, albeit at the light end of the scale. Eventually we empowered the
Commission with teeth to do the job at hand and the industry has flourished
ever since.

More importantly, the consumer has also benefited. We’ve
seen prices tumble as speeds and data caps increase. Increased investment means
we have three cellphone network operators each with extensive networks and more
to come. We have a fibre network deployment underway to satisfy pent up
customer demand. We are addressing rural New Zealand’s broadband needs, and
while I’m clearly in the “more, better, faster, sooner” camp, we are heading in
the right direction.

Unfortunately the government and in particular minister of
communications Amy Adams has derailed all the good work of the past decade with
one announcement.

Chorus’s shareholders’ needs 
are now the key driving force behind the government’s approach to
telecommunications, not consumers.

The side-lining of the Telecommunications Commissioner means
we have no way of ensuring users’ needs are first and foremost in our
regulatory landscape. In effect, the minister will be setting the price of
service directly, with little or no regard for either international
benchmarking or the contract her government signed with Chorus.

The fibre rollout will only ever reach 75% of the population
and most of those users won’t be signed up until after 2020. That means the
quarter of the population who won’t get fibre will forever more be subsidising
fibre users. It also means that most of us will be paying the Chorus tax for at
least the rest of the decade.

This, then, is the heart of the matter – we have a contract
with Chorus that has now been renegotiated without input from the rest of the
industry, without reference to international best practice, without even a
tender process to see what’s available in the market today.

The minister is now entirely responsible for the regulatory
regime in which the telcos operate without the safety net that the
Telecommunications Commissioner brings to that regime. Not only is the
government the investor in the network, it has now taken over as regulator and
that’s an appalling position for the industry to be in.

What next? Will she decide that Vodafone’s 4G network is a
threat to uptake rates on the UFB and regulate Vodafone? Will she decide that
the price of UFB is too low to ensure returns to the shareholders and put up
the price? Will she allow Chorus to pocket price in areas where the other LFCs
are building our network? Will she encourage Chorus to buy up those LFCs on the
basis that having one network operator is better than four?

Governments that invest in infrastructure should stay out of
the business of regulating the same investment. They can’t wear two hats, they
can’t be both investor and regulator. They can set policy directions and try to
encourage investment all they like but if they’ll also regulate to protect
their own investment the whole thing will come apart at the seams.

We now face a monumental struggle to ensure the Chorus tax
is repealed, that the government reinstate the Telecommunications Commissioner
as the regulator and that the Beehive stops introducing more uncertainty into
this sector. It’s too important to leave it up to the politicians.

 

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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.

 

Managing Expectations

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I’m writing this from the Commerce Commission conference into the cost of wholesale services delivered by Chorus.

This service is regulated as Chorus is a monopoly provider. It is really the only provider of copper lines in the country and as a monopoly it is regulated accordingly.

The pricing principle underlining the Commerce Commission’s approach has changed. In 2010 a new Telco Act was introduced that foresaw the split of Telecom into Telecom and Chorus. As part of that split, the government realised it could no longer rely on a “retail minus” pricing model as Chorus would no longer have any retail products. Instead, the Telco Act says the Commission must move to a “cost plus” model. That is, instead of taking the retail prices in the market and taking off a regulated percentage to deliver a wholesale price point, the Commission would look at the price of delivering the service at the base level and add a margin to that.

You may remember the debate around the introduction of the new Telco Act. It focused almost entirely on the ten-year regulatory holiday the government slipped in to the Supplementary Order Paper that came with the bill. Indeed, the SOP was larger than the bill itself and led to many thousands of words being written by journalists around the country on this unusual approach.

As the debate ground on, with little sign of victory for those of us that supported the Commerce Commission’s role and the need for an independent regulator, the one redeeming feature of the bill was this decision to move to a cost-plus model.

Eventually we won the day with regard to the regulatory holiday. Backroom political machinations saw the government drop the clause, although the level of political interference in the regulatory regime since then has been alarming, to put it mildly.

All that happened before Telecom split in two. Indeed, all this took place before Chorus was incorporated and floated on the stock exchange. It should have been no surprise to anyone, least of all Chorus or its shareholders – especially given the inclusion of a three year delay because of the impact this change to the pricing model would have on both Telecom and Chorus.

We expected a major drop in wholesale price. Telecom CEO Simon Moutter says he also expected a similar drop and today we heard from CallPlus’s Graham Walmsley about his experience installing copper equipment and selling as a wholesale player to ISPs. Graham says his experience is that the UBA draft price is far too high and that he is selling a product that includes voice capability at a price point that is lower than the draft price today.

For years, Telecom managed to keep the price of wholesale services high by managing its suite of retail products so as to retain one or two highly-priced products. That way the “wholesale” price was artificially high.

As I write we’re hearing from economists who (with a straight face) are suggesting they didn’t expect any drop in terms of price with the move from retail minus to cost plus. They’re earning their money today.

If anyone at Chorus, or at any of its investors, was caught by surprise by the drop in price, they need to find a new line of work. It was obvious even to a non-economist, non-lawyer like me.

The solution for Chorus is simple. Any price drop can be offset by launching other products that aren’t regulated and which offer a higher return on its investment. Failing that, it should take a close look at its dividend to shareholders which currently sits at 25 cents per share.

More to follow.