Chorus’s costs

Chorus has a few tough decisions to make if yesterday’s financial reporting is anything to go by.

Where to prioritise its spending, where to make cuts and how to manage the regulatory process are all key questions the Chorus senior management will be asking themselves.

First things first, as you know TUANZ disagrees with Chorus on its handling of the regulatory process. The company should have seen the Commerce Commission UBA price point coming and had three years to prepare for it.

Fortunately, after a year of fluster from the government, we’re now back on track with a Final Pricing Principle (FPP) process to determine the costs of both UBA and UCLL components of the wholesale regime.

If I were Chorus I’d ditch the legal action against the Commission’s determination. It’s hard to see how that is anything but a delaying tactic at this point and could very well derail the whole process. Let’s just get on.

The good news is, regulatory issues aside, Chorus seems willing to do just that, focusing on the real heart of the matter – its cost structure.

Chorus has managed to bring the cost of each UFB premise passed to $3000. That’s a staggeringly high figure – in its bid process Chorus was estimating it would cost roughly half of that, and I have it from the LFCs that they pay significantly less per connection on average. This is the real problem and it’s good to see Chorus addressing it head on. Staff levels will have to fall, says CEO Mark Ratcliffe, and the company will have to consider how much and how it invests in copper lines.

This will be difficult for some customers – particularly those who are on the waiting lists for broadband. They may be years away from getting UFB and are hoping for more investment in the copper network to get them on to ADSL or VDSL in the meantime.

Unfortunately, not everyone is going to get copper broadband. Chorus’s main focus is on delivering the UFB and moving customers to that as quickly as possible. I suspect from here on in, it won’t be increasing the foot print of its copper network and will switch to maintenance only for most of us.

I’m in two minds about this. On one hand, customers need broadband today and as it’s now the 21st century we really shouldn’t be talking about people not being connected.

But on the other hand, copper is yesterday’s news and I want everyone (or as near as we can get) on fibre as quickly as possible.

Where Chorus must continue to invest in the copper realm is, of course, that quarter of the population that will never see a fibre connection under current plans. We need to make sure they don’t get left behind and I’m looking to the political parties to tell us what they plan to do about the digital divide.

The second point is Chorus’s ability to make money. As a regulated monopoly, it’s somewhat constrained in this. Chorus says it will be looking at new revenue opportunities and will be working with its customers (the ISPs) to determine what products it can come up with that they’ll actually be interested in buying.

When I first heard that, alarm bells rang. New ways to make money, eh? So you’ll be throttling everyone back to crawling speed and forcing the ISPs to buy bigger and better plans?

Chorus says no. In fact, to quote spokesman Ian Bonnar the company “categorically rules out” going for this so-called nuclear option.

I’m very pleased to hear that because the rumours among ISPs is that this is what was being planned. Certainly until yesterday I hadn’t heard Chorus deny it, rather it wouldn’t rule anything out. Now it has and that’s for the betterment of the industry as a whole.

So where can Chorus reduce its spend? I visited Northpower’s deployment last year and saw an overhead rollout moving swiftly and efficiently. Two-person teams connecting houses to fibre via overhead lines wherever possible. The record stood at just over an hour to connect one property.

We need more of that kind of approach deployed throughout the rest of the UFB network, I think, and it’s well worth looking to the other players to see what they’re doing well and what can be applied elsewhere.

But the single biggest thing that can be done to help Chorus, and indeed all the fibre companies, is to revisit this asinine resource consent process we currently have in place.

Even though this is a government project for the betterment of all New Zealand, even though this is a once-in-a-generation network replacement that will see us right for the rest of the century, the fibre companies have to jump backwards through hoops to get consent from all involved.

It’s foolish, to put it mildly.

Why aren’t we treating this as a replacement for what’s already in place and allow the fibre companies to install without needing all the red tape? Northpower tells me it could double the footprint of its fibre network in Northland if it didn’t have to spend so much on consents, and Chorus and the other LFCs would likewise make a tremendous saving.

That’s a network I’d like to see – perhaps we can whittle down that 25% non-fibre number and solve the digital divide as we go.

One thing is obvious – the day will come when each area is completed and Chorus can switch off the copper network. That needs to be managed and planning should start now. Whangarei will be fully fibred this year – there’s no need for Chorus to continue maintaining a network that is surplus to requirements, yet no thought has been given to Chorus’s requirement to provide the network of last choice. Once fibre is available to all properties in an area, the copper can go. That’s something we need to plan for right now.

Commerce Commission ruling on copper

This morning’s announcements from the Commerce Commission
suggest we need a major rethink on the way we price regulated services in the
telecommunications industry.

We’ve had two recommendations handed down today – the first
around the price of unbundled local loop lines and the second around the
wholesale price of the product
most ISPs resell – UBA (unbundled bitstream

It’s important we step back a little and compare the two
product sets. On the one hand, wholesale isn’t really wholesale – it’s resale.
In effect, every ISP that sells the Chorus UBA product sells a virtually
identical product to every other ISP. You can change the colour of your
advertising campaign, but the product is basically the same. There are some
variations – enhanced UBA versus basic UBA – but in essence it’s one size fits
all. It’s what we’ve always had – a re-badged product based on a standard set
of inputs.

On the other hand, unbundled services leave far more up to
the individual ISP or telco. They can define parameters like contention rates,
committed information rates and so on. They also get to pay less money to
Chorus, meaning they can invest more in the hardware or offer these differentiated
products at a competitive rate.

All of the competition we’ve seen in the fixed line
broadband market in the past five years has come from the unbundled players and
it’s precisely because of this competition that any changes to the pricing structure
need to be closely examined. I want a competitive market that has energy and
which delivers products and services that customers want. I don’t want a
government-mandated product offered at a government-mandated price because
that’s not going to deliver the drive we so badly need.

Let’s look at the prices. Unbundled access was de-averaged –
that is, urban folk paid less than rural. Actually, that’s not quite true –
customers in urban areas cost the telcos less than customers in rural areas –
the customers themselves all paid the same price, assuming they could get
unbundled service.

The Commission was told to average the prices and come up
with a new price point for all services, rural and urban. Chorus argued that
the existing prices should simply be added together and divided by two – the
competitors argued that the Commission needed to compare our figures with
services offered overseas and that the price should come down considerably.
Given this is the only opportunity to review prices for the foreseeable future
(once they have been introduced the Commission will stop its annual price
assessment regime), the ISPs and telcos are very keen to make sure the price is
right for the remainder of the decade.

Chorus argued that we need to consider uptake of UFB and
that too low a price-point for copper would mean customers have no incentive to
move to fibre. TUANZ believes the opposite is true – that if customers are to
be encouraged to take up fibre they need a reason and that reason will be found
in the kinds of products and services that will be developed firstly on a
faster copper network and then (once it’s available) on fibre. Without those
drivers, the only way we’ll see mass uptake of fibre is if customers are forced
to migrate. There should be no need for that if the incentives are set

The Commerce Commission draft decision set the price at
$19.75 per line, but in the final report it sets the price at $23.53 a month
per line – a reduction of 3.85% on the average price set in 2007.

This is clearly a huge win for Chorus and could potentially
cause problems for those telcos and ISPs that have unbundled and wanted a lower
price to extend their unbundled offers further into the network.

It’s not much of a change, however, so taken in isolation we
must shrug our shoulders and move on.

Let us turn to the wholesale pricing and what’s going on
there. Instead of continuing with the current “retail minus” approach, the
Commission has moved to a cost-based model, something TUANZ heartily agrees
with. Retail minus means we never really see the real price for a wholesale
service on the grounds that it’s relatively easy to game. Prior to separation,
all Telecom had to do was maintain a couple of high-end products that nobody in
their right minds would buy and the retail-minus approach meant competitors
were forced to pay more for wholesale service .

Of course, now Telecom is separated, Chorus doesn’t have a
retail service to consider and so the move to cost-based services is entirely

Here the Commission has dropped the price from $21.46 to $8.93
for the basic service (basic UBA) . Enhanced UBA services receive a similar
price drop.

This will be great news for ISPs reselling Chorus’s
wholesale product and means we should see more aggressive pricing in the
wholesale market from the various ISPs assuming the price point is introduced
in two years’ time as expected (there’s plenty of debate on the wholesale price
yet to come I’m afraid and the Minister’s press release makes it clear we may
need to develop a uniquely New Zealand methodology for wholesale pricing).

What’s not to like about that, you say? Well, again, taken
in isolation it’s a great outcome. Prices will fall for UBA-based services in
two years’ time when it’s introduced. But this isn’t an isolated market –
instead we have to consider what will happen with both wholesale and unbundled

On the one hand we’ll hopefully see a huge fall in prices
for wholesale service while unbundling will continue for those that have it but
not be extended out any further. 
Instead, we will likely see those plans for increasing the number of
unbundled exchanges and cabinets come under threat as the business case for
unbundling becomes squeezed by better pricing in wholesale.

There is still plenty of life left in unbundling as we know
it. Not only are there more lines yet to be served in existing exchanges (I’m
told unbundling accounts for only a relatively small percentage of the total
lines running through those exchanges) but there is still revenue upside to the
service in terms of offering VOIP services instead of the plain old telephone

But it does smack of the end of unbundling’s brief but
glorious day in the sun and as customers we should be unhappy about that.
Unbundling offers a leg-up to those companies that do make the effort to
install their own equipment and has done tremendous things for the customers of
New Zealand who have been able to get it. I’d like to have seen that run
extended, but it’s not to be.

Most residential customers won’t be getting connected to the
fibre network for the next four years, which means these prices are going to be
our guiding light until 2016 or so.  If
that’s the case, we’ll need to look very closely at the VDSL product set and
work out whether that will be an acceptable substitute for the time being.
Currently Chorus charges a premium for the service (around $20 extra per line
per month) which discourages ISPs from offering it. If that’s the case that may
well be the next job for the Commerce Commission.