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.

Unintended Consequences

Content is king, and
will be the driving force behind any significant uptake of the UFB.

It’s a given – certainly among users – that without the
content there can be no success story for UFB. Why would mums and dads in
middle New Zealand bother upgrading given the current state of access to

Certainly in the UK the pressure for content has seen some
remarkable changes to the telco landscape.

BskyB, the UK’s leading cable TV provider, has bought
its way to number two in the ISP market and is now growing at an astonishing

To compete, BT has acquired rights to major sporting events
and given them away to fibre customers for free.  In less than a year it has added 1 million
customers to its subscriber base.

Clearly, content is what will drive demand and if buying
rights to the footy (or local variant thereof) brings in the punters, that’s
the way to go about business.

But the flip side of this story is quite sobering.

I was at a Commerce Commission conference on Friday on a
panel with Telecom CEO Simon Moutter when this issue came up. Moutter pointed
out the big difference between BT and any telco in New Zealand – we have
dis-integrated the telcos and in the UK they have not.

BT is a fully integrated player. It owns networks, it
wholesales and it retails directly to customers, in competition with its own
customer ISPs.

No telco in New Zealand in the fixed-line space can lay
claim to that.

Moutter pointed out that BT offset the cost of buying the
content against the profits it makes from the sunk-cost network, and that New
Zealand telcos don’t have the same ability. Profitability in the fixed-line
broadband market in New Zealand (let’s talk fibre as that’s the direct
comparison with the UK) amount to only a couple of dollars per line, after you
take into account call centre staff, buying backhaul and international capacity
and so on.

But these are high value customers, right? They’re the
future of the network, and BT was right to entice them over.

BT spent GBP1 billion on the rights to various sporting
events and has given those rights away for free to its retail customers. Sure,
it won 1 million new subscribers as a result, but that’s a purchase price of
GBP1000 per customer. The payback period at even $10 a month is not
insubstantial, let alone at the lower profit margins the telcos in New Zealand expect
to make.

If we look at the landscape in New Zealand there isn’t a
single fixed-line operator that could do to our market what BT has done in the
UK. Instead, all our telcos can do really is look to partnerships with content
providers in order to offer more to customers, and even then it’s more likely
that the ‘over the top’ (OTT) providers will sweep in with a more comprehensive
offer and scoop up most of the revenue that might be on offer.

This is one of those unintended consequences of market
intervention. By splitting Telecom into two parts, we secured a more level
playing field for the future, but the downside is a lack of cross-subsidisation
for the telcos.

On the plus side, that’s probably a good thing for
customers. I don’t want to find my content locked to a particular provider, and
I’m ever hopeful that the whole model of distribution that the content makers
are forcing on is eventually goes away. I don’t want to have to sign up to
Telecom in order to get rugby but Vodafone in order to get rugby league, for
example. Much better to sign up to the internet and get whatever sport or other
entertainment I require when I require it.

But his does pose a problem for New Zealand UFB retailers.
How will they entice customers to the shiny new network if sports and
entertainment content are out of reach?

It could well be that the only telco able to deliver the
content needed is already in the market today. It’s Chorus, the owner of the
copper network.

It’s an interesting old world, isn’t it?