High Court rules in favour of Commerce Commission

April 9th, 2014 at 4:00 pm by David Farrar

Stuff reports:

A consumer group has welcomed a High Court ruling on copper broadband prices, saying it should eventually deliver lower prices for telecommunications users.

The court said today that Chorus had lost its challenge over cuts to copper broadband prices by the Commerce Commission.

This is not a surprise.

The commission had decided Chorus could charge only $10.92 a month for copper broadband connections, down from $21.96.

Brislen said lower prices were not expected soon as a drawn-out process to establish final prices for the sector was continuing.

Not as drawn out as it could be. A final price may be set by year end.

In a judgment released today, Justice Stephen Kos rejected Chorus’ appeal.

“The simple fact is that the commission did not accept Chorus’ submissions,” he said.

“Despite the combined intelligence and force with which Chorus’ submissions were delivered, I am left unpersuaded that the commission erred in law.

“In my view, submitters were plainly aware that a price point above the confines of a more limited benchmark range was a possibility. The commission, in my view, was also open to that possibility.

“In my view, the commission has done just as Parliament had prescribed.”

This is a key point. Parliament passed the law. The job of the Commerce Commission is to interpret and implement it. Those who don’t like the outcome shouldn’t have attacked the Commerce Commission for just doing their job.

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Where to for Chorus

December 3rd, 2013 at 9:00 am by David Farrar

The decision by every other party and MP in Parliament (and the Conservatives outside it) to oppose legislating to overturn the Commerce Commission decision on the price of copper broadband was both bad and good for the Government.

The bad is that legislation was obviously a preferred option for the Government, even though the Telecommunications Review was only a discussion document. It is true that they had some weeks ago started to back off that route, and look at other options, but their statements up until then had quite strongly been in support of legislation.

I think it is a fair criticism that the Government should have talked to other parties at an earlier stage about whether they would support legislation, rather than fairly forcefully support it, and then realise you can’t do it.

So while the political management hasn’t been optimal, the upside is that having Parliament assert its right to say no to the Government, does actually assist the Government. It removes the legislative option off the table, and will I believe lead to more constructive dialogue between all parties on where to go from now. The members of the Coalition for Fair Internet Pricing (Kiwiblog is a member) will I believe be keen to engage constructively not that the risk of over-riding the independent regulator is gone, and Chorus can’t demand the Government do something it is clearly incapable of doing.

The decision by Amy Adams to have an independent financial review of Chorus was an excellent one (and something I had called for), and the way I see it is there are four steps ahead of us on resolving this issue They are:

  1. Does Chorus have financial problems under the current settings, and the Commerce Commission determination?
  2. If the answer to 1 is yes, Are there changes Chorus can make to solve those problems themselves?
  3. If the answer to 2 is no, then what are the factors that got Chorus into this state?
  4. If the answer to 2 is no, then taking account of 3, what options are open to the Government, and which are preferred

We will soon get the answer to No 1. I am sure it will be a comprehensive report. I’ve had a financial modelling expert take me through what they expect the report will find, and that it will conclude on current settings Chorus will breach their debt financing agreements – specifically the acceptable ratio of debt to EBITDA. The Commerce Commission determination will increase debt and decrease EBITDA and this means the banks could withdraw their loans to Chorus which could plunge it into an Air New Zealand type situation.

Note that this does not mean Chorus will be bankrupt or even unprofitable. The report could well conclude that over the next six years or so Chorus will still make small profits, and even have marginally positive cashflow. The issue is likely to be mainly around debt and timing of cash requirements.

So if the answer to 1 is yes as the Prime Minister has (correctly it seems) warned, then we get to whether Chorus can make changes themselves to prevent a breach of their debt agreements, or can renegotiate their financing.

Obviously one change is a reduction of dividends. I say this with sadness as a Chorus shareholder, but if you have a debt problem, then you can’t expect to pay out dividends. Once you are getting the full benefits of the fibre investments, then they would resume I expect. I note Chorus has already started to head down this path by saying their proposed dividends are likely to be reduced.

It is unlikely that change would be enough. So the report needs to also look at whether other changes will be enough to prevent a debt default. Can opex be reduced. Can capex be delayed.  With that in mind we note the story yesterday:

Network company Chorus is flying about 200 staff from Wellington to Auckland today for an annual get- together – despite “crying poverty”.

Mr Bonnar said Chorus had twice been recognised as one of the best employers in Australasia, “and a big part of that is once a year we get all our people together”.

“It’s to hear from the senior people in the business where the organisation is at, where it’s going, what its strategy is and how what they do fits in with it.”

Now I don’t have a problem with Chorus doing this as a private company. But if you are sticking your hand out for Government assistance, then decisions like this will face public scrutiny. The cost is minimal to their overall opex, but taxpayers will expect Chorus to be as fiscally frugal as possible, before any additional taxpayer money is considered.

But what happens if the report concludes that Chorus does both have a debt problem, and can’t solve it internally. Well then I think you need to identify the factors that got Chorus into this state. I don’t mean a blame game, but identifying what contributed. Obviously the Commerce Commission determination is a significant factor, but is it the only factor? Have there been UFB cost over-runs? Was Chorus too close to the debt rations anyway, regardless of the determination?

Then after you have identified the factors involved, do you look at potential outcomes for the Government and Chorus. Off the top of my head, they include:

  • Chorus defaults on its debt (highly undesirable)
  • Chorus defaults on the UFB build (highly undesirable)
  • Chorus renegotiates the debt (would banks agree?)
  • The Government guarantees the debt for Chorus (the banks may call it in immediately)
  • The Government makes the repayment schedule for the UFB build financing longer (will it make much difference?)
  • The Government loans Chorus more money
  • The Government slows down the UFB build (undesirable)
  • The Government takes a stake in Chorus

I’m not against the last option. In fact the Government already has some preference shares in Chorus as part of the UFB contract. When it comes to commercial trading companies, I believe the Government shouldn’t own any shares at all. I’d sell 100% of the power companies etc. However just as I can accept the state should own Transpower as the national electricity grid, there is a case that the national fibre and telecommunications grid should be a government utility also.

Put it like this, if you were back in 1987, knowing what you know now, you would have split NZ Post telecommunications division into a Telecom and a Chorus on day 1, and have sold Telecom and kept Chorus. You sell off the competitive elements and own and regulate the monopoly.

So I’m not ideologically against the Government taking a stake in Chorus. It also would mean that both current Chorus shareholders and the Government would both share in the pain of getting Chorus out of its debt problems – which is preferable to it being just the Government (or worse Internet users as originally mooted).

To a degree, I’m getting ahead of myself. Let’s see what the report says on 1, 2 and 3. Then we can focus on the “least bad” option for ensuring Chorus can deliver on the UFB project and 75% of New Zealand homes get fibre access to ultrafast broadband.

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A suggestion for the Government

November 5th, 2013 at 3:00 pm by David Farrar

Stuff reports:

Chorus says it could default on its loans and may not be able to complete construction of its share of the ultrafast broadband network, following a ruling by the Commerce Commission this morning.

The NZX-listed company issued the dire warnings after the commission released a “final determination”, which ruled that the company should be allowed to charge $10.92 a month for its copper broadband connections.

Its shares have plunged 8 per cent this morning, and were trading down 21 cents at $2.42 within minutes of the NZX opening at 10am.  

Chorus has a contract with the Crown to complete its work on the UFB network by 2020 but the company said that if the Government didn’t intervene, it would be left with a $1 billion “funding shortfall”.

Chief executive Mark Ratcliffe said Chorus would “simply not be able to borrow the money we need” to complete its UFB contract.

The company had notified its bank lenders that unless the Government intervened, the ruling would have a “material adverse effect” on the firm.

“If this did occur lenders would be entitled to trigger an event of default,” the company said in a statement.

Chorus would also “discuss with the Crown whether Chorus is still a credible UFB partner” and how it might still deliver on its contract, the company said.

No one wants to see Chorus bankrupt or defaulting on its loans. But wise politicians would do well to remember the words of Mandy Rice-Davies who basically said “Well he would say that, wouldn’t he?”

The price set by the Commerce Commission is almost half way between the draft determination and the price the Government indicated in its discussion document it might set.

Now I can totally understand that the Government doesn’t want the UFB project derailed, or worse Chorus to go bankrupt or default on its loans.

But please please please I hope they don’t just take Chorus’ words for it, and make a decision based on a press release. This is not to suggest that Chorus is wrong. Just to say, that a very high level of certainty should be required before you intervene. It should be the last option, not the first option.

If the Government really thinks there is a risk of that magnitude to Chorus, then it should hire the best accountancy or financial analysis firm in New Zealand to go into Chorus, and do an independent review of its income, spending, profitability, debt and the like and have them report back on whether they concur with what Chorus has said. Release that report publicly and allow people to peer review it.

As Chorus is asking the Government for a special law change, that would benefit it by hundreds of millions of dollars, surely they could not object to an independent review?

I understand the Government is stuck between a rock and a hard place. They have to make a decision. My plea is for them to make a decision based on the best independent data there is, not on the basis of a press release from a monopoly provider.

Also the Government could do worse than play a bit of hardball themselves. If Chorus is going to threaten the Government by saying it may default on the UFB project, then maybe the Government should open talks with Vector and other UFB bidders and see if they would be willing to step up if necessary. Use the same tactics that Steven Joyce used with Novopay – keep the pressure on the company, by looking at backup options.

Personally I think it is almost beyond belief that Chorus would seek to default on its UFB contracts, considering that would leave the company with almost no long-term future – being a copper provide only in what is a fibre future world.

Maybe the price recommended would cause them issues with their debt. If so, let’s have the details.

As I said I understand the difficult position the Government is in. But this is a decision they should take great care about. Both because it may set a precedent, and also because it will affect almost every Kiwi household.

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More thoughts on copper pricing

September 26th, 2013 at 3:00 pm by David Farrar

I remain puzzled by what the Government is proposing (or consulting on possibly doing) around the price of copper broadband. I blogged in detail on this issue two weeks ago.

I genuinely don’t know why the Government is proposing to change the law in a way which will deliver a huge amount of extra money to Chorus (note it is more money compared to the draft Commerce Commission determination, but is less money than they currently get), because they seem willing to gift this money to Chorus and not actually get anything in return for it. That is what baffles me.

If you compare the proposed actions here, with other interventions by the Government, the other interventions are easy to understand in terms of benefits (even if one may disagree on them). They are:

  • Sky City – in return for some pretty minor regulatory changes, Auckland gets a $400 million convention centre. A great deal for taxpayers.
  • Warners – in return for a slightly increased subsidy (for all productions) and some minor employment law changes, we retained not just The Hobbit in NZ, but also a viable film industry, protecting thousands of jobs and also a huge tourism gain.
  • Rio Tinto – while I personally did not support this deal, I understood the rationale – if Rio Tinto abandoned Tiwai point it would be a huge loss of jobs in Southland, so the deal was to guarantee they remain operating Tiawi Point for at least the next few years.

But the proposed law change to benefit Chorus is, well bizarre, because neither taxpayers nor consumers will receive any benefit from it. Chorus is already contracted to deliver fibre to their portion of 75% of NZ homes. The proposed law change will not require them to deliver one extra centimetre of fibre to anyone.

I really can not work out why the Government thinks this is a good idea. And if I, a pretty passionate supporter of the Government, can’t work it out – then I think most people can’t.

There have been two major rationales put up for the proposed law change. They are broadly:

  1. Chorus may go broke without it
  2. We don’t want the price of copper to undermine uptake of fibre

Taking the first rationale, let me say if there is a chance that Chorus could go broke under the draft determination, then of course that would be a concern. I am a shareholder of Chorus. I don’t want them to go broke. But what I am surprised about is that the evidence for Chorus being unable to be profitable under the draft determination is based on no official analysis. If the motivation for this law change is to stop Chorus going broke, then I would expect Treasury to be involved, just as they are with Solid Energy.

But of course the taxpayer owns Solid Energy, and does not own Chorus. I am unsure how you can justify bailing out Chorus, yet not bailing out Solid Energy.

But the reality is that Chorus would not go bust under the draft determination. They do not say they will. The market analysts do not say they will. Yes the draft determination will adversely impact their profitability and dividends, and that is bad for Chorus shareholders like myself. But that is one of the risks of investing in regulated monopolies.

My concern is that if No 1 reason is the rationale for the Government, then they will set a precedent that will come back to haunt them. If all you have to do is tell the Government that a (draft) decision by the Commerce Commission will affect your profits, and you get a law change, well the queue to the Beehive door will be long. Think Vector, Auckland Airport and others.

So let us look at the second rationale, which is we do not want the price of copper undermining the price of fibre. I personally am unconvinced the relative prices will be a major factor, but for the sake of debate am happy to concede the point that this could be undesirable. However what I can’t get is why you would just gift the extra money (being the gap between the proposed price and the price the Commerce Commission says should be charged in its final determination) to Chorus in return for, well nothing.

Chorus has signed a legally binding contract with the NZ Government to roll out fibre to their portion of the 75% of NZ target. Steven Joyce and his team did a great job negotiating that contract. There was no requirement in that contract for copper to be at a particular price. It was well understood that the price of copper would be set by the Commerce Commission (as it has been for decades) under a cost plus calculation (instead of retail minus).

So again I honestly do not understand why the Government is proposing what it is proposing. If someone from the Government can explain it to me, and others, that would be good. While there are some commercial players involved in this debate who of course have financial motivations – most of the people I talk to on this say they are genuinely baffled. They support the fibre rollout, but don’t see how the proposals advanced will be beneficial to anyone but Chorus.

Adding to the confusion is the fact that the Government appears to be contradicting itself with its own arguments. We have been told the major rationale for this law change is to stop the price of copper dropping (in line with the Commerce Commission determination) as this will undermine fibre uptake. Yet the Government has also argued that if the wholesale price of copper drops, then the retail ISPs will not pass the savings on, and hence consumers will not benefit.

Well I’m sorry, but pick one of those arguments, but you can’t pick both. You can’t argue this proposed law change is to stop the price of copper dropping significantly, and then also argue that the price of copper won’t in fact drop as the ISPs will not pass on the savings.

So you see why I am confused.

I don’t think the Government has any bad motivations around this. I just don’t understand what benefits this will bring, as opposed to all the other deals where the benefits (a convention centre, jobs, tourism) have been well understood.

I was chatting to someone on this yesterday, and he had what I thought to be a good suggestion as a compromise.

  1. Wait for the final Commerce Commission determination
  2. If the price recommended is at a level that the Government thinks could undermine fibre uptake, then proceed to set a minimum price for copper
  3. However have the difference between the Commerce Commission price and the Government price go to Crown Fibre Holdings rather than Chorus.
  4. Have Crown Fibre Holdings use the extra revenue to extend their fibre programme to more New Zealanders – go beyond 75% to 80%, boost rural broadband, help with access in more deprived areas etc.

While this compromise still has elements that I regard as undesirable, it would at least have the advantage of there being benefits in return for keeping the copper price higher than recommended. And while Chorus would of course rather get the extra money directly, they would still benefit by no doubt winning additional tenders by Crown Fibre Holding to extend fibre even further than the current 75%.

But as I said at the beginning, I just can’t understand why a law change is being promoted that simply would deliver more money to Chorus (compared to the Commerce Commission determination) that doesn’t deliver any benefits to consumers, taxpayers and Internet users. The proposals are just a consultation, so I hope that the Government takes the feedback as constructive and seriously looks at if there is a better way to achieve what they want – which is a fibre connected country.

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Why the price of copper broadband should be lower

September 12th, 2013 at 12:30 pm by David Farrar

Stuff reports:

An alliance of internet and consumer groups will today launch a campaign claiming Kiwis are paying $12 a month too much for broadband, through a government subsidy for network company Chorus.

It’s not a government subsidy. It’s a proposed government law change that would see the price Chorus charges for copper broadband not fall as much as the Commerce Commission has said it should.

Rural Woman and Consumer New Zealand will stand alongside the likes of Internet New Zealand and internet service provider Orcon to launch the “axe the copper tax” campaign.

It will argue that Chorus is effectively being given hundreds of millions of dollars in subsidies on the amount it charges broadband providers for the old copper-based communications network.

The subsidy is effectively from Internet users on DSL broadband packages.

Sources said last night that some members of the consortium had already been placed under political pressure not to publicly criticise the Government’s position.

However, it is understood that David Farrar, the National Party’s own pollster and the man behind the National-sympathetic Kiwiblog, is still a sponsor of the campaign.

I am, and no one has asked me not to be involved. The reason I’m involved is simple – on this issue I don’t agree with what the Government is proposing. This is not a exceptional thing. I blogged at the end of last year a list of over 50 times in 2012 I disagreed with or criticized the Government.

Like most people, I have a mind of my own. I support the Government overall strongly, and agree with probably 90% of what they do. But no-one ever agrees 100% – even Keith Holyoake once said he only agreed with 80% of what his own Government did. Mind you, I imagine Muldoon agreed 100% with what his Government did :-)

In the Internet space, I have been and remain a massive fan of the policy to roll out fibre to the home to 75% of New Zealanders. It is world leading. I’m in Shanghai at the moment as a guest of Huawei, and talking to them has made it clear very very few countries are taking fibre all the way to the home as NZ is. It’s a great forward looking policy, and I’m proud National campaigned on it in 2008 (Labour did not commit to it), and have implemented it.

I also think they way the police has been implemented has generally been excellent. The regional tenders worked well, and the requirement for open access by regional fibre providers led to the structural separation of Telecom into Telecom and Chorus, which is a huge boost for competition.

Also I very much admire the negotiating skills of the Government, led by then Minister Steven Joyce who managed to get contracts signed for 75% of NZ’s population for under the $1.5 b funding package. That was a pretty remarkable achievement when you consider a similar policy in Australia was budgeted to cost $43 billion!

So what is this current issue, and why am I against what the Government is proposing. It is important to note that the Government has not actually made any decision in this area of copper pricing. They have a review document out for consultation. I hope that the consultation will lead them to decide not to change the pricing principles for copper. Anyway, here’s the background. It is a fairly complex area, so bear with me.

When Chorus was part of Telecom, The wholesale fee for copper broadband products was determined by the Commerce Commission on a “retail minus” basis. Basically they looked at the charge Telecom had for copper broadband, and deducted off their certain retail costs to determine the fair wholesale price. You can argue that the Commerce Commission shouldn’t be involved at all, but the reality is that monopoly utility charges (especially in telecommunications) are regulated in pretty much every country on Earth. The Commerce Commission is independent of the Government, and makes decisions based on lengthy hearings of law, economics and engineering. Their job is to be the independent regulator under the Acts passed by Parliament.

Once Chorus was split off from Telecom, a “retail minus” pricing calculation was impossible. So the Government and Parliament changed the law to have the Commerce Commission determine the price another way, a sort of “cost plus” methodology. You look at what the actual costs of the copper network are, the appropriate return on capital and determine the price that way. Part of that involves international benchmarking.

The Commerce Commission did its job and came out with a draft determination that the price of copper broadband should drop by around $12 a month. The draft determination meant, if finalised, that ISPs would pay a lot less for copper broadband service, and with competition you should see fees drop for consumers.

Now Chorus, one can appreciate, didn’t like a draft determination that would see its revenue drop significantly. They, and the Government, have criticized the draft determination. It is important to note that any criticisms of how the Commission has done its job can be made in the consultation on a final determination (which is ongoing), and if people think they have interpreted the law wrongly, then you submit that to them. You can even appeal to the Courts on matters of law. That is how independent price regulation should work – draft determination, final determination, court appeals if necessary.

If people really thought the Commerce Commission had got it wrong, then they’d wait for the final determination, and if necessary take court action. But instead what is being proposed is a law change.

The law change (discussion document is here) basically says that the cost of copper services should be much the same as the cost of fibre services. There are two arguments for this. One is that the cost of a network should be calculated on the cost of the replacement network (fibre) and the other is that you don’t want cheap copper broadband resulting in few people taking up fibre. I’ll deal with those two points in turn.

The Government is quite right that generally the cost of a utility should be priced on the cost of its replacement network. You do this to ensure the utilities have enough money to fund the replacement network. This is how pricing works in electricity generation for example.

However this overlooks the major difference. Chorus have been given a significant Government subsidy through the contract with Crown Fibre Holdings to deliver their portion of the fibre roll-out to 75% of New Zealanders. They now have a contractual obligation to deliver that fibre for the contracted price to so many people. That contract means that the argument you need to price copper at the same price as fibre is not a valid argument, as far as I am concerned.

The contract was signed in the knowledge that the Telecommunications Act was going ot price copper under a different methodology. There was no provision in the contract that Chorus will be guaranteed a certain price for copper.

Now there have been stories of price over-runs at Chorus, and that they basically signed up to deliver the fibre at too cheap a cost, and are struggling to do it. Well, in a nutshell, tough bikkies. And I say that as a shareholder of Chorus.

They bid in a competitive tender for the right to build the fibre network with the Government subsidy (actually a loan). They had competitors such as electricity lines companies also bidding. The lines companies would not have been relying on income from copper to fund their fibre build. They were bidding on income from the fibre services themselves.

If Steven Joyce was such a good negotiator that they bidded too low to win the contract, that is not a good reason to increase the price of copper. If their lawyers were not up to scratch and they failed to get a guarantee of a minimum copper price in the contracts, then again why is that a reason for a law change?

So the existence of the contract means I can’t accept the argument that the price of copper should be based on the price of fibre to fund the fibre network. That argument only holds if they had not signed a piece of paper agreeing to do so, in return for most of the $1.5b subsidy.

That brings us to the second argument, which is should we keep copper prices higher than they would otherwise be, in order to encourage consumers to switch to fibre.

Reasonable people can disagree on this second argument. I’m personally sceptical of it, as I don’t think over-charging people for a product is a good way to encourage migration. I think some people will want fibre and happily pay more for it (like me). Others won’t need it, and having them pay $10 a month more than they have to is unfair. It is important to note that the Government is not looking to put the price of copper up from the status quo. They are looking to change the law so the price of copper broadband doesn’t drop by as much as the Commerce Commission has calculated it should.

But in terms of this second argument, the major problem for me, is that even if you accept there is justification for charging copper users more, to encourage people onto fibre, why would you effectively gift that money to Chorus? Chorus have, again, signed a contract requiring them to establish in most parts of NZ a fibre network. They must build this regardless of the copper price.

If the Government truly thinks it is necessary to have the price of copper much the same as fibre in order to promote fibre uptake, then don’t gift what could be up to $100 million a year to Chorus. Be upfront, and call it a fibre development levy, and have the Government collect it and use it to fund fibre outreach for the 75% of NZ not covered by the current UFB project. It could fund ultra-fast broadband in rural areas, or economically deprived areas.

Note that I am not advocating per se for an Internet development levy. I am saying that if you are determined to have the price of copper and fibre the same, then it is better to have the Government spend that money on actually getting more people onto fibre. If you just allow Chorus to have a higher wholesale price for it than justified under the law, that won’t result in one extra home getting fibre.

So that is why I’m not supporting the proposed changes in the Telecommunications Act Review. Copper users should not be over-charged or taxed to fund the fibre development.

I have no commercial interest in the outcome. I just want what is best for Internet users in New Zealand, and to my mind that is the status quo. I think the major beneficiary of the proposed changes would be Chorus, and I don’t believe in corporate welfare – for Rio Tinto or Chorus.

Technically I am arguing against my own self-interest as a (very minor) Chorus share-holder. But for me it is about the public interest.

InternetNZ is also involved in the campaign, and I am a former office holder and chair their policy group. But that doesn’t mean I always agree with them. On the GCSB bill for example, I had a much more benign view of the law change.

In my role as Kiwiblog, I am a official sponsor of the Axe the Copper tax campaign. It wasn’t InternetNZ that asked me to join. The campaign co-ordinator did, and after reading the campaign proposal, I decided to do so on the basis I agreed with its aims. I am reluctant to join a campaign which is asking the Government I support to change course but I will do so when I don’t believe they are on the right track.

My hope is that the Government will conclude that the status quo (which was put in place by them!) is working, and allow the price of copper to drop to whatever the Commerce Commission determines it should be under the law passed by Parliament. In the cases where we do have price regulation (a necessary evil as I see it), the prices should be set by independent regulators after hearing all the evidence, not by politicians. They should make the law for setting the price, and not second guess the Commerce Commission. If the Commission gets it wrong, their decisions can be appealed in court on matters of law.

UPDATE: A much more readable opinion piece on this issue is at NBR by Paul Brislen.

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Barton on broadband cost

September 5th, 2013 at 12:00 pm by David Farrar

Chris Barton writes in the NZ Herald:

The PM further fuelled the uncertainty flame following the release of the commission’s report saying: “It has significant implications both for [Chorus] and for UFB. It substantially reduces the income of that company and its capacity around broadband.”

Here’s what John Key might have said: “Well, thems the breaks. The Commission has arrived at its determination after careful consideration. The determination was signalled in 2010. The process has been in law since 2011 and we’ve been expecting it since before Chorus was formed, following the de-merger with Telecom. No one, including the analysts, should be surprised by this. If they are, then they haven’t done their homework.”

To which an enquiring journalist might have asked: “What about the extra cost Chorus is facing on the UFB?

Key: “Well that’s a bit rich. We’ve given Chorus $929 million interest free for 14 and half years, making it a loan worth about $1.2 billion, to build its part of theUFB.

That’s a pretty generous deal agreed by both parties on commercial terms. That’s business. For Chorus to be moaning about extra costs – well that’s its problem – we acted in good faith.”

Journalist: “So you’re not at all worried that Chorus could fail and the UFB won’t get rolled out in time?”

Key: “Not at all. Look, 18c per share is still a good dividend. Chorus is still a good business with a captive market. It has until 2020 to get just 20 per cent of users onto its part of UFB and has from 2025 to 2036 to repay the loan. That seems quite doable. Meanwhile it has a guaranteed revenue stream from its existing copper network. Nothing to see here.”

But of course John Key didn’t say that. Instead he set in train Adam’s intervention to hold copper broadband prices artificially high.

I think the planned intervention is not well justified.

Even if one accepts that it is in the public interest (not that I do) to have higher (than they would be if no intervention) copper prices so that people migrate to fibre, I don’t understand why you would gift the extra revenue to Chorus – rather than use it to fund further fibre roll-out – or rural broadband.

I’m a Chorus shareholder, but I don’t want Chorus to benefit from regulatory changes that are not good for consumers.

I quite accept that there are legitimate issues over how to price the copper network, and should it be based on its current cost, or the cost of the replacement network – as it is in electricity.

But the complicating factor is that the future network is being delivered by way of government contract and subsidy through contracts with Crown Fibre Holdings. So the investment decisions shouldn’t be based on revenues from copper (well not for 75% of the country).

By coincidence, I was at a Chorus announcement last night, and it was an exciting one. They announced that they will connect an entire town in New Zealand up to 1 GB/s fibre. And they are effectively having a competition where towns will say what they would do with it, how they would market themselves, and the winning town will be chosen, and made the fastest town in the Southern Hemisphere when it comes to the Internet.

That’s a great initiative to get communities involved in thinking about their fibre future, and will attract lots of attention. I suspect, sadly, Thorndon doesn’t qualify as a town :-)

Paul Brislen writes more about the Chorus announcement:

Chorus has launched a promotion that will give one town in New Zealandgigabit speeds on the Ultra Fast Broadband network.

One gigabit per second is fast. OECD rankings suggest that only four countries in the world offer national 1Gbit/s plans – Turkey, Slovenia, Sweden and Japan (this was in 2011 so there may be more by now) and that most top out at about half that speed.

We’re talking about 1000Mbit/s. Today I get 15Mbit/s download so to call it a step change is something of an understatement. My upload speed is barely 1Mbit/s.

We tend to get complacent about the fantastic advances technology makes each year. A doubling of capacity, a tripling of speed, these numbers become run of the mill and users are blasé about them. But a thousand fold increase in my upload speed would be startling to put it mildly, so good on Chorus for trying this out.

The economic potential of offering such a service is astonishing. Think what having such a speed would do to the way we think about remote working or having to live in the main centres. Think about what access to the world at those kinds of speeds would mean for start-up software developers and to our migration patterns. Software companies should be lining up for our cheap housing and staff with no fear of us being too removed from the world.

I am excited about a fibre future. But I also want copper not over-priced during the transition to fibre.

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Would this have been legal?

June 13th, 2013 at 11:00 am by David Farrar

Tom Pullar-Strecker at Stuff reports:

Chorus made an expensive gamble in rejecting a deal that would have seen it paid just under $14 a month for wholesale copper broadband connections, according to sources close to the failed negotiations.

Chorus’ share price has been on the slide since the Commerce Commission proposed slashing the regulated price of wholesale copper broadband connections by about $12 a month to $8.93 in a draft decision in December.

But the company is understood to have chosen to take its chances persuading the commission to set a higher price or on government intervention.

It is understood all major telecommunications retailers agreed on the compromise price and Communications Minister Amy Adams, who would have had to regulate it over the head of the Commerce Commission, was informed.

The compromise was brokered by the Telecommunications Forum, whose chief executive, David Stone, declined to comment.

I’m not  lawyer, and welcome comment from lawyers who work with competition law. But I thought competitors couldn’t all sit down together and try to negotiate an agreed price level.

It didn’t eventuate in this case, but I think the possible precedent is somewhat alarming. The Commerce Commission is the appropriate body for pricing of monopoly utility services, not a private gathering of retailers with no input from consumers.

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The wrong decision

February 9th, 2013 at 1:00 pm by David Farrar

The Herald reports:

The lowest price of broadband internet access is less important than ensuring consumers move as quickly as possible to high-speed fibre-based services, says Telecommunications Minister Amy Adams.

I disagree. I’m a huge fan of the fibre roll-out but you don’t force people onto fibre by artificially keeping the cost of copper high.

“I don’t think the over-arching criteria in this is ‘what is the cheapest option’,” Adams told BusinessDesk. “If that was the case, we’d be sticking with dial-up. I don’t think you’d find any consumer saying ‘if dial-up’s cheaper, let me have that’.”

I don’t accept that comparison. The difference between dial-up and broadband is massive. My laptop effectively freezes on dialup. The difference between dial-up and DSL is like the difference between a wheelchair and a car. While the difference between DSL and fibre is more like the difference between a Lada and a Porsche. And for some people a Lada is fine.

Her comments followed her announcement the government would accelerate its timetable for reviewing the regulatory regime for telecommunications services. The decision effectively neuters the Commerce Commission, which issued a draft determination late last year that could favour a longer life for the existing copper wire network by pricing it highly competitively with new fibre services.

That draft determination, which Adams described as a “curve ball”, sparked protest from the key players in the ultra-fast broadband roll-out, including NZX-listed Chorus, whose share price recovered 12 per cent today, immediately following Adams’s announcement.

I think it is disappointing that the Government has intervened in this way. The Commerce Commission is doing the job set down by statute. If it has made an error, then that can be challenged in the submissions on the draft and if need be in court. I’ve not see any suggestion the Commission has got the law wrong.

“Carrying on the way it was would have changed the landscape in the way telecommunications services were priced and delivered and we saw some real risks around that in terms of market uncertainty and the market not looking to develop and promote high speed fibre products,” said Adams.

I think the market works better when the Government doesn’t artificially push the price of one product up.

“What became very clear is that this sort of uncertainty and decisions coming out that have really taken everyone by surprise are the last thing that anyone needs in this space.

Not at all. I am not surprised that the Commission found out copper services were over-priced.

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The price of copper

December 14th, 2012 at 11:00 am by David Farrar

Tom Pullar-Strecker at Stuff reports:

Communications Minister Adams has declined to shed light on whether the Government is considering intervening over broadband pricing because of concerns about copper-based competition to ultrafast broadband, or Chorus’ ability to fund the UFB roll out.

Adams said claims that consumers would lose out if the Government overruled a Commerce Commission move to drop the wholesale price of copper broadband connections by as much as $12.53 a month were exaggerated.

It “was highly unlikely that retail service providers would fully pass through any wholesale cost savings”, she said.

I’m quite dismayed that the Government’s response to the Commerce Commission’s draft copper pricing determination has been to threaten to legislate to overturn it, if they persist with it.

Lower prices are a good thing. Unless the Commerce Commission has misinterpreted the law they operate under, they should be applauded for looking after the interests of consumers.

And while it is right that retailers may not pass on the entire $12.50 a month saving, I am confident they would pass on the vast majority. If you think they won’t, then you are saying we do not have a competitive retail market and that is a far bigger issue.

I have been a huge supporter of the fibre roll-out to 75% of New Zealanders. But you don’t get people onto fibre, by artificially inflating the price of copper.

To be blunt the Government should shut the hell up on the Commerce Commission’s draft determination. There are some aspects of the Commerce Commission’s work where they refer to to Ministers for a decision, such as mobile termination rates. In those areas it is entirely appropriate for Ministers to express a view – as they are the decision making.

But in this area of setting copper access prices, it is purely a decision for the Commerce Commission, under the law passed by Parliament. The only response by Ministers should be that these pricing decisions are a matter for the Commission, and they support its independence.

 

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Don’t subsidise fibre with copper

December 4th, 2012 at 11:00 am by David Farrar

Stuff reports:

The price of broadband could fall by about $12 a month in two years’ time if internet providers pass on swinging cuts to Chorus’ charges that were proposed yesterday by the Commerce Commission.

Good.

But Scott Bartlett, the boss of New Zealand’s fourth largest internet provider, Orcon, is doubtful. He said Telecommunications Commissioner Stephen Gale already seemed to be signalling “almost in code” that the commission would back down from the steep cuts when it finalised its decision on wholesale pricing in June.

Prime Minister John Key signalled that the Government was concerned about the effect cheaper copper-based broadband could have on the fibre-optic ultrafast broadband network, in which the Government has agreed to invest $1.3 billion.

He did not rule out using legislation to overturn the proposed price cut yesterday.

I think that would be a bad thing. The Commerce Commission should be left alone to set the price of copper access based on existing competition law.  I’m a huge fan of the fibre rollout, but we shouldn’t try and get people to move to fibre by having copper priced artificially high.

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The Chorus deal

November 2nd, 2012 at 11:00 am by David Farrar

Stuff reports:

Today’s confirmation that Chorus will provide free ultra-fast broadband connections to many residences with awkward access is good news, a telecommunications commentator says.

Network provider Chorus announced in partnership with the Government today that it would contribute $20 million towards the cost of connecting “non-standard” homes, in an effort to encourage greater uptake of high-speed broadband.

Up to 30 per cent of homes within the UFB rollout zone are thought to have fallen into the Chorus “non-standard” category.

Paul Brislen, of the Telecommunication Users Association of New Zealand (TUANZ), said many urban houses were more than 15m from the street, Chorus’ previous limit for free fibre.

So today’s announcement that Chorus would extend that limit to 200m was “tremendous”.

“That captures 99.3 per cent of the [UFB network] population, possibly even more …That means everybody that can get connected will be able to without extra cost.”

Excellent.

However, Brislen said there was a drawback in that the offer only lasted until 2015, by which time only about a third of the network would be completed.

“Most of the connections for residential customers won’t take place until after 2015, so we need to use this to get the ball rolling and then revisit it rather quickly.”

I suspect come 2015, things may get extended – time will tell.

Chorus, which has contracts to provide 70 per cent of the Government’s UFB network, has so far rolled out 1500km of ultra-fast fibre, enough to connect 72,000 customers.

But to date, only 700 have signed up.

Brislen said the problem was that speed alone was not enough to encourage many customers to switch to UFB. Overseas, penetration of ultra-fast broadband was about 38 per cent and a good uptake in New Zealand was important to justify the expense.

Absolutely few will sign up for speed alone. What will push uptake is when companies such as Sky roll out TV and movies on demand services that work far better over fibre. A killer home video-conferencing app that works through your TV set and is as simple to use as a TV remote will also get people flocking to it.

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Hotel wifi

October 24th, 2012 at 7:00 am by David Farrar

Matthew Backhouse at NZ Herald reports:

Hotels are charging exorbitant rates for Wi-Fi and guests are much better off paying for mobile internet, a consumer advocate says.

A survey of New Zealand’s top central-city hotels, as rated by Five Star Alliance, has found only two offer free wireless internet in rooms – despite some exclusive suites costing more than $2000 a night.

It’s like charging for water. I can understand 10 years ago charging extra for wifi, but the vast majority of hotel guests today will want wifi – either because they are travelling from overseas or to reduce their mobile data usage.

What I want to do one day is set up a website (or get an accom website to do it) which lists the wifi charges for every hotel and motel in NZ, so people can pick ones with cheap or free wifi. I think that would provide an incentive for more accom providers to stop charging for it. Whne you have have paid over $200 for a room, it is aggravating to be told 24 hours of wifi will cost more than a month’s data for a residence.

The other top hotels either make guests buy packets of data or charge up to $45 a day.

The rates compare poorly with mobile data plans, which give 1GB of data for an average of $20 a month.

I used to have a vodem, just to avoid hotel wifi charges. Now I tether my iPhone.

Tourism Industry Association chief executive Martin Snedden disagreed that free Wi-Fi was the norm overseas, saying he had been charged as much as $30 a day during a recent trip to Europe and America.

Now sure where Martin stayed, but in the US it is free most places I have stayed at.

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Broadband competition

October 14th, 2012 at 10:00 am by David Farrar

The Herald reports:

Broadband users are being bombarded with offers of higher data caps, Sky TV discounts, free surfing on unmetered websites and cheaper prices.

And an industry expert says New Zealanders will soon have access to even more data without any great cost increase.

Orcon is leading the charge with a $99-a-month plan that includes unlimited data and national landline calls of up to an hour.

That’s pretty good. I suspect they have some sort of reasonable use policy though for their data.

A year ago, customers on Vodafone’s Ultimate package paid about $120 for 30 gigabytes of data and anytime national toll calls.

Now their data limit has been lifted to 80GB – at no extra cost.

Telecom has also increased its 30GB data allowance to 50GB – also at no extra cost.

That’s good from both.

Telecom’s head of marketing, Chris Thompson, said more of its customers were spending time online and increasing their data use mainly because of the availability of music, video and on-demand TV services.

Among its packages is a 500GB plan for heavy users. “We are also seeing usage increasing on mobile data very strongly as Kiwi take-up of smartphones rapidly increases.”

Orcon’s general manager of retail, Taryn Hamilton, said that three years ago, customers paid $81 for 1GB.

“Now we do 30GB and free national calling for $75, or unlimited data for $99.”

As UFB really hits my expectation is data plans will be TBs not GBs, and hopefully one day NZer kids will say”Daddy/Mummy what was a data cap”.

 

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NZ Broadband Tests

August 10th, 2012 at 3:00 pm by David Farrar

Some may have seen this already, but the NZ broadband test by REANNZ is a bit more sophisticated than other tests – it asks you what plan you are on so it can compare ISPs and plans.

I’ve got 1 Mb/s up and 9.2 Mb/s down which isn’t too bad.

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2degrees shared data

May 8th, 2012 at 11:00 am by David Farrar

Stuff reports:

Mobile 2degrees will today launch a new offer that knocks down one of the biggest mobile data customer pain points by allowing customers to share data from one account.

Shared Data” means a customer can use data from one account across a range of devices, or share that data with friends and family, provided they too are on 2degrees’ network.

Malcolm Phillipps, 2degrees’ chief marketing officer, said 46 per cent of mobile users now have more than one device while 72 per cent of those with a mobile data plan don’t use their full allocation.

Shared Data will address both of those issues and simplify account administration and payment for customers.

Now, many customers “tether” devices such as iPads, setting up a wifi network from their smartphones and using that for their tablet to avoid extra data charges. Shared Data means customers will no longer have to do that, said Phillipps.

This is a good initiative. To save money I tether my devices but it can be a hassle to bluetooth them together and to have them all with you. I’m currently with Telecom and Vodafone on contract but could consider 2degrees at some stage. Of course quality is also a factor. Telecom has been good for signal availability and strength.

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Cheaper copper

May 5th, 2012 at 12:41 pm by David Farrar

The Herald reports:

In a draft determination, the Commerce Commission indicated it wants to reduce the geographically averaged unbundled copper local loop (UCLL) service to $19.75 a month from its current price of $24.46 over two years.

UCLL lets Chorus’s competitors use the copper network between an exchange and an end-customer’s premise to offer their own voice and broadband services. The current urban price only has to come down $19.81, and the biggest access gains would be in non-urban areas, which are sitting at $36.63. …

Wholesale prices for access to the copper lines were averaged as a result of legislation enabling Telecom to carve out its Chorus unit last year, something that rankled with rival telecommunications companies who claimed it would lift their costs. The de-averaged urban and non-urban prices are $15.82 and $29.19 respectively, the regulator said.

It is a pity the Government decided to require an averaged price, as it means urban users are subsidising rural users. Instead of urban users getting a wholesale price drop of $3.99 and rural of $7.44 the drops are $0.06 for urban and $16.88 for rural.

But still good to see overall wholesale prices heading in the right direction.

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Broadband – the good and bad

February 21st, 2012 at 12:00 pm by David Farrar

First the good from the Dom Post:

New Zealand’s $3.5 billion investment in an ultrafast broadband network will reap economic benefits worth nearly $33b over 20 years, according to a study carried out by Bell Labs in the United States.

Alcatel-Lucent New Zealand chief executive Andrew Miller will present the results of the study at a Commerce Commission conference in Auckland today that is looking at barriers to uptake of the network, which will be available to three-quarters of homes and businesses by 2020.

Miller said the benefits included the “consumer surplus” – gains to consumers that aren’t directly reflected in higher incomes or GDP.

Bell Labs, which is owned by Alcatel-Lucent, estimated the gains in health and education at $5.9b and $3.6b respectively and said it would be worth $9.1b to the dairy industry in increased productivity.

The biggest benefit of $14.2b would come from helping businesses in general improve productivity, reduce travel expenses and make better use of cloud computing services.

I wouldn’t place huge reliance on the exact numbers as these sort of studies always tend to be rather optimistic. However I don’t dispute the overall conclusion that there will be net economic benefits from having the ultra-fast broadband go out to 75% of New Zealanders – that is why it is being done. The study shows that the benefits could be considerable. I think the reduction in travel and increased use of cloud computing will be major. When people can access files from home as quickly as from work, and when they can say do a six way video conference at the push of a couple of buttons, then some workplaces will reduce to meeting rooms only.

And the bad:

British actor Stephen Fry will not be the only one up in arms if internet providers don’t improve miserly broadband data caps, the Telecommunications Users Association says.

Fry labelled New Zealand broadband a “digital embarrassment” in tweets yesterday after finding he could only upload videos over the internet at a snail’s pace while working from a house in Wellington.

He is in the capital for the filming of The Hobbit.

It transpired that the connection he was using had been intentionally “throttled” down to a slow speed by Telecom because he had exceeded the data cap on the broadband plan – the amount of data that can be downloaded and uploaded for a fixed monthly charge.

Fry said restrictive data caps were “a disaster” for the economy.

But Telecom spokeswoman Kath Murphy said he had been using a plan that “clearly wasn’t suited to his needs”.

Comedian Raybon Kan consoled Fry, telling him: “Don’t think of it as the worst broadband in the world, think of it as the best dial-up”.

Heh.

Data Caps are a huge pain though. They fundamentally change the way you use the Internet as you are always thinking about what if exceed the cap. Some ISPs also have an effective daily data cap and will throttle your speed if you use to much data in a 24 hour period (even if well below your monthly cap).

The consensus at the 2011 Net Hui seemed to be that data caps are the biggest remaining issue for the NZ Internet community.  A great example of what we are missing out on is here:

Netflix’s Christchurch-born vice-president, Brent Ayrey, said in November that meagre data caps were one factor preventing the popular United States online movie and television service launching in New Zealand.The average customer in the US consumed a terabyte each month.

I’m on a 60 GB plan, which is the largest available from my ISP. You can double your data for extra money but still a long way off allowing Netflix to launch in NZ.

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A terabyte data cap

July 5th, 2011 at 1:00 pm by David Farrar

Hamish Fletcher in the NZ Herald reports:

CallPlus plans to offer internet users hooked into the ultra-fast broadband network at least a terabyte of data each month.

While New Zealand may be looking forward to the 100 megabit speeds on the fibre internet network, commentators are worried the infrastructure will not be used to its potential as data caps will restrict the amount customers can download each month.

Slingshot and CallPlus director Malcolm Dick said his companies could offer unlimited data on the ultra-fast broadband network if more internet links out of New Zealand were built.

“A couple of years out … you’d hope that all those caps would be removed and it would be the same as in Europe and the States. Certainly in the worst case we’re looking in the terabytes [of internet use a month]. It will be up to at least a terabyte, I reckon, it has to be,” Dick said.

Having more content hosted and cached in NZ would help also, but sadly it is cheaper for major content providers to host in the US than in NZ.

A 1 TB data cap would be a lot better than the current offerings. But let us look at how quick it might still be gobbled up.

Say you are on the 30 Mb/s plan. That is equal to 3.75 MB/s. A TB is around 1 million (2^20) MBs so a 1 TB cap would last for around 280,000 seconds or 4,660 minutes which is around 78 hours.

Now a month has around 720 hours in it, but you don’t tend to spend all day on the Internet and you don’t spend all your time using the maximum speed.

So a 1 TB data limit would look to be pretty good to me.

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Fibre, copper and telcos

March 23rd, 2011 at 9:00 am by David Farrar

There’s been a number of news stories on the Government’s Telecommunications Amendment Bill, which is currently before the Finance & Expenditure Select Committee. A typical story is this one at Computerworld.

The telecommunications sector is always somewhat controversial, but this bill has attracted criticism from just about everyone – telcos, ISPs, the Commerce Commissions and user groups. This post is aimed to explain what the debate is about, and reflects my views.

It is worth noting that most of what is in the TAB is not controversial, and is generally well supported.

Three aspects which are controversial are:

  1. a “regulatory holiday” for the local fibre companies until 31 December 2019.
  2. “re-averaging” the costs of local loop unbundling and unbundled bitstream, which will lower the wholesale cost in rural areas but increase the wholesale cost in urban areas by around 20%
  3. possible structural separation of Telecom if they win the majority of regions for fibre rollout

In this post I will leave (3) for now as that little baby is so complicated it needs its own post. I want to focus on (1) and (2) and these will apply (if passed) regardless of whether Telecom wins most of the regions for urban fibre, or the lines companies led by Vector win most of the regions.

You may ask why would the Government consider giving the future fibre companies an exemption from the normal regulatory oversight of the Commerce Commission? Well the short answer is because the companies bidding to be future fibre companies have asked for it.

Okay well companies ask for lots of things from the Government. Many companies would like to be exempt from the Commerce Commission until 2010. Why would the Government agree to this?

The answer is because then the bidders will make better bids. They value having a regulatory holiday, so they will agree to roll out more fibre for the same subsidy. It is what Sir Roger Douglas (very perceptively) said was a regulatory subsidy instead of a greater direct financual subsidy.

Now before we talk about the pros and cons of this approach, you need to know the background. In the 2008 election National pledged $1.5b towards having ultra-fast broadband rolled out to 75% of NZ over the next decade. This was a lot of money (Labour committed only $300m – 1/5th of what National did) and it was in my opinion a great policy.

Work done by the NZ Institute concluded that investing in ultra-fast broadband, would result in significantly higher economic growth, and there is evidence from other countries to back this view up.

Now the cost of rolling out fibre to 75% of NZ is hard enough to estimate, let alone what the direct commercial returns will be on doing so in ten years time. The amount of subsidy needed to achieve the 75% target was estimated at $1.5 billion, but this was an estimate. An opposition does not have the resources available to get a precise projection, and even when you do have access in Government to Treasury, even then projections can be wrong.

To some degree one was never going to know until the actual commercial negotiations conclude, whether $1.5b was enough. InternetNZ did try to get some idea of how much it would cost to reaach the goal of 75%, and what would be the best way to go about it. They (which includes me)  commissioned a report from Network Strategies, a specialist economics consulting firm, which is here.  It was published in 2008.

The report concluded that the cost of fibre to 75% of NZ was around $3.3b if one utilised existing utility companies for at least half of it, and that the government’s contribution would need to be around $1.75b. So the $1.5b was a pretty good estimate, but may be not quite enough.

So this takes us back to why the Government is seeking to legislate a regulatory holiday – it makes it more attractive to its potential commercial partners, and helps close the gap. So the motivation is good – to save the taxpayer money.

However that does not mean it is the right decision. If there is a funding gap between the 75% target and what you can achieve with $1.5b, I would rather it be dealt with directly, not indirectly by way of regulatory holiday. Options are to increase the $1.55b on offer, or to reduce the coverage area from say 75% to 70% or push out the timeframe from say 10 years to 12 years etc.

The concern over the regulatory holiday is that whomever wins the contract, will be exempt from the Commerce Commission regulating access to their services until 2010. The Government will be relying just on the contracts they had to regulate the price, However this places Crown Fibre Holdings in the unenviable dual role of being an investor and a regulator. Also 2020 is almost nine years away, and that is a lifetime in the Internet world. The costs and prices of fibre and data may have changed massively in that time. Many people are very nervous about what could happen in the next nine years. This is partly because of the lessons from the past with Telecom (note again they may not be the fibre companies).

Now the Minister has pointed out that as the local fibre companies can not be owned by a company that will provide retail services over them, then it is less likely there will be a need for regulation, as the fibre companies should operate on an open access platform to all providers. But a lot of devil is in the detail. For example you could have Chorus (if they win) saying it will operate a volume discount scheme that only Telecom Retail will qualify for due to its size.

The Minister also says that as the fibre products will be competing against the regulated copper and that the challenge will be ensuring uptake, which will keep prices down also. I suspect Steven is right on the prices – but from my thinking why remove the safety net of the Commerce Commission, in case you’re not.

Now the other major change is that the calculation of costs and hence prices for the current copper based broadband services is to change from deaveraged to reaveraged. At present the costs and prices reflect the fact it is cheaper in urban areas than rural areas. The Government is proposing to legislate to change this, which means the price of broadband over copper will increase in urban areas. The estimate I have seen is by 20%.

So again why would you do this? The answer is the same. It means those bidding for the fibre contracts will be motivated to invest more money into them. Because if the price of broadband over copper increases, then you can be confident that more customers will switch over to broadband over fibre.

So again the rationale is quite understandable, but again that does not mean it is necessairly a good thing. It means people in urban NZ will pay higher prices than they should for broadband over copper for the next six years or so. Should the Government be effectively tilting the playing field to favour fibre over copper?  Again I’m in favour of tilting the field by way of Government subsidy, but not in favour of tilting the field by interfering with a regulatory regime that actually has worked very well in the last few years.

As I said, in a separate post, I’ll cover the possible structural separation of Telecom, and how this may result in a really great outcome or a really lousy outcome, depending on how the structural separation is done. And the consequences of getting it wrong will reverbate for a couple of decades. This is not something to rush.

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Telecom get Auckland and Wellington

December 13th, 2010 at 10:15 am by David Farrar

The Government has announced that Telecom has won most of the remaining areas for fibre to the home rollout. This includes Auckland and Wellington, but in Christchurch and Dunedin the local lines companies are still  in the running, with both them and Telecom proceeding to negotiations.

This is pretty exciting, as it means Telecom will structurally separate, with Chorus becoming a standalone telecommunications infrastructure company. This will be the most important change in the telco sector for a generation. The details of how the separation occurs will be crucial in determining how beneficial this is.

Vector will feel hard done by, but that is the nature of a tender process. Their involvement has probably meant the bid by Telecom is significantly better for taxpayers than would otherwise have been the case.

Telecom will be pleased to have won the bulk of the country, but not be that happy that they may not end up with Christchurch and Dunedin – they’ll need sharp pencils.

So the overall picture is:

* Hamilton, Cambridge, Te Awamutu, Tokoroa, Tauranga, New Plymouth, Hawera & Wanganui – WEL Networks
* Whangarei – Northpower
* Dunedin – Aurora Energy
* Christchurch, Rangiora – Enable or Telecom
* Timaru – Alpine Energy or Telecom
* Elsewhere – Telecom

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Corruption or Idiocy?

December 7th, 2010 at 6:28 pm by David Farrar

No Right Turn has breathlessly labeled as corruption the Government’s announcement of the first ultra-fast broadband contracts.

Why? He blogged:

So, what does this look like by electorates? UFB will be rolled out to:

  • Whangarei, held by National’s Phil Heatley, with a majority of 14,663;
  • Hamilton East, held by National’s David Bennett with a majority of 8,820;
  • Hamilton West, held by National’s Tim Macindoe, with a majority of 1,618;
  • Taupo, held by National’s Louise Upston, with a majority of 6,445;
  • Taranaki-King Country, held by National’s Shane Ardern, with a majority of 15,618;
  • Tauranga, held by National’s Simon Bridges, with a majority of 11,742;
  • New Plymouth, held by National’s Jonathan Young, with a majority of 105;
  • Whanganui, held by National’s Chester Borrows, with a majority of 6,333.

So, the first thing to note is that only National-held electorates get broadband; those with Labour MPs need not apply (sorry, you voted for the wrong person and so must be punished). The second thing to note is the targeting of marginal seats New Plymouth and Hamilton West. It’d be interesting if someone who knew about IT policy used the OIA to delve into National’s rollout decision, but from here it looks like pure pork-barrel politics. And I don’t like it one bit.

Idiot/Savant is like the boy who cries wolf. He slanders so many people as corrupt, that it becomes a meaningless label. Basically it just all comes over as hysterical rants.

His idiocy was picked up and blogged by Clare Curran, but even Clare worked out what weak ground he and she were on, and later did updates backing away “before David Farrar at Kiwiblog has a go”.

I will indeed have a go at such gross stupidity, and even worse effectively slander. Where do I start.

  1. National holds every single seat outside the four main cities (which due to their size are more complex decisions) except for Palmerston North. So I guess the first contracts should have gone to Tasmania, to stop them including National held seats.
  2. Six of the eight seats listed are very safe seats with majorities over 5,000
  3. This is not a case of some areas getting funding, and some not getting funding. All medium to large urban areas will be getting fibre to the home. This is purely an announcement of the first two contracts. Other contracts will be announced in the near future – the difference between being announced first and second is absolutely minimal.
  4. Ever heard of MMP?

Clare initially blogged:

Steven Joyce is a crafty fellow. But even he will overplay his hand one of these days.

Then later as she realised every non metro seat bar Palmie is national held:

Oh and before David Farrar at Kiwiblog has a go and points out that Labour holds only Palmerston North of the general electorates outside the metropolitan centres, that’s true. But it would have been smart for the government to think about this. Instead it doesn’t look so good.

So Steven in the one blog post goes from the too crafty manipulator of funding to National seats to being not very smart for not thinking about the look. He can’t win can he!

Frankly I am sure Steven didn’t spend one second thinking about electorate boundaries with the contracts, and am personally very pleased with that.

Oh and here’s one for the conspiracy nutters. 25% of NZers will not be covered by the UFB initiative. And pretty much 100% of them live in National held seats. So 100% of people in Labour seats will get UFB and only around 65% of people in National sears. Yes, obviously pork barrel politics.

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Five cities now have fibre certainity

December 7th, 2010 at 3:00 pm by David Farrar

Steven Joyce has announced:

The cities of Hamilton, Tauranga, Whangarei, New Plymouth and Wanganui will be among the first to benefit from the government’s rollout of ultra-fast broadband (UFB), says the Minister for Communications and Information Technology Steven Joyce.

Crown Fibre Holdings has concluded negotiations with two partner companies, following shareholding ministers’ approval of the deals over the weekend.

The partners are:

  • Northpower Limited
  • and Ultra Fast Fibre Limited, owned by WEL Networks,

The new companies will rollout fibre in Whangarei, Hamilton, Cambridge, Te Awamutu, Tauranga, New Plymouth, Wanganui, Hawera and Tokoroa.

Northpower will commence its roll out in Whangarei before Christmas with Ultra Fast Fibre expected to begin laying fibre early in 2011.  Both companies will have completed their rollouts by 2015.

These joint ventures represent nearly 16 per cent of UFB premises and a combined value of more than $200 million.

This is excellent news. It shows the regional approach has worked, in preference to one nation-wide contract.good to see there will be some fibre laid before the end of the year.

There was some suspicion that Northpower and WEL would not end up with the contracts, despite being announced as preferred bidders. People speculated that Telecom might grab it away from them in a negotiation for a nation-wide contract.

So good to see there will be some fibre laid by the end of the year.

CFH will shortly announce a list of parties with whom it will next elect to negotiate with in the remaining 25 UFB regions.

All eyes are on this.

My view is that Telecom/Chorus will be successful if their price is the same or close to the Regional Fibre Group – say within a couple of hundred million. There are long-term benefits to getting Telecom to structurally separate, and having Chorus as a stand alone infrastructure company.

But it is possible the Regional Fibre Group will have undercut Telecom. They have certain cost advantages such as current ducts and poles and resource consents. Over 70% of the cost of fibre is digging up the road, and the less of that you have to do, the cheaper you do it.

In an ideal world I’d have Telecom sell Chorus to the Regional Fibre Group – then you’d have an integrated infrastructure provider. However I’m not sure Vector and co could afford to buy it!

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Vodafone on Rural Broadband

November 26th, 2010 at 12:00 pm by David Farrar

A guest post by Steve Rieger, Vodafone’s General Manager of Wholesale and New Business Development:

Rural Broadband – an easy answer

The Telecom-Vodafone joint bid for the Government’s Rural Broadband Initiative (RBI) has certainly got attention.  Who would have thought that these traditional arch enemies would entertain such a partnership?  Well, it’s the right thing to do to deliver a step change in connectivity for New Zealand’s rural community and moreover we think it’s the way of the future.

We think rural Kiwis deserve high speed broadband, wider mobile coverage and a choice of service provider.  That shouldn’t just be the preserve of the city-dwellers.  That’s why our solution – a new open-access network which combines fibre and wireless gives better bang for the tax-payer’s buck.  It equips New Zealand’s economic heartland, which accounts for 60 percent of New Zealand’s exports, for the 21st century.

So what will we deliver?  Fibre to 97 percent of rural schools and a minimum of 5Mbps broadband service to 80 percent of rural households within six years and priority users with fibre-based broadband services.  That’s a minimum of 5Mbps.  In time we will deliver more.  And, we will deliver it faster than the government’s timetable.

The solution looks like this: Chorus will extend Telecom’s existing fibre infrastructure to key rural points of presence, including schools and hospitals.  Vodafone will expand its wireless infrastructure to deliver wireless high speed broadband.  Chorus will build the fibre and DSL network and Vodafone will build the mobile towers.  XT and Vodafone will put their cellular equipment on the towers and provide independent services to their wholesale and MVNO customers as well as directly to retail customers.

The key is open access.  Anyone will be able to offer a retail service over the new infrastructure, whether fibre or wireless, on an equivalent basis.  2degrees, XT and regional wifi operators will be able to put their equipment on the towers and provide independent services to their customers, competing on equal terms.  The result – strong retail competition and a real choice of retail solutions and providers for rural customers.

We think this model is the new state of the telecommunications industry.  We compete vigorously on one hand and cooperate on the other.  The design of this solution means we will continue to be fierce retail competitors – and have created a platform that enables other operators to compete with us.  Trying to deliver this as a sole operator just doesn’t stack up economically.

Our proposed solution delivers choice to rural customers: either fixed broadband, or fixed wireless broadband.  In delivering wireless broadband we provide additional social advantages by enabling wider use of mobile voice and text, two important communication channels for individuals and communities.

Why not fibre to the farm? The economics just don’t stack up.  International best practice for rural communities is to deliver broadband over wireless networks.  Ireland, Germany, the US and Australia have all gone this way.  It means rural families can stay connected at home and on the farm, reducing geographical and social isolation.

Wireless is also future-proofed.  It means next generation mobile technologies such as 4G (otherwise known as Long Term Evolution – LTE), can be rolled out to rural users at the same time it’s made available to urban customers.  4G will offer faster data rates, lower latency, shorter delays and loading times, and ultimately a better experience.

Vodafone and Telecom can bridge the urban/rural digital divide in New Zealand, give other players equal access to the infrastructure, and deliver choice to rural New Zealand.

The Minister expects to make a decision by Christmas.

I am a big fan of the open access nature of the proposal, and think it is a model for future mobile expansion.

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All about Telecom

November 12th, 2010 at 2:00 pm by David Farrar

Four recent Telecom issues, so will talk about them all in the one post.

First they have a new data roaming deal.

The new pricing gives customers 100 megabytes (MB) of mobile data for $100 while roaming overseas in these locations that’s the equivalent of $1/MB.

Customers will be charged $8.00/MB for the first 12.5MB and a remaining 87.5MB worth of data for the rest of their billing month will be free.

A year ago we were all paying $30/MB for roaming data, so this is a good step in the right direction.

If you are on a big trip and will use close to 100 MB this is a damn good deal. If you will only use 10 MB or so, then not so great.

Vodafone charge $5/MB in Australia and $10/MB elsewhere (off memory). So if you plan to use more than 20 MB in Australia Telecom are better. And for US and UK they are cheaper at any rate.

My personal price point is around $1 – $2/MB. I will grudgingly pay that for international data for my mobile devices.

Secondly Stuff reports on the UFB tender:

Telecom will today step up its campaign to become the Government’s broadband partner, releasing a poll on its website that says more Kiwis would prefer its network arm Chorus got the job of building the ultrafast broadband network than electricity lines companies headed by Vector. …

UMR said 48 per cent of those polled would prefer to see Telecom broken up and have “an independent, stand-alone Chorus extend the existing fibre network”, while 28 per cent favoured the Government investing in a new network rolled out by electricity lines companies led by Vector.

Vector spokeswoman Philippa White responded: “Essentially the decision as to who will partner with the Government for the UFB build sits with Crown Fibre Holdings”.

The poll is interesting but to some degree irrelevant. Because it ignores the most important factor – cost.

If the Regional Fibre Group/Vector and Telecom/Chorus both say “Yes we can do fibre to the home to 75% of NZ if the Crown invests $1.5b”, then my view is you would absolutely go with Telecom/Chorus due to their existing infrastructure.

If the two bidders are even “close” to each other – ie Chorus says we can do it for $1.7b and Vector/RFG for $1.5b, then you’d probably still go with Telecom/Chorus – just to avoid the possibility of Telecom using the copper network to make the fibre network unprofitable by undercutting them.

But what the poll ignores, is that there may be a large difference between the two bids. If Vector/RFG are saying we can do 75% in 10 years for $1.5b and Telecom/Chorus are saying we can do 75% but need $2.4b to do it within 10 years, then one goes with Vector (in my opinion). And this scenario is not impossible. The lines companies already have infrastructure assets and resource consents which may allow them to do the job far cheaper than even a structurally separated Chorus.

So at the end of the day it is not a popularity contest between Telecom and Vector. The actual commercial details of their bids are vital.

Thirdly, Telecom have put together a one stop shop website about UFB and their bid. I’ve already read most of the site – lots of useful info there.

Finally, we have an announcement from Telecom and Vodafone about a joint bid for rural broadband:

Telecom and Vodafone have announced they have made a joint bid for the Government’s $300 million rural broadband initiative, bids for which are due in today.

Telecom chief executive Paul Reynolds said the solution would New Zealand’s two largest telecommunications providers “combining their extensive resources and skills to bring the benefits of high speed broadband to rural communities as quickly as possible”.

One goal of the rural broadband initiative is to ensure 93 per cent of New Zealand’s 900 rural schools have access to 100 megabit per second broadband, with the rest getting a 10Mbps service.

The other goal is that 80 per cent of rural New Zealanders get a 5Mbps service to their homes, with the rest able to access broadband with a speed of at least 1Mbps.

Telecom said the joint solution would involve extending Telecom’s existing fibre infrastructure to key rural points of presence, including schools and hospitals, and expanding Vodafone’s wireless infrastructure “that harnesses the power of this fibre to deliver high speed broadband services wirelessly”.

Telecom said any service provider would be able toretail services over the new infrastructure. “This means that rural customers will have not only faster data services but also a much wider choice of technologies and suppliers for these services.”

Telecom would be responsible for building fibre to schools and hospitals, cellsites and rural exchanges and cabinets.

Vodafone would be responsible for the design and build of “open access tower infrastructure” that Vodafone and Telecom XT would share, “as indeed could any other wireless service provider who wishes to do so”.

I’m very supportive of this. I think open access cellphone towers are where the future is. It makes a lot of sense economically, and from a resource consent point of view, to share this infrastructure.

Once we do have announcements on who will be the local (or national) fibre companies, there could well be a role for them in providing future cellphone towers, which Telecom, Vodafone, 2 degrees etc could all put gear on. The fibre company of course would provide high capacity backhaul. There are some technical challenges around size of towers and having all the gear high enough to get a good signal, but these are workable.

So good to see Telecom and Vodafone moving in this direction.

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First three regions selected for fibre rollout

September 9th, 2010 at 10:18 am by David Farrar

Crown Fibre Holdings have just announced three parties who are entering prioritised negotiations for the fibre roll-out. This will come as a surpise to those who assumed that Telecom/Chorus will win a nationwide contract. The three parties are:

  • Alpine Energy (Timaru);
  • The Central North Island Fibre Consortium (Hamilton – including Cambridge and Te Awamutu – Tauranga, New Plymouth, Wanganui, Hawera and Tokoroa); and
  • Northpower (Whangarei).

This is a welcome step forward, and residents in those communities should be pleased.

CFH note:

“All shortlisted parties remain important contenders for future negotiations of binding agreements.  CFH is open to either a Telecom, New Zealand Regional Fibre Group solution, or some form of combination for the balance of the UFB project.”

So Telecom (and the NZ Regional Fibre Group) can still win the rest of NZ. If they did, presumably they would co-operate with the winners in the above areas. There is of course a risk Telecom/Chorus will try to undercut, if they don’t win a significant portion of the business. That will lead to infrastructure competition which is good in the short term, but inefficient in the long term. Services, rather than infrastructure, is where you want the competition to be.

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