Telecom’s profit

December 20th, 2010 at 4:00 pm by David Farrar

Telecom has just published their second set of regulatory accounts, which breaks down their income, expenses and profit between different sections. The 2010 historical cost accounts show:

  • Access Services (Chorus) – a profit of $571m on revenue of $1,059m, so profit is 54% of revenue
  • Wholesale Services – a loss of $10m on revenue of $925m, so profit is -1% of revenue
  • Retail Services – a profit of $143m on revenue of $3,301m, so profit is 4% of revenue

This shows that basically even Telecom Wholesale struggles to make a profit because the charges from Chorus are so high.

This is why structural separation will be a good thing (if done properly), as Telecom will have to compete for its profit, not just use the monopoly infrastructure to get it.

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Options for Telecom

September 21st, 2009 at 11:00 am by David Farrar

In light of the Government’s fibre to the home proposal, there seem to be three distinct paths forward for Telecom. They are:

Structural Separation

If Chorus is sold off, then Chorus would be in a very strong position to effectively gain most of the $1.5 billion on offer, by partnering with the Government to set up many of the regional fibre companies – or even one national fibre company.

The likely sucess in gaining most of the $1.5 billion would increase the value Telecom would get by selling Chorus. Also Telecom might not have to sell all its shareholding in Chorus – it could, I beleive, still retain a minority stake as an investment.

This would leave Telecom with its wholesale and retail arms. They would probably immediately have most of the current obligations imposed on them, such as equivalence, dropped.

With much reduced capital expenditure needs, and a cash inflow from the sale, Telecom should be in a position to increase the dividends it pays.

The downside will the inability to leverage the advantages of also owning the existing infrastructure. They’ll be paying an outside company to utilise their lines – the same as everyone currently has to do to Telecom. They will also be more at the whim of the market. If they lose market share to competitors, they won’t have the compensation of the fact the competitors are still paying them access fees.

Infrastructure companies tend to be safer, but have lower dividend returns. Competitive companies are a more risky investment, but can produce higher returns.

Participate as a minority partner

If Telecom do not structurally separate, then they are deemed a “partner” that owns a retail operation. This does not preclude them in any way from full participation in one or more local fibre companies (or even to still propose they be a partner in a national fibre company).

The key restriction is that will not have the right to appoint a majority of Directors to the Board of the LFC, and the Chair of the LFC Board must be agreed unanimously by all shareholders.

I’m not sure how important control of the Board of an LFC will be to Telecom. The initial partnership agreement with CFH setting out terms of investment and how extensive a fibre build will be is arguably the more important factor.

It is quite possible Telecom could decide to participate and invest in one or more LFCs. This will also help protect their investment in current legacy assets.

Do not participate

The third option is for Telecom not to bid to be a partner for any LFCs, or they do bid and are unsuccessful.

If this is the path chosen, then Telecom will be in a fairly strong position to ask for some of the current requirements imposed by operational separation to be removed. There would be issues over timing, of course.

It is likely Telecom would not undertake any more major infrastructure investment (such as further cabinetisation or further upgrades to VDSL2) beyond their current commitment of $1.4 billion. This would save them money in the short term, and in the long term they would become a customer of the LFCs for their higher speed products.

Telecom could do quite well relieved of the need to keep rolling out faster and nearer infrastructure. For many of their customers, the current speeds will be adequate for some time.

It is possible that they might keep up an aggressive investment programme to try and compete with the local fibre companies, and even drive them out of business. That would be a very ballsy call though, considering the firm policy of both major political parties is that the future fibre infrastructure must be open access and not part of a vertically integrated monopoly.

Telecom’s decision is going to be one of those really big ones – on much the same scale as which mobile phone technology to go with. The wrong call can cost a lot of money. The senior staff and board have an unenviable task looking at their company, considering its strengths and weaknesses, and deciding on the best path forward.

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Fibre to the Home proposal finalised

September 16th, 2009 at 2:28 pm by David Farrar

I’m very very happy with today’s announcement from Steven Joyce:

Communications and Information Technology Minister Hon Steven Joyce today released the details of the government’s $1.5 billion ultra-fast broadband investment initiative. …

Key highlights of the proposal include:

  • An open, transparent partner selection process, which will be initiated in the next month.

  • Government investment directed to an open access, wholesale-only, passive fibre network infrastructure.

  • A new Crown-owned investment company (“Crown Fibre Holdings”), which will be operational by October, to carry out the government’s partner selection process and manage the government’s investment in fibre networks.

  • Crown Fibre Holdings and each partner establishing a commercial vehicle, a “Local Fibre Company” (LFC), to deploy fibre network infrastructure and provide access to dark fibre products and, optionally, certain active wholesale Layer 2 services.

  • Provision for national and regionally-focused proposals, as well as consortium and proposals aggregating any combination of LFC regions.

  • Independence, equivalence and transparency requirements for LFCs.

  • Expansion to 33 candidate coverage areas based on the largest urban areas (by population in 2021).

What is really good is the commitment to open access to dark fibre, and the regional approach to the issue. The Government has held firm to most of their draft proposal, with the main change being an increase in the number of coverage areas to 33.

Computerworld reports on positive reaction:

“This ushers in the biggest and most fundamental change to telecommunications in New Zealand since the privatisation of Telecom 20 years ago,” TUANZ CEO Ernie Newman said in reaction to the news.

“The paper builds very constructively on the work done previously,” Newman says. “It takes into account most of the key issues raised in submissions, and sets a timetable with milestones. It is an excellent blueprint on which to build.” …

InternetNZ also welcomed the plan, saying it is “delighted” with today’s announcement of a regionally-based approach to investment.

“This is a world-leading programme that can be expected to deliver the infrastructure New Zealand needs,” spokesperson Jordan Carter says.

“Steven Joyce and the Government have put in place a framework that over time can deliver a widespread fibre rollout across urban New Zealand.”

Those unsure about the benefits of ultra-fast broadband, might want to read the guest post from Rod Drury earlier this week.

Chris Keall (and Kelly Gregor) at NBR cover the proposal in detail. Keall highlights a new focus:

In the proposal document released today, the minister also flags that “The capacity and reliability of New Zealand’s international data connectivity will become increasingly important as LFCs’ [local fibre companies'] networks are deployed over the course of the UFB Initiative.”

The Commerce Commission recently identified slow international data as a roadblock to better domestic broadband performance, with testings showing that overseas pages take twice as long to load as those hosted locally – even with our current copper-dominated networks.

International bandwidth and data costs are often cited as a big issue also.

In a fit of good timing, Juha Saarinen has an article in Computeworld on dark fibre, and how you basically can not get it from Telecom or TelstraClear. Have a look at this price comparison and weep:

James Watts, who runs Palmerston North-based ISP Inspire Net, says the reason dark fibre is attractive to his customers is because they can “do whatever the hell they want with it.” Inspire currently charges $595 and $995 for intra-town dark fibre pair leases, depending on contract terms, and double that for inter-town unlit circuits.

To light the circuits, Watts says his company sells Gigabit Ethernet transceivers for $140 each.

A similar 1Gbit/s circuit from Telecom apparently costs $7000 a month, plus installation charges.It’s $69k a year according to Telecom’s pricing book.

Finally a focus on the issue of fibre providers being discouraged from also operating retail telecommunication services, both here and in Australia. Steven Joyce said in a Q&A:

Will Telecom have to structurally separate its network business to participate?

Any such decisions are up to Telecom.  The Government has made it clear that it will only invest money into fibre companies that are not controlled by shareholders who also operate retail telecommunication businesses.  The Government is also clear that potential partners who already own fibre assets can table options that involve those fibre assets being vended into any new fibre companies.

Preventing vertically integrated monopolies is crucial. This basically means Telecom can not be a majority shareholder in any regional fibre company unless they structurally separate (ie sell off Chorus). They can have a minority stake however.

In Australia, the Government has done similiar:

The government could also deny Telstra access to new spectrum for advanced wireless broadband unless the telco sells off its cable network and 50 per cent stake in Foxtel (25 per cent owned by News Corporation, owner of The Australian)

If you want to be part of the future, you need to be separated.

For those who think separation is not a big issue, think what it would be like if Air New Zealand owned the airports and could set access terms for other airlines. Or if Ford owned the roads and set the rules for what other cars could drive on them, and for how much.

So as I said, very pleased with the announcements today, and now working my way through the details.

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