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The real big game continues

Readers of this blog will remember the so called 'Copper Tax' campaign from the end of last year. Things may have seemed a little quite on that front lately, but behind the scenes there's quite a bit going on.

The latest skirmish to surface burst onto the scene with a press release from the Commerce Commission, then the story has started to grow, CallPlus have come out and shared their submission and the Telecom view is out there too.

Its interesting that the issue is seen as a Telecom [NZX: TEL] complaint to the commission as it is wider than that and pretty much involves everybody except Chorus [NZX: CNU] including InternetNZ, Consumer NZ & TUANZ.

At stake is the integrity of our regulatory system and the future of copper (DSL) based broadband in New Zealand along with quite a few global trends as well.

It's easy to get bogged down at this point in a veritable alphabet soup of 3 letter acronyms and deep interpretations of the Telco Act, so here's my 'idiots guide':

The current broadband regulations set up a service called 'UBA' or 'Unbundled Bitstream Access' which specifies the price and performance of the 'DSL' services that Chorus are required to provide to retailers (what we used to call Telco's and ISP's).

Chorus has had 3 years to get ready for a change from 'retail minus' to 'cost plus' pricing for this service. The Comcom has set a new price for UBA which will come into effect on 1 December 2014.

This 'interim' price is substantially lower than the current price and will punch a big hole in Chorus revenues. Chorus are understandably not happy about this and have been trying a number of strategies to reverse this situation. I won't go into all this now but its important to keep this in mind whenever you see anything about Chorus in the news.

In an attempt to use what they see as a 'get out of jail free' card, Chorus want to use a loophole in the act to launch some new copper services that because of their innovation and the investment involved are outside of the act and can be prices in binding contracts between Chorus and the individual retailers.

It is now well established that real 'killer app' for all forms of fast broadband is on-line video, it started with the growing popularity of YouTube and now extends to iTunes, Quickflix, Netflix etc and is the new battleground.

Telecom (soon to be Spark) have announced they are launching a service called 'Lightbox', CallPlus are going hard with their geoblock avoiding 'global mode' and of course Vodafone already have a strong relationship with SKY.

Google have recently certified a number of RSP's as being good enough to receive their 'HD Verified' status (remember who owns YouTube). Video is seen as driving future broadband demand and traffic growth.

So along come Chorus with a special video optimised service called 'Boost HD' which will be specially tailored to deliver 'HD' video content. Sounds great doesn't it? The hitch comes when the retailers get the details on HD and quickly learn that it will be priced like todays UBA services, that its performance will increase as investments in the core network come on-line (investments also necessary to meet growing UFB traffic) and because Chorus consider this to be a new and innovative service it would no longer fall under the Commerce Commission's oversight.

But wait there's more, Chorus are also proposing that their regulated legacy UBA services, the ones that get cheaper at 1 December and may get even cheaper after the current FPP (Final pricing Principle) process (which Chorus asked for) has been concluded, will essentially be frozen in time at current speeds and they won't enjoy the benefits of future network upgrades only the 'commercial' Boost HD services will.

From a Chorus perspective this all looks pretty good, dodge the regulatory bullet, preserve current copper revenues and get to sound like a player in the booming broadband video space.

However, from the retailers perspective it looks a bit different, they feel it is Chorus trying to abuse the act to in effect get them to 'contract out of the law', that Boost HD is simply a continuation of network upgrades that were planned back in Telecom days and that have been getting rolled out progressively anyway until now. And finally they see Chorus wanting to effectively degrade the regulated service that has actually worked remarkably well in improving the urban broadband experience for most New Zealanders.

At its root this issue comes down to money, Chorus want to restore their financial position and get back on track with their investors, this weeks CFH deal is part of that strategy as well. The retailers also want the best services at the lowest prices and see the current Comcom IPP & FPP processes delivering that.

The users groups, ourselves, InternetNZ & Consumer NZ want to see the savings passed onto the consumer and we are committed to preserving the integrity of our current regulatory system because it is actually working.

TUANZ has invested a lot of time and effort in getting the NZ telecommunications market to its current structure, we have a robust regulator and strong multi-stakeholder processes. Boost HD could see an end to all that and it would be a return to the dark old days.

This really is the big game in town.

Chris O'Connell is the interim of CEO of the Tuanz, the Telecommunications Users Association of New Zealand and the director of Strategy for XandAR

Comments and questions
8

Hi Chris,

Of course you naturally left out that in the draft (IPP) ruling by the Commerce Commission, they state in black and white that "we have expressly determined that VDSL (ie the high speed services) is not part of the regulated service when it is used provide a higher level of service"

This is was confirmed by the Commission itself in a ruling titled "Final Decision of the Commerce Commission on the applicability of the UBA STD to Telecom's Wholesaler VDSL2 servce (20 December 2010)."

So what this means is that the price Chorus gets paid (which drops on the 1st of December 2014 due to the IPP ruling) is for the "basic" UBA service. Which is of course "99.9% probability of providing to any provisioned End User a minimum uplink and downlink average throughput of 32kbps during any 15 minute period on demand". ie Dial up rates basically

So to summarise, the price Chorus gets to charge is based on a 32kbps service! Of course Chorus has been providing a far greater speeds and bandwidth than that on its basic UBA service. So they have been in fact been providing a service that far exceeds what they are legally required to do. But then the ComCom goes and prices that service on the dial up speed, rather than what they were actually providing. What were they supposed to do?

What business in its right mind when forced to cut its prices will then continue to provide the same quantiy of that good or service, or, as the industry seems to want, to continue to increase supply of that good or service?? Ever done basic microeconomics? Seems a quick way to go bust.

So rather than taking the "nuclear option" as some have feared (ie dial back basic UBA speeds to what it legally could do ie dial up) Chorus has instead compromised and said "We'll keep providing the current service at current levels but that's it" Anyone who wants higher levels of service (just like in the real world) will have to pay for it.

And as the Commission itself said back in 2010 regarding VDSL "The intent of the (UBA) STD is clear. Telecom (now Chorus) must provide access to BUBA (Basic UBA) and EUBA (Enhanced UBA) in accordance with the terms of the STD. The DSL technology which Telecom elects to use to deliver BUBA and EUBA is a decision for Telecom alone. There is no compulsion on Telecom to use VDSL to deliver the regulated BUBA and EUBA services, except where they have chosen to make it the only DSL technology available in an exchange or cabinet to deliver the regulated service. "

So for Telecom itself now to come out with a complaint seems laughable.

Also regarding the change from Retail minus to cost plus pricing for the UBA service, if you read the actual commentary when that law was brought in, it was to allow enough time for existing unbundlers to get a return on their equipment investment before the price changed (either up or down) - it was very much a "qualitative" assessment. It wasn't some sort of "price freeze" for Chorus' benefit with the implication that the price was always going to fall massively. To quote from the supplement order paper (SOP) "This uncertainty (by the ComCom setting the new price) is mitigated in the SOP by including transitional measures that ensure the change to the new UBA price will not occur for three years from separation day. The purpose of this delay is to maintain the stability of the key wholesale service during a period of major industry change and to provide the Commission with time to implement cost-based pricing. Access eekers can have certainty that the current prices they are paying will remain stable for the three year period, providing sufficient time for them to update their investment plans in relation to UBA."

All Chorus want's is an adequate return on its assets - the simple fact is that ComCom's UBA IPP pricing, based as it is on the provision of dial up speed, does not come close to doing that.

You forgot to mention that we have a regulator that seems hell bent on driving Chorus bankrupt. It can always be nationalised back into the PT&T. What could go wrong?

The Commission is simply doing its job as defined by the law. A law passed by this Government and accepted by Telecom as being an acceptable path to structural separation.

The law as interpreted by the Commission has judged by the High Court as having been corrected applied (Chorus do have an appeal currently going through).

The question does need to be asked of Chorus as to why they want special treatment, don't they believe in the creative power of the competitive market.

We're not alone on having these dramas check out the situation in the US here

http://readwrite.com/2014/07/22/internet-slow-expensive-us

Is this a natural consequence of the American approach to telecommunications introduced to NZ in the 1990's with the short sighted fire sale of Telecom?

Ironically those are the circumstances that lead NZ's corporate sector to back the creation of TUANZ and still provides much of our 'raison d'etre'

This article is well written and pretty balanced, especially when read in conjunction with the first comment. Hats off to the lawyer at Chorus who worked out a way to (seemingly) comply with the law but also to keep the company afloat.

It won't have been a Chorus lawyer, that's for sure.

I still find it laughable how vested interests try and use the moral high ground of saving monies for consumers when in reality they are just feathering there own nests.
Good on chorus for not bending over

Clearly at the heart of this issue is the failed free market experiment of selling off key infrastructure in NZ, driven largely by a failed pig farmer.

Chorus have been subsidised by the taxpayer, to the tune of $1.5 billion, to roll out this broadband. Meanwhile, their previous and existing shareholders have enjoyed excessive dividends, at the expense of the taxpayer.

Plane and simple, the government should either let Chorus go broke (charge the directors with reckless trading and pick up the pieces like they did with Air NZ) or regulate them out of the games they are playing.

This countries taxpayers have been abused for too long by monopoly practices, for this side show to continue. Free market doesnt exist, due to the unethnical behaviour of a few, in a small country like ours.

We know who the few are, and they should be locked up, to set an example for those who follow in their footsteps.

"Chorus have been subsidised by the taxpayer, to the tune of $1.5 billion..."

Wrong. Chorus has been given a LOAN of $1.5 billion. Not a subsidy. It has to be paid back from the revenue created by the use of the UFB utility infrastructure that will replace the 20th century copper wiring with something that should outlast our grandchildren.

If Chorus goes broke and they turn off all the phone lines and exchanges, then NZ goes out of business. But if you'd prefer to live in the dark ages, then perhaps Somalia or North Korea is the right place for you.