Q&A - Chorus' CEO on what he needs to cut 3-month UFB wait times; the PM's "go broke" comment; the Vodafone effect
NBR ONLINE caught up with Chorus CEO Mark Ratcliffe during a controversial week for his company.
Mr Ratcliffe weighed in on the now well-canvassed controversy of the "Axe the Copper Tax campiagn."
One element of the issue is that if fibre uptake speeds up, Chorus will start making serious revenue from the UFB, reducing his company's reliance on copper - and the attendant poltiical fire-fight over its wholesale pricing.
The Vodafone effect
Mr Ratcliffe said Chorus is now connecting around 1300 premises a month as they sign up to retail UFB fibre plans - up from 100 to 150 a month at the start of the year.
"Now those are small numbers. We’d all like it to be faster," the CEO said.
"I suspect we’ll see the competitive dynamic changing a bit when Vodafone’s in the market. When you’ve got the big two retailers going head-to-head, competition drives greater demand.
"When you’ve got two big guys going hard at it, that will see faster uptake."
Telecom, which holds around 50% of the retail ISP market, launched its UFB plans at the end of April; Vodafone, which has around 29% market share, has yet to set a date to launch UFB plans, or set any date to do so.
I agree with Mr Ratcliffe that the Big Two retail ISPs need to be in the market to gee along uptake.
But Vodafone seems pretty disgruntled with things, if it's toey submission to the government earlier this week is anything to go by.
The carrier called the government's plan to over-ride the Commerce Commission's suggested copper broadband price cut of up to 25% "corporate welfare" for Chorus.
Like the recently launched Campaign for Fair Internet Pricing, Vodafone says cutting copper pricing won't speed UFB uptake a jot. It argues that instead there needs to be much faster fibre plans at the same price as today's cheapest UFB plans. Chorus has said 200Mbit/s plans - or twice the speed of today's fastest plans - are on the way within a year. Vodafone may be waiting for them to come on line.
Intriguingly, Vodafone is also pushing for access to "dark fibre" - a much more basic Chorus wholesale product that would allow Vodafone to offer more of its own products and services.
RMA changes to cut three-month waits
NBR asked the Chorus CEO how long people had to wait to get connected to fibre, once they ordered it from thier ISP.
Mr Ratcliffe said the wait time was about a week for standard installs.
But if someone lives down a right of way or in a multi-tenanted dwelling like an apartment block or block of flats, the process can take up to three months as Chorus has to locate then get permission from every property owner involved.
The Chorus boss told NBR he wants UFBs to be deemed a "designated service" - meaning his company would have to consult with property owners, but not need their sign off to lay fibre down a shared right of way, or into an apartment.
He is discussing a change to the Resource Management Act (RMA) that would allow this with Environment Minister Amy Adams - who also happens to be ICT Minister in charge of the UFB, making her well positioned to make changes. At least in theory. NBR wonders - along with many potential UFB customers - why issues like this and the kerfuffle over overhead lines were not resolved before the UFB rollout began.
Mr Ratcliffe also confirmed his company's Gigatown competition - which launches in five weeks and will one lucky locale 1000Mbit/s fibre at the price of the cheapest 100Mbit/s plans today - will be open to suburbs of big cities as well as standalone towns.
Measuring competing towns' social media activity around the competition will be one way it's decided.
Mr Ratcliffe also says the town will serve as a showpony for what can be achieved with fibre, helping to spur uptake across the country - and on that note competing towns will also have provide ideas about business development and education projects that would benefit from ultrafast fibre.
RAW DATA: Chris Keall talks to Chorus CEO Mark Ratcliffe on Sept 16; see more in today's Sept 20 print edition of NBR
The PM's "Could go broke" quip
CK: The Coalition for Fair Internet Pricing asked the NZX to investigate conflicting statements [by the Prime Minister] about Chorus’ financial viability [it’s now asked the ASX, where Chorus is dual listed, to mount a similar investigation]. What’s your reaction?
MR: Well, we take our disclosure obligations really seriously, and we have been thinking about the disclosure about this and we have since the Commerce Commission first came out [and suggested cuts of up to 25% on Chorus’ copper broadband pricing] in May last year
You will have seen us put every single thing through the exchange. And we’re very confident we’ve kept the market completely informed about what the range of outcomes could be [impact; earnings]
CK: I guess the Prime Minister possibly didn’t do you any favours on Friday when he said there was a chance Chorus could go broke? [Though it could also be looked at as a bit of gaming as the PM attempts to make it look more attractive for the government to directly intervene with its own, much more modest proposals for a copper price cut. The Coalition for Fair Internet Pricing says gap between the Commission’s potentially steep cut, and the government’s potentially light trim, will deliver Chorus $600 million or more in revenue it would otherwise have lost by 2020. It says this “copper tax” will subsidise the Ultrafast Broadband (UFB) rollout, which is so far running $300 million over-budget. The Coalition, and Vodafone, what the indpendent Commerce Commission to set regulated pricing, not the Crown, which they see conflicted by its $929 million investment in Chorus]
MR: “We’ll that was a view that he has. He’s entitled to his view. We’ve kept the market informed about the range of potential impact on revenue under each scenario. That’s what our obligation is. These are all potential things – and none of which apply for some time.
And all of the processes are ongoing.
The things is what we’ve got is two Commerce Commission processes underway, and the government review underway, all on slightly different timetables.
The Commerce Commission’s indicated the final UCLL price could take two years to determine [UCLL is unbundled copper local loop] and we’ve got the UBA [copper broadband] pricing that’s … we’ve had the draft determination and we’ve had some further clarifying things, then they’ll go to a final draft determination [on October 31] then they’ll go to final pricing.
CK: So that’s October 31?
MR: Yes, that’s the final pricing based on [international] benchmarking. If people don’t like what that comes up with [in submissions] that can go to a final pricing determination that can take two years.
This is the thing, all these processes take … you measure decision making in years.
The government’s indicated it is going to do a review, it’s put out three options. Those options all require some sort of legislative change so one assumes that legislative change would be done in this Parliamentary term.
So we’re taking the view these are very long processes. You release information to the market and you deal with the facts in front of you rather than getting into a lather every time someone suggests an extreme price point.
CK: The Prime Minister and [ICT Minister] Amy Adams are saying the Commerce Commission’s draft determination could lead to quite an extreme result.
MR: Absolutely. The initial determination painted a picture of something like $160 million revenue lost, which actually turns out to be $160 million of ebitda loss in a single year [Chorus' ebitda or earnings before interest, depreciation and amortization, rose 1.2% to $654 million in the 12 months ended June 30, 2013. It's net profit rose to $177 million from $102 million in the prior year, which captured only seven months of Chorus' demerger from Telecom). Chorus also said the Commerce Commission's draft determination could require it "to fundamentally rethink its business model, capital structure and approach to dividends." ]
Now I don’t know any company that can sustain that without having to review capital management settings.
CK: What does it mean exactly to review capital management settings? What could be a practical effect of that?
MR: Things like, what are your abilities to pay dividends [Chorus paid out $95 million to shareholders last year]; how much money do you need to borrow to meet your capital commitments; all sorts of things. It’s largely around how the company is funded on the balance sheet and what kind of returns you could expect to give to share … stakeholders during that period.
CK: Could it potentially slow down the UFB rollout?
MR: I mean there’s a contractual obligation for UFB. We’re contracted to build it within a certain time frame [by the end of 2019], and we don’t have any ability to vary that timetable unless the other party agrees. The government is making a loan to us to enable us to bring forward the bill [the Crown is investing $929 million in Chorus, half in the form of non-voting shares, half in interest-free debt securities] but at the end of the day the loan has to be repaid to a timetable [between 2025 and 2036] and the network has to be built on a timetable.
CK: If we did go through a scenario where copper pricing was at the lower end of the draft, is that a situation where you could say to the government, We need more time, or We need more subsidy?
MR: You could always ask for things, but we’ve got a really unambiguous contract. We’re contracted to build past so many premises per year until the end of 2019 and you can only vary contracts if both parties are willing to vary.
And we’re no where near where we need to get into those types of discussions with the Crown yet.
True UFB cost known?
CK: In April you said it the UFB was costing more per premise than you anticipated …
MR: Yep …
CK … and that worked out to about $300 million more [taking the total cost of Chrous 70% share of the UFB rollout to an estimated $1.6 billion to $1.8 billion].
Do you think you now know the true cost of the UFB rollout? Once you get further down the track could you re-assess …
MR: No. We’ve given our best … our responsibility is to keep the market informed with what are estimates are of the cost of the build. We’ve said [in April] it’s between $1.6 and $1.8 billion and we’re holding to that estimate. Nothing we’ve seen in the last six months has given us any indication we need to change that.
CK: Could there be further revision once you’ve had a broader look?
MR: No, not from anything we’ve seen at the moment.
CK: You say it’s quite an unambiguous contract, but the rules keep changing around the periphery like the copper pricing potentially, and where the government said-
MR: But the copper pricing wasn’t in the contract at all …
CK: I mean the issues around it [The Telecommunications Act which facilitated the UFB always called for a move to cost-plus pricing, which was widely expected to deep wholesale copper price cuts when it kicked in after three years].
And you’re having to chip in $20 million more for home installs because the government wanted to change the rules around free UFB connections. I guess it’s hard to anticipate what other costs like that will happen?
MR: In a long term relationships you vary things at the margins on a pretty regular basis.
CK: What do you think will happen to the free connection deal after the end of 2015? Do you see that rolling over?
MR: The free connection for a standard connection goes through to the end of 2019. The only thing we’re talking about is non-standard installations. We provided a $20 million fund there and the fund will last until it runs out. That might be 2015. It might be longer, it might be shorter.
[Coalition for Fair Internet Pricing members CallPlus and Orcon have argued the definition of a standard connection is much too narrow, ruling many homes including those down right-of-ways, or just set a modest distance back from the road.]
Until you see what the uptake is, and what the mix of uptake is, it’s had to be any more precise than that.
The 3% uptake at the moment [with just under 10,000 of just over 300,000 customers now within reach of fibre choosing to take up a plan], is that in line with you projections?
MR: Yes, I think it’s pretty good. What I tend to look at is you look at a range of technology update curves and see what they’re like. And if you look at the uptake of broadband and the uptake of dial-up in New Zealand you see both of them reached 50% uptake after about 13 years.
Dial-up went faster then slowed down, whereas broadband [DSL] went very slowly then sped up in the second six years.
So you’d think moving to fibre would be somewhere around those uptakes. So getting to 50% uptake at 13 years – in the absence of anything else, or overseas markets where you can look at how long fibre’s been deployed for … you know those things are considerably faster than say the uptake of mobile phones or Sky TV. Sky TV took more like 20 years to get to that point, and mobile phones took about 15 years to get to 50% penetration. Now mobile phones then took off enormously after that.
The Vodafone effect
CK: Do you think more could be done to promote the benefits of UFB? When I talk to home users and business people, most of them say, “Why do we need it?” I don’t think Crown Fibre Holdings or or the government or ISPs have made a persuasive case at all [to be fair to Crown Fibre Holdings, it’s put together a series of nifty case studies on the business and home-working benefits of UFB – it’s just that it seems to have close to zero budget for promoting them].
MR: I think it’s early. The footprint [around 20% of premises now have access to fibre] isn’t big enough for some for some of the bigger retailers to really get in behind it. Telecom is running a pretty extensive campaign now-
CK: Hmn, they seem to be trying to co-opt the term “Ultra” [hitherto associated with the phrase Ultrafast Fibre] to cover DSL and VDSL too …
MR: … Ultra Broadband I think they’re calling it.
MR: Well you can understand why they’re doing that because they’re trying to advertise on a bigger footprint. It is getting cut-through. We’re doing 1300 fibre connections a month, up from 100, 150 a month at the beginning of the year.
Now those are small numbers, but it’s good, steady growth.
We’d all like it to be faster.
I suspect we’ll see the competitive dynamic changing a bit when Vodafone’s in the market. When you’ve got the big two retailers going head-to-head that generally … you know, competition drives demand."
I think when you’ve got two big guys going hard at it, that will see faster uptake [Telecom, which holds around 50% of the retail ISP market, launched its UFB plans at the end of April; Vodafone, which has around 29% market share, has yet to set a date to launch UFB plans.]
RBI blowout too?
CK: Is the RBI going to budget?
MR: Absolutely. We are completely on … we are slightly ahead of the rollout. We are on budget and that programme is just rolling on with really good broadband into rural communities. The schools are coming on board pretty fast. That’ll accelerate now [new Crown company] Network for Learning is starting to get involved. But we’re also seeing high uptake of the cabinet product we’ve deployed there. I don’t know about uptake of the mobile product [Chorus won the contract for the six-year, $300 million public-private Rural Broadband Initiative in a joint bid with Vodafone. Chorus is handling the fibre leg of the rollout, Vodafone the mobile and wireless internet element.].
3-month waits for UFB installs
CK: What’s the wait time for people who order fibre at the moment?
MR: The wait time is short if you don’t live in a multi-dwelling unit or you don’t live down a right of way.
So you could expect if you ordered it this week to get fibre next week.
CK: What if you live down a right of way or an apartment block?
MR: It depends on the consenting process.
You’re required under New Zealand law to get approval from everybody with an ownership interest in the right-of-way of the multi-dwelling unit before you can start work.
So that goes at the speed with which the slowest person signs off.
CK: Who gets that consent. Is that you?
MR: We get it on behalf of the industry. So that involves finding and communicating with every single person who has an ownership right. Of course, a lot of the time the tenant of the apartment isn’t necessarily the owner, so you’ve got to go to the owner to get their approval to do it, so that can take up to three months, which is frustrating.
CK: With the overhead line issue too with Telecom’s rollout, people are like “Why did no one even start thinking about it until April?
MR: Well the case of Telecom launching without voice-over-fibre wasn’t something that we had anticipated. [Telecom's failure to develop a voice-over-fibre product in time - it says one is on the way by Christmas - meant customers with overhead copper lines - about 30% of its total - had to keep a copper line for voice calls. But two overhead lines is an RMA no-no. It took Chorus and Telecom a couple of months to come up with a solution involving bundling fibre and copper into a single cable.]
Now we quite quickly dealt with that. The dual lead in does not cause a delay in the installation process.
CK: But it took a little bit of pain to work that out?
MR: There wasn’t any pain between us and Telecom. We were quite clear all the time about …
CK: Well there was pain and confusion with the Telecom customers who tried to get it …
MR: Operationally, I mean, new things do take time to settle in. But the research we’ve seen indicates customers are now feeling pretty good about the installation process. You can always find people were it did go wrong. But on average there’s a high degree of positive feedback about the installation process, the way people spend time there making sure things are up and running …
CK: I’d say it’s pretty mixed …
MR: I’m talking about the independent research. Anecdotally, you can always find people who are willing to have a go and we think some people have had poor experiences, but the research that they’ve done more generally indicates the experience is generally very positive.
CK: I don’t know. You had 30% of the people who tried to get it with Telecom essentially going away again when they found it was too complicated, and then the mulit-tennant and right-of-way situations, so it is pretty mixed.
MR: Unfortunately a lot of people live in multi-dwelling units and right-of-ways. That’s a fact. The law says owners get rights. You can’t just roll the stuff …
CK: I accept that’s the case, but it does give you bad word-of-mouth in some cases.
MR: Unfortunately, the law is the law. You can’t just ignore it.
CK: I accept that.
MR: And we’ll get smarter about his. People understand more about it and we might even get … If we had legislation that was similar to the rest of the world, then you wouldn’t have to go through and get everybody’s approval.
Seeking RMA change
CK: So would you like to see some tweaking to the RMA [Resource Management Act]?
MR: Yes, that would be really helpful.
CK: Is there something specific you would like to see?
MR: We’re working with the officials to see whether or not these things [multi-dwelling and right-of-way fibre installs] could be called a designated service – which means you have to consult with people about it but you don’t have to seek the opinion of every single owner, as long as you’re doing it in a way that takes into account environmentally issues, health and safety and all those sorts of things. So you can just get on with the job when there’s demand for services.
CK: I guess that would have been another good thing to sort out before the rollout started.
MR: It would be, but legislation takes time.
CK: There was like a two or three year lead up to it [the UFB was first announced in September 2009], and nobody seemed to think about it.
MR: I think everybody knew about it. What … it’s not until you come to a particular suburb that you discover just how many multi-dwelling unit and right-of-ways there are. And this is principally an Auckland issue …
CK: I’m sure you guys know how many buildings there are. You have copper running into all of them.
MR: Well, there’s … hindsight gives you so much insight into what you could have done. All you do is say, we’ve got an issue, let’s confront it and get on and find a solution for you. And in this case we’ve got workable solutions within the existing legislation, and it could be a lot easier if legislation was amended to make it in line with how things work in Australia and North America.
CK: I guess Amy Adams is quite well positioned to change things a both ICT Minister in charge of the UFB, and Environment Minister in charge of the RMA …
MR: And she’s also an environmental lawyer who knows a lot about this stuff so she’s been really helpful. And she’s sympathetic but we’ll just have to work it through.
MR: It’s about raising awareness for UFB. Your point about why some people are not sure why they would get it.
What we’re trying to do is to create a platform which says, here’s a town that’s going to get it, and we want people to compete to be that town. And then you’ll have a showcase of just how it can showcase a community.
CK: Can you give an idea of how towns will compete?
MR: It’ll be like a sort of an American Idol or
Elissa Downey [Who recently joined Chorus after working at a series of non-profits including Halberg Disability Sport Foundation and the National E-Health Transition Authority (NEHTA) and who is involved with Gigatown: We want towns to really tell us why they want it. So we really want to foster that innovative thinking around what fibre can do for a small community or a large community.
And how it’s going to be measured is that we will run a very transparent campaign. We’re currently working through the details of how it will work with our partners who are going to be involved, which range from partners to ISPs to local communities to everyone.
We expect that measuring social media activity will play a role in that.
MR: So it won’t be a political decision, and it won’t just be us just playing God about which community wins. It will be to give it to the community that looks like it will get the best bang-for-its-buck out of it. So you want to give it to a community that’s got really good ideas about business development, about health, about how they could help education, and all the other things the broadband progamme is designed to give. Who looks like they’re going to showcase the biggest explosion in usage?
And that could be any community. That could be a provincial town; it could be part of a large metropolitan area.
We’re trying to make sure everybody’s got a chance so even the big cities can say ‘This suburb is making a bid …. Certainly I’ve talked to the Wellington people and they’ve got a couple of areas where they think there could be big advantages to the city and I think the city’s going to get behind one or two bids rather than 20 bids on the basis councils can divert their resources toward these things too. So if they think they’ve got areas of cities they think need developing … I can talk more knowledgeably about Wellington than about Auckland because I live there, but there are areas where there are concentrations of the movie industry and thing like that where you think that could possibly be …
ED: Anything could happen, any area.
CK: I hope it goes well. I think it will raise awareness. But there’s a slight danger someone will come up with a hero project like 3D teleconferencing between schools or something that makes everyone think that’s abstract and high-end, whereas the real story’s you can actually backup your hard drive to Sky Drive or do cloud computing or a VPN to your office that doesn’t time out …
MR: It’ going to have to get educational. We’ve got local education institutions onboard, it’ going to have to get some kind of business development focus, and it’s going to have to have a town that understands the social media and uses that to vote and communicate. You want it to be an inspiring choice, we’re you get a wow factor over the course of the programme for two or three years as that community’s rolling stuff out that can perhaps be first in the market for the rest of New Zealand.
CK: Thanks for that Mark.
As we were packing up I asked Mr Ratcliffe what he made of new Labour leader David Cunliffe. Obviously there’s a subtext hear that the Chorus CEO doesn’t want investors to get spooked about a possible change of government between now and when the UFB wraps up in 2020. But he said he knew Mr Cunliffe well from his time as ICT Minister when Labour organisationally separated Telecom. The new Labour leader had a lot of industry knowledge and they worked smoothly together, Mr Ratcliffe said.