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Telecom, Vodafone on whether they'll pass on copper price cuts

ICT Minister Amy Adams says Labour and other Coalition for Fair Internet Pricing supporters have been suckered into a corporate lobbying campaign backrolled by ISPs.

The Coalition says small businesses and householders will save $150 a year if Commerce Commission-mandated cuts to wholesale copperline pricing kick in, as scheduled, in December next year (and consersely, that if the government manages to over-rule the regulator and minimise the cuts, the revenue otherwise lost to Chorus will go to its shareholders in dividends rather than help pay for the UFB).

Ms Adams, says, in effect, Get real suckers, ISPs will simply pocket the savings. She said in Parliament yesterday:

I can tell you who it is not benefiting. It is not the consumers; it is the retailers. So if we insist on a lower price for the wholesalers, as Labour wants to happen—follow the money. Follow the money. I will tell you who benefits: the large corporates like Vodafone, which benefits from the extra money. That is what Labour is supporting.

That is what it wants to see happen. I will tell you what will happen now. The consumers will not see anything at all, I predict. If they do, it will be a tiny fraction of any drop

Ms Adams theory is quite easily tested.

There are many internet service providers.

But according to the most recent Commerce Commission figures, there are only four games in town.

Telecom holds around 50% of the market, Vodafone (including the old TelstraClear) 29%, CallPlus (including Slinghot) on 9% and Orcon 5%.

It would be quite easy for the four to put Ms Adams' argument to bed by pledging to pass on the copper price cuts.

But Telecom and Vodafone talked around the issue when approached by NBR today (see statements below).

Telecom spokesman Richard Llewellyn said "There are still too many moving parts to say."

Vodafone's Tom Chignell said, "We believe the whole copper pricing debate is a wholesale one and not a retail one ... We note that other ISPs (including Orcon and Slingshot) have made statements about their intentions with respect to pass through of savings in wholesale copper pricing.  We share the view of the Commerce Commission that the retail market for broadband is highly competitive and that if some players lead with price cuts, the others will have to follow."

Earlier, CallPlus and Orcon pledged to pass on the copper price cuts - or most of the amount - although Orcon CEO has noted that an internet account is made up of a lot of different pricing components. And you've got to feel for the two ISPs given the millions they've spent installing their own gear in Telecom then Chorus exchanges. It's something that's made the market more competitive overall, and helped them add services like internet voice calling - but they must also be champing at the bit for an opportunity to recoup that investment (as Mr McAlister intimated in its his initial comments to NBR).

I hope the UFB gets completed, and on time, and that the government holds Chorus' feet to the fire and makes it see through the contact it (and shareholders) signed up for. The government has badly managed the issue overall.

But especially while Telecom - holder of half the retail market - evades the question, the "Will ISPs pass on the savings?" argument is a clear-cut result: Adams 1, Coalition 0.

ckeall@nbr.co.nz


RAW DATA: Telecom statement

In response to your question on what Telecom's stance is on whether we will pass on wholesale copper price cuts:

There are still too many moving parts to say. What we can say is that Telecom is committed to competing hard in a brutally competitive broadband market, and consumers will undoubtedly benefit further from lower wholesale input costs.  It’s worth noting that over the last 18 months or so, our average revenue per broadband customer has declined about 16%. In the same period, average data usage has almost tripled. This has been happening even without any change in the input costs we pay to Chorus.

The reality is there is an extremely competitive market in New Zealand with almost 50 ISP’s competing for customers. No ISP can take an isolated view of what to charge its customers, as a monopoly provider might do. We have to continually take account of dynamic market changes. Apart from pricing, ISPs are also constantly making decisions on how they choose to deliver value to customers, and we will all try and do it in the way that gives us a competitive advantage.

So, in terms of putting specific numbers on it, because the market is so competitive we don’t intend letting our competitors know about our pricing plans a year in advance. We also don’t have enough certainty at this point in time as to what the final wholesale prices or other market factors will be in a year’s time.


RAW DATA: Vodafone statement

 We believe the whole copper pricing debate is a wholesale one and not a retail one.  Telecommunications regulation deals with wholesale markets.

We note that other ISPs (including Orcon and Slingshot) have made statements about their intentions with respect to pass through of savings in wholesale copper pricing.  We share the view of the Commerce Commission that the retail market for broadband is highly competitive and that if some players lead with price cuts, the others will have to follow.

In the Commission’s clearance of the Vodafone acquisition of TelstraClear in 2012 the Commission said:

“The Commission considers that, post acquisition, Orcon and Slingshot will continue to act as aggressive, price leading competitors in the market. While they lack the scale of Telecom or the merged entity, they are able to compete effectively, especially in areas where they have unbundled (where Vodafone’s fixed network is largest). The Commission considers that, post acquisition, Orcon and Slingshot will provide competitive constraint on the merged entity.”  (Para 219)

That has certainly been our experience since the merger took place and we expect it to continue.

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Comments and questions
9

The answer to the minister's concern is competition. The more competitors, the more fierce the competition, the more likely these rates will be passed on.

Smaller ISPs tend to be price leaders because they see it as a way to steal market share, and rightly so.

If the big guys don't want to pass on savings, if they think they can sit on their laurels with a cosy duopoly approach, then they can go right ahead - that's their right. But customers aren't stupid and we vote with our wallets. Callplus and Orcon market share will only increase if customers realise they can get a better rate for the same service from these two.

That's the way the market is supposed to work and if the minister doesn't believe in a free market solution, I suspect she's in the wrong political party.

But don't just take my word for it - in the years since regulation was first introduced in this market, prices have fallen by well over one third, at a time when the cost of living has increased.

It's very easy to compare your phone bill today with what you paid a year ago, or even ten years ago, and complain that it hasn't changed much in terms of price.

I look at my landline at home - ten years ago when I first got broadband it was about $100 a month. Today it's ... about $100 a month.

But in that time I've doubled my download speed to 15Mbit/s, got a much better router that does wifi as well as fixed line and, most importantly for me, moved from 1GB/month data limit to 1020GB/month data limit.

In a competitive market, prices fall and customers move to the provider that best meets their requirements.

Why take the risk? Perhaps the ISPs need to be regulated as well - so the Commerce Commission cuts aren't pocketed by greedy ISPs.

The ISPs will be printing money come next December. You just know Telecom and Vodafone will say "we haven't cut our prices by $10, but instead we've given everyone 20GB more data for the same price." What a joke.

Surely someone can take some time right now and thoroughly document every single broadband plan in the market and then check to see how prices change come December. I for one don’t want more data. I want my 30GB plan to be $10 cheaper next December. No ifs and no buts.

Mr Brislen is dreaming if he thinks Orcon/Slingshot can somehow force Telecom/Vodafone to drop their prices by $10. What we have in NZ is a duopoly. Telecom knows that many of its customers are only with them out of inertia and will never consider moving ISPs. Furthermore, in many rural areas there is simply no competition at all.

Why doesn’t the Coalition turn itself to something useful and publicly run a campaign to get Telecom/Vodafone to make a commitment to pass through the price drop?

Minister Adams has a point

Vodafone need to publish detailed accounts like everyone who has market power , Chorus, and Telecom publish ,detailed accounts ( its often a requirement from regulators )

It's time for Vodafone to publish detailed accounts as they are the dominant force in NZ telecommunications, Telecom is only a 1/3 the size of Vodafone on a real profitabilty basis

Go on Voda , publish detailed accounts

Ms Adams please consider asking EY to conduct a similar financial analysis of Voda NZ (similar to your Chorus review) before you sell the last 5mhz of 700

Cheers

T

Tex is right - and perhaps we could go a step further and regulate the vertical bundling of services Vodafone/TCL currently enjoy with their own copper network; yes they have one, but are not subject to the same regulation that Chorus is.

In all the hooha Vodafone/TCL have been remarkably silent on the regulation of the above............

I agree with Paul Brislen above - at least there is competition at the level of the ISP retailers to help drive down prices and eventually pass on savings to consumers. There is no competition with Chorus for a vast majority of its network, so no way any competition will drive down prices - hence the COMCOM intervening. What planet is Amy on??? Quit your position now Amy - you are in dream land!!!

Something similar happened a short time ago in the electricity market, when an EDB or ETB had its regulated revenues cut, and the saving was pocketed entirely by the other players in the vertical supply chain.

ISPs fierce lobbying makes their incentives clear...

You’ve hit on the key issue. If ISPs were going to fully pass through the savings to consumers, they should be completely indifferent to wholesale prices – a lower or higher price wouldn’t affect their margins. Vodafone’s bankrolling of this campaign shows it will make a lot of money from this.

So Vodafone have paid for the campaign; which campaigned on the basis that we will get a cut, and no they won't be passing on the cuts?

So basically this overseas-owned multinational has hidden behind a lobby group in order to increase its profits and, at the same time, put our infrastructure development in jeopardy.

And people hate on Telecom?