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Why isn't Orcon heeding Dotcom's call to eliminate data caps? CEO's telling response

Orcon has previewed a new TV commercial, which will debut Sunday.

It stars former Mega director Kim Dotcom, who tells the camera, “Every day, thousands of Kiwis are living below the global broadband line." (See full clip below.)

The line is a reference to an OECD survey, being circulated by Orcon's PR, that show New Zealand as one of the few countries were data caps are the norm.

Mr Dotcom continues, “The sad truth is that bullying corporations restrict your internet data so they can make more profit. It’s called capping, and it’s not cool."

It's hard to argue with the sentiment.

No one likes running into their data cap as they try to backup or share files online, use their cloud apps or call a client. In the US, persuasive availability of unlimited data plans has underpinned the rise of street-legal TV and movie streaming company Netflix - which according to Wired now accounts for more data than shady file sharing services. 

So why are thousands of Orcon customers suffering under uncool data caps?

NBR put the question to CEO Greg McAlister.

NBR: So you're making all your plans data cap-free?

GM: No, just the $99 unlimited one

NBR: If you’re campaigning against data caps, why have them on any of your plans?

GM: We are in the market with the rest of them with $75 and $85 capped plans. But we’ve got a truly uncapped one at $99 – that’s our hero plan – and last month that’s what 60% of our new customers signed up for.

NBR: So what stops you offering uncapped data at $75?

GM: Can’t make any money.

NBR: Why can’t you make any money?

GM: Well, the input costs. When you take $75, less GST, and then about $45 for EUBA  [Chorus’ enhanced unbundled bitsteam access product, or broadband over copper plus a voice service]; another $3 or so for national backhaul, and another $7 or so for international [data] then I’ve got to run a call centre, billings, [customer] acquisitions. There’s just no money left for uncapped data at $75. Whereas at the $99 price point I’ve got a little more to play with.

Ah, we seem to be circling back to thihg copper broadband costs. Orcon is a supporter of the "Axe the Copper Tax campaign, which criticises the government's plan to over-rule the Commerce Commission and implement only modest copper broadband price cuts (the regulator wanted to slash Chorus' wholesale charges by up to 25%. This week John Key re-iterated his September 16 statement that his government will wait until the Commerce Commission's final determination on October 31).

NBR: NBR broadly supports the Axe the Copper Tax campaign, but it seems to me ISPs are between a rock and a hard place. I've been badgering you to say you’ll pass on 100% of the cuts, but then if you do you'll-

GM: -make no money

CK: -copper much cheaper, and that’s part of the government’s argument - that cheaper copper will retard fibre.

GM: Cheaper fibre would help get better penetration of into NZ households. But fibre also has to stand on its own feet by the value it brings. It's new, innovative products like video surveillance that will make fibre stand alone. That’s what we’ve got to do, not strangle copper.

There’s no way we should be keeping artificially high copper pricing to support a migration to fibre. It doesn’t make sense. Fibre’s got to stand on it own.

The CEO also name-checked video as a killer app and said he agreed with Vodafone's call for Chorus' cheapest wholesale UFB plans to offer double the speed for the same price - making fibre more attractive rather than relying on artificially pumping up the price of copper.

He also bemoaned that being down a right-of-way, and with the UFB not due to reach his neighbourhood until after 2015, "my house is never going to get fibre."

Chorus' $20 million free non-standard connections is set to run out at the end of 2015. The many homes down right-of-ways are among non-standard connections. And there's anohter complication: in an interview with NBR last month, Chorus boss Mark Ratcliffe told NBR people who live down a right-of-way or in a mulit-tenant dwelling can face a wait of up to three month as his company seek to get the permission of every owner involved. Chorus - which is rolling out around 70% of the UFB, is pushing ICT and Environment Minister Amy Adams to make the UFB a "designated service," which would allow it automatic access to ROWs and apartments.

Orcon paid Mr Dotcom told $35,000 to front the clip. He donated the fee to Starship

The giant German told NBR that Orcon was also throwing in a year's free uncapped fibre (Dotcom has a custom fibre install, courtesy of Telecom's Gen-i unit).

"It’s not about the money for me. It’s about changing the landscape in NZ," Mr Dotcom told NBR.

"Orcon is a good company to do that with. They are one of the smaller players in the market. They want to grow aggressively."

Capacity upgrade
NBR put it to him that while people want uncapped data, power users also worry that unlimited data will be shaped or throttled at times.

"Orcon have upgraded capacity. They had around 8Gbit/s of capacity, now they’ve upgraded that to 23Gbit/s," Mr Dotocm replied (Orcon later confirmed this Southern Cross Cable capacity upgrade. Asked about shaping or throttling, spokesman Quentin Reade told NBR, "We have a fair use policy – but to date, since we launched almost a year ago, we haven't kicked anyone off, or changed any service levels for people. People regularly use more than 1TB a month; some use much more.")

"And they told me once they reach a 75% utilisation threshold they will up the bandwidth," Mr Dotcom said. 

"I've been on Orcon of over a year now. They’re really making sure you don’t get too many hops and the latency is under control. It’s really smooth for me, and I'm a competitive gamer who can sense a difference of 20 milliseconds in the latency. So they have provided a really good experience."

READ ALSO: Orcon CEO thumbs nose at Sky TV, signs up for Netflix

ckeall@nbr.co.nz

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Comments and questions
5

I kind of doubt Orcon is spending "$7 or so for international [data]" per subscriber.
 
Latest figures put Orcon at 56,600 subscribers at the time of the Kordia sale: http://www.nbr.co.nz/article/kordia-sells-orcon-ck-138660
 
That'd put their international capacity spend at $400k/month, which would buy them 20gbps, or around 350kbps/user.
 
The top of the line copper product from Chorus (VDSL2) only offers a committed 96kbps/user, so purchasing international capacity above that would be a pretty poor idea, unless some significant proportion of your user base was on UFB.

I had an Orcon rep in Dunedin last month telling me happily that Orcon had just added 5Gbps capacity and would be adding 5Gbps more, so the 23Gbps figure seems accurate. We know the range of costs on Southern Cross is between $0.05/GB and $0.65/GB, so 30GB comes out to between $1.50 and $19.50. At 23Gbps purchase, Orcon is most likely in the $0.15/GB range, making 30GB = $4.50, not $7. With a $400K spend monthly, this equates to $17/Mbps per month, which is ballpark for the market at that volume.

It seems to me that Orcon's current UFB pricing is not predatory, but definitely loss-leading, with the expectation that margin on product will come through decreased unit price on higher bandwidth purchase, rather than increased retail price.

It's also disappointing to note that Orcon base their data cap decision purely on international usage. If the 30GB plan is there because of the $7 of international buy, there's an equivalent 210GB of national data. With more and more content being delivered from NZ-based Content Distribution Nodes, there would seem to be plenty of room for Orcon to move, at least for national delivery.

Hey there, Anonymous.

1.) Capacity on the Southern Cross Cable is not sold "per gigabyte", so none of those calcs are valid.

2.) In the North American market, per household traffic consumption has a median of 18.2GB and mean of 44.7GB. (See Sandvine Global Internet Phenomena Report 1H 2013) NZ isn't even close to that.

3.) If Orcon really needs 20+ gbps of international capacity to service ~ 60k customers, they're chasing the wrong end of the market (all the heavy users and none of the light users) and they're liable to end up real broke, real fast.

Orcon wants Chorus to take a hit, so Orcon can make more money? And data caps are "bad", except when Orcon does it. But all other companies should have no data caps?

Does this guy sleep straight in bed at night?

Greg makes me realise you don't have to be particularly bright to be a CEO.