A Boost boost for Chorus or bust?

The political football known as Chorus has had a tough time of it lately.

Shares are down 46% since it was spun off from Telecom. Its once fat dividends have been suspended for an unknown period of time; and long-suffering investors face the fear their holdings will be diluted by new shares issued at a discount.

Chorus’ annus horribilis was capped off this week by the announcement of its annual result: profit was down 14% to $148 million in the year ended June 30, meeting market expectations, as sales edged up to $1.058 billion from $1.057 billion.

Ebidta fell 2% to $649 million.

Is there worse to come?
One big hope for Chorus shareholders has been that National will win a clean majority on September 20 – giving more wriggle room to reverse the Commerce Commission decision to cut Chorus wholesale copper pricing by around 23% from December 1 (a move Chorus says will blow a $1 billion hole in its earnings up to 2019).

Make that was a big hope.

During his Ask Me Anything session with NBR readers (www.nbr.co.nz/ask-steven-joyce) earlier this month, I asked Economic Development Minister Steven Joyce, “Last year John Key proposed using legislation to over-rule the Commerce Commission’s determination to slash Chorus’ wholesale pricing. This plan got derailed when ACT, UnitedFuture, the Maori Party and others refused to get onboard. If National gets a clean majority on September 20, is it an option you would revisit?”

Mr Joyce replied, “We have no plans to revisit that post-election.”

Chorus has two appeals on the go against the Commerce Commission’s price-chopping decision: one is in the Court of Appeal; the other is the Commission’s Final Pricing Principles (FPP) review, which won’t wrap up until next April. The court action could be optimistic (Chorus having already lost a High Court appeal). The FPP is up in the air.

A welcome Boost?
Chorus has forecast another fall in ebitda in FY2015, down to $590 million to $605 million.

That forecast assumes the Commerce Commission-mandated cuts go through and, on the positive side of the ledger, that Chorus’ new Boost plans gain some degree of traction in the market.

How much traction? In an interview with NBR earlier this week, Chorus CEO Mark Ratcliffe wouldn’t say.

The Boost copper broadband plans, scheduled to launch December 1, are on the face of things a cunning ploy for Chorus.

These new plans, set to launch December 1, would not be regulated and (after an introductory period) would be a little more expensive.

Mr Ratcliffe says Boost plans will offer guaranteed performance for those streaming high definition video from a service like Netflix, Lightbox, Quickflix or Youtube.

He sees it as a win for Chorus because the new plans will be “commercial,” not subject to Commerce Commission regulation. And being $5+ more expensive a month they will help to plug the $1b hole that will be blown in Chorus’ ebitda between December 1 this year and 2019.

He says it’s also a win for retail ISPs such as Spark, because they can use it as the basis of new premium broadband services.

And he says it’s a win for customers because they will get guaranteed performance in the fast-growing area of video streaming, compared to the best-effort benchmark for regulated copper broadband today.

It all sounds win-win-win

The problem is that retail ISPs don’t share Mr Ratcliffe’s rosy view of the new commercial service.

“We’ve been clear that we don’t see any need for the Boost product at this point,” Spark CEO Simon Moutter tells NBR – and bear in mind Spark holds 50% of the retail ISP market.

Mr Ratcliffe told NBR that might be true for watching a streamed movie or TV show on a laptop or tablet but not so much if you prefer to stream broadband-delivered content to a big screen, high definition television. Or if two or more people in a household want to stream video at once.

But Mr Moutter brushed off that argument when NBR relayed it to him.

The Spark CEO says his company has been running trials for its Lightbox video streaming service which have confirmed “the vast majority of customers could get an HD level of performance from their existing broadband.”

Family feud
In an ideal world for Chorus shareholders, the Spark and Chorus bosses would be diplomatically reconciling their differences over Boost.

The reality is that they are moving further apart.

The Commerce Commission is investigating a Spark complaint that Chorus plans to make Boost more attractive by degrading the performance of its regulated copper plans.

The commission is also assessing whether the Boost plans are in fact “new” enough to escape its regulatory clutches.

This week, Mr Ratcliffe told NBR Chorus is in talks with other ISPs about adopting Boost plans but wouldn’t say who. The possibilities are limited. CallPlus, No 3 in the ISP market, is openly hostile to the new plans.

A number of analysts are hopeful Chorus will resume dividends. First NZ Capital is picking by the 2016 financial year.

But it would be a brave investor who makes a punt on that score.

The known unknowns, as Donald Rumsfeld might call them, keep growing.

This week, on top of everything else, Chorus said its $28 million fund for free non-standard Ultrafast Broadband (UFB) connections would expire before the rollout is complete (non-standard connections include people who live in multidwelling units, or down right-of-ways). Talks with Crown Fibre Holdings about what will happen when the money runs out are still going. But NBR suspects the outcome will be the same as the first time the issue came up: The government will lean on Chorus to tip more of its own money into the pot.

ckeall@nbr.co.nz

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