Chorus pricing decision could cost us $60m a year, Spark says

Spark says it faces an extra $60 million in annual costs following a draft Commerce Commission review of Chorus pricing, released this morning.

The regulator has proposed Chorus' wholesale price for the average copper line setup be $38.39 per month. The commission was reviewing its own decision to slash pricing from $44.00 to $34.44, which Chorus said would wipe $1 billion from Chorus' ebit between now and 2019. The new sums were based on work by French consultancy Tera, which the commission asked to estimate the cost of building Chorus' copper network today, and maintain it. Monthly costs were then extrapolated.

Almost immediately, Chorus revised its estimated ebitda hit from the regulated copper line price reduction from an $170 million a year to $80 million.

Chorus investors cheered today's draft decision, pushing its shares [NZX:CNU] up more than 16%. Spark [NZX:SPK] shares dipped close to 3%.

Spark, which holds around 50% of the retail market, says it is now undertaking an urgent review of all broadband and fixed voice customer pricing.

The implication is it could go up. 

While Chorus has been planning for the worst — suspending dividends, extending debt limits, laying off staff and cutting costs — it seems Spark had been banking on the best-case scenario of the commission's review keeping the $10 cut.

The regulator has now opened 30 days of industry consultation. Its final ruling will be made in April. Cynics will see political gamesmanship in various players' threats about price rises in the meantime.

“Today’s announcement is unexpected and we are now facing costs approximately $60 million a year higher than we previously anticipated. These higher costs will affect all our fixed services, not just broadband services,” Spark managing director Simon Moutter says.

(Coincidentally, $60 million is also the cost Spark says will be imposed on it under the government's plan to extend the Telecommunications Service Obligation industry levy for three years to fund a $100 million top up for the Rural Broadband Initiative.)

“For the past two years, we have been anticipating a $10 reduction in broadband costs, which has been reflected in our current customer pricing. But what we didn’t expect was a $5 increase in the cost for a residential or business line – for both broadband and standalone voice services. All of this comes on top of recently implemented increases in Chorus connection charges for broadband services," Mr Moutter says.

Mr Moutter says intense market competition means the anticipated reduction in wholesale broadband charges (signalled by the Commerce Commission as far back as December 2012), has already flowed through into retail broadband prices.

“For instance, what you get in our basic $75 broadband plus home phone plan today would have cost you $105 three years ago. In that time, our wholesale costs have barely moved until the new charges came into effect yesterday.”

“Given today’s decision, we feel we have no choice but to undertake an urgent review of our current pricing across both voice and broadband plans.”

Mr Moutter says well as the surprise increase in line charges, there is now considerable uncertainty about when these new charges will take effect – with the possibility of backdating any increase to 1 December 2014.  “This means we will need to take a conservative view now to hedge against any financial exposure from the final decision.”

Mr Moutter says today’s announcement highlights the challenges as retail broadband providers fiercely compete to give consumers the best possible deals, yet face a continually shifting outlook in terms of their underlying costs.

“This is not a criticism of the Commerce Commission which, as the regulator, is required to follow due process – or of the process itself which is inevitably complex given the transition from the previous regulatory regime.

“Over the last two years, we have consistently called for more certainty to ensure retailers can plan appropriately and deliver customers the best competitive deals. We led an initiative seeking an agreed industry solution for wholesale broadband charges and we also welcomed the government’s attempt to provide this certainty through legislation.

“Neither came to pass, meaning we – and the rest of the industry – were left with only the initial schedule of charges set out by the commission in 2012 and 2013 to guide our budgeting and retail pricing.  These initial charges were finalised by the commission in November 2013, upheld by the High Court in April 2014 and by the Court of Appeal in September 2014.  They have been anticipated by Spark and other providers in our existing customer pricing.” 

Not all bad for Spark
However, there is a twist. "December 1 wasn't just the end of price relief for Chorus," an industry insider notes to NBR.

"Spark is now free to unbundle. So that business case just got a lot stronger. If Moutter was right that they could get ports for $7, then who knows?"

Unbundling would involve Spark moving its own gear into Chorus exchanges, in the same manner that ISPs used to invest in unbundling to when Chorus and Telecom were one, network-owning company.

"Maybe they just need to run really hard on UFB," the insider adds.

Vodafone: price drop already factored in
Vodafone head of external relations Craig Jones echoes Spark's sentiment

"Vodafone’s broadband pricing has already factored in the drop in copper pricing from 1 December," he says.

"The commission’s proposed pricing will increase the costs faced by our business. It also unfairly penalises the significant investment Vodafone has made in LLU [local loop unbundling] infrastructure  – building out its own fixed network across New Zealand."

The company, which holds around 32% of the retail ISP market, is still working through the implications of the commission's decision, he says.

Bad, bad, bad
CallPlus Group chief executive Mark Callander is blunter.

The pricing decision is "Bad for consumers, bad for competition and a big win for Chorus," he tells NBR.

CallPlus, which includes Slingshot, Orcon and Flip, is New Zealand's third largest retail ISP with nearly 13% of the market.

“Companies such as ours have spent millions unbundling. Unbundling has bought price reductions and innovation to Kiwis – and ultimately driven down broadband costs across the country. Today’s announcement is a massive kick in the guts for unbundlers," Mr Callander says.

“If today’s price remains, it will penalise competitors who have invested in their own equipment to control broadband services and provide innovation as a result.”

CallPlus is still weighing its option, the chief executive says.

Commission has caused uncertainty — InternetNZ
Meanwhile InternetNZ say's it's "displeased" that today’s announcement of a draft final pricing principle for copper broadband "hasn’t provided the certainty the industry needs."

InternetNZ chief executive Jordan Carter says that what the industry most needed now is certainty over the pricing and "with the commission’s refusal to make a position clear on backdating we have not got that.

“We’ve had a legal opinion that suggests backdating should not be put in place. We don’t understand why the Commerce Commission didn’t take the opportunity to provide certainty when that is what every part of the industry has called out for," Mr Carter says.

“What the commission has done is release a stack of documentation and asked organisations to digest a lot and make comment in a very short span of time. We’re grateful that the commission says that it will consider requests for extensions and we hope that isn’t an idle offer.

“From our perspective, it’s important that we get this process right, not rushed."

InternetNZ is also worried about the disincentive to unbundling that the latest figures provide, the non-profit says. Unbundling (an ISP putting its own switches inside a Chorus or Spark exchange) is important to providing competition in the industry, most broadband users are still using copper. This reduces competition in that space, InternetNZ says.

Price reductions could be reversed — Tuanz
New Telecommunications Users Association chief executive Craig Young echoes InternetNZ's themes, saying the uncertainty for broadband users is disappointing.

"The Commerce Commission draft decision on wholesale copper charges this morning has introduced new uncertainty for users of broadband services by proposing a $4 increase from their interim decision.  Users have already seen the benefit of lower prices flowing through as a result of this process and improved competition. Tuanz expected that yesterday’s implementation of the interim prices would further reduce prices. This may now be reversed in April next year when the final price applies," Mr Young says.

"Tuanz is also concerned that the commission has chosen not to make a formal statement on backdating at this point until it releases a discussion paper on the issue."

Meanwhile, NBR can't help but think the ultimate answer will be faster UFB fibre update, leaving the copper pricing mess behind (read 10% of those within reach now connecting to UFB fibre).