Vodafone slams 'corporate welfare' for Chorus

Economic Development Minister Steven Joyce may have successfully leaned on Vodafone not to join Orcon and CallPlus in the Coalition for Fair Internet Pricing.

But that hasn't stopped the company unloading on the government's plan to over-ride the Commerce Commission's recommendation to cut copper pricing by up to 25%.

Vodafone's submission to the government's review of the Telecommunications Act - not yet made public but obtained by NBR ONLINE - gives it to the Crown with both barrels. 

"The Government’s proposal set out in the discussion document Review of the Telecommunications Act 2001, means taking money from New Zealand consumers and paying it to Chorus shareholders. This intervention is quite simply a stealth copper tax on all consumers with no justification," the submission begins.

It continues:

"The government must stop this ill-conceived intervention to raise copper prices above cost. There is no evidence to suggest the UFB objectives are at risk. This proposal acts on a whim to deliver unnecessary corporate welfare to Chorus, at the expense of all consumers who will pay more for telecommunications services, including those consumers who gain nothing from UFB for a substantial period, if at all."

Vodafone also submitted a study, by Network Strategies, which says "In the Review of the Telecommunications Act the Government proposes to set wholesale copper access prices to be approximately equivalent to fibre prices as a means of supporting the economics of the UFB deployment."

Network Strategies maintains the Crown's three proposals for wholesale copper broadband pricing (all more modest than the Commerce Commission's cuts) are higher than they should be under the Telecommunications Act's an efficient forward-looking long-run cost (LRIC) principal, which says fibre is the modern equivalent asset of fibre, and that UFB prices should be an accurate reflection of copper replacement/fibre rollout costs.

Vodafone says it's hard to tell the financial situation, given some of the material around the UFB is redacted, but that"[any] funding issues should be addressed within the remit of the Crown/Chorus contract, rather than increasing the price of copper broadband.

Like Tuanz CEO Paul Brislen, Vodafone says Chorus knew the commercial UFB contract it was getting into, and that a move from "retail minus" to keener "cost plus" pricing was on the way after the three years it was given to keep its house in order (read Mr Brislen's excellent user-friendly walkthrough of the jargon-filled UBA/UCLL world of copper price regulation and Chorus' contract here).

Vodafone say Chorus loses revenue per customer as people switch from copper to fibre, and lacks migration targets beyond the 20% by 2020 mandated in its contract with the government.

ABOVE: At 2pm today, Chorus and the "copper" tax were the subject of David Cunliffe's first Parliamentary clash with John Key since becoming leader. The question time exchange was lively, with Mr Cunliffe managing to extract a possible source the PM's theory Chorus could go broke - a phone call from Chorus chairwoman Sue Sheldon on the day the Commerce Commission released its draft pricing. During the exchange, Key called the Coalition for Fair Internet Pricing's Covec report fundamentally flawed. Later, new Labour deputy leader David Parker linked the Chorus-friendly moves to limit copper line price decreases to the government's $30 million power price subsidy to Tiwai Point smelter owner Rio Tinto, claiming it showed a pattern of crony capitalism. 

The government is investing $926 million in Chorus under the terms of Chorus' UFB contract (half in the form of non-voting shares, half in interest-free debt).

Vodafone says the Crown is conflicted.

All three options presented will damage competition presented by the government to step in and set wholesale copper pricing itself (rather than leave it to the independent Commerce Commission), will "raise prices for consumers, and do nothing to address issues that are equally important for securing a fibre future. The proposals amount to bad policy and will create more uncertainty, not less," Vodafone says.

Building on earlier comments by Vodafone CEO Russell Stanners that the government's fibre rollout lacks ambition, the submission calls on the Crown to take a more positive approach.

Make fibre more atrractive, not copper more expensive
"If UFB is to be successful and transformational the Government must require all LFCs to increase the entry level service speed to 100/50Mbps at today’s 30/10Mbps price. Make fibre a compelling choice. Don’t make other competing technologies, in this case copper, more expensive," it says.

VDSL retarding fibre
Vodafone also says Chorus is pushing its VDSL wholesale product hard (VDSL being the fastest form of copper. It can achieve high speeds - but because copper bandwdith degrades rapidly with distance, only for those lucky enough to live close enough to the nearest phone exchange or cabinet). 

VDSL is billed as a stepping stone for those who don't yet have fibre in their neighbourhood.

But Vodafone maintains VDSL's market success is retarding fibre uptake. It proposes a solution:  lifting the cheapest fibre plans from 30Mbit/s to 100Mbit/s download speed. The 30 Mbit/s fibre plans are an "ugly duckling" not competitive with similar speed VDSL plans. (NBR thinks the cheapest fibre plans have pretty unattractive data caps, too.)

"It is clear from the rapid uptake of VDSL that high usage copper customers are being targeted , not only those who have long potential waits for UFB. Given the attractive returns on offer for Chorus from VDSL, the life of the copper network will be significantly prolonged at the expense of accelerating fibre uptake," Vodafone says.

If the cheapest fibre plans are made more attractive than VDSL, the government's whole UFB vision is threatened, Vodafone says.

Vodafone's entry will speed UFB adoption - Chorus
So far UFB uptake has been sluggish, with only 3% or just under 10,000 of 300,000 customers within reach of fibre choosing to sign up to a plan.

Yesterday, in an interview with NBR, Chorus CEO Mark Ratcliffe said uptake was in line with projections, and the uptake of other new technologies.

Vodafone, which holds around 29% ISP marketshare (including customers of the told TelstraClear) is the only major ISP yet to release a UFB plan.

Mr Ratcliffe said Vodafone's not entering the market was a factor in the level of uptake. He said once Vodafone entered the market, going head-to-head with Telecom (which holds around 50%) market share, the pace of UFB adoption would pick up.

Regardless, the Chorus CEO expects it will be 2020 before 50% of households are on fibre.

Chorus made part of its own submission on the Telco Act review public today, wheeliing out a surprising ally - it's old Telecom-era sparring partner Dr Ross Patterson. The former Telecommunications Commissioner turned gun-for-hire wrote a report that forms Chorus' submission. It finds the current regulatory framework isn't fit for purpose and undermines the government's vision to switch people from the old copper lines and on to the under-construction fibre network.  

The Commerce Commission will make its final pricing recommendation on October 31. On Monday, John Key said if the regulator's final pricing was in line with his the government's discussion paper, "we may well accept that."

In his private submission to the Telco Act review, 2degrees founder Tex Edwards said the Commerce Commission should be assigned to assess the true cost of the UFB (which Chorus has so far estimated will cost $300 million more than anticipated). Vodafone also picks up on this theme, saying the government needs to "open the books."

Chorus shares [NZX:CNU] were down 1.03% to $2.90 in midday trading.

Read more of Mr Ratcliffe's comments in this Friday's print edition of NBR.

RAW DATA: Vodafone's submission (PDF)

RAW DATA: Network Strategies Report for Vodafone