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Govt may overturn 'very problematic' Chorus pricing decision, says Key

High-profile investor Aaron Bhatnagar says Prime Minister John Key is right to consider leglislation that would over-rule a draft Commerce Commission decision to slash would Chorus can charge for copper wire broadband.

The draft decision saw Chorus [NZX:CNU] plunge 14.41% or 49 cents to $2.90 – three cents below its December IPO price 12 months ago.

Yesterday, Mr Key said cheaper copper lines could threaten uptake of fibre under the government's $1.35 billion Ultrafast Broadband (UFB) rollout, 70% of which is being carried out by Chorus.

"I don't recall anyone voting for the Commerce Commission to deliver New Zealand superior infrastructure. It was John Key who was mandated by the public to deliver a step-change in New Zealand's infrastructure," Mr Bhatnagar told NBR ONLINE.

"From a public policy perspective, it is wrong for government organisations like the Commerce Commission to be delivering changes that are hugely at odds with the government's desire to deliver on fibre, and where the government itself it spending huge sums of taxpayer money to deliver outcomes.

"At the very least, the commission should seek some determinations from government ministers on taking into account how its operational framework works with mandated government flagship policies.

"This might require a law change. Mark Ratcliffe from Chorus is right that the government should bring forward the 2016 regulatory review, because there is no certainty in how the commission is operating."

Telecommunications Users' Association head Paul Brislen disagreed.

"I'm quite surprised to see the Prime Minister wading into the discussion," he told NBR.

"It was, after all, this government which introduced the new Telecommunications Act which includes the requirement that Chorus wholesale services be assessed on a cost basis rather than 'retail minus'.

"The draft Commerce Commission decision is just that - a draft - and the process from here is well laid out. To intervene at this point in the process is to usurp the role of the Commission and to sideline the views of the entire industry in favour of the views of one participant in the industry. Regardless of whether the $8.93 price point is acceptable to all parties, having the PM jump in at this point is not helpful."

Yesterday, Telecommunications Commissioner Stephen Gale told NBR it was not his statutory role to promote fibre uptake, but rather to monitor incentives around the uptake of new broadband technologies, which could also include technologies like VDSL that boost speed over copper lines.

"It will not have escaped the government's attention that the commission has now delivered outcomes that are significantly injurious to some of New Zealand's biggest companies in less than a 12-month period – Sky TV, Vector and Chorus twice," Mr  Bhatnagar says.

"This year alone, there have been market stampedes that have wiped out over half a billion dollars from these companies – about $150 million from Chorus in early May, about $150 million from Sky TV in mid-May, just under $200 million for Chorus from yesterday and around $150 million with Vector in late October."

This may be indicative of cultural issues at the ComCom that the government may wish to address, the investor says.

However, a UFB booster would note that if Mr Key's aim is to boost fibre uptake, then the commission's investigation into Sky TV's content deals, and whether they prevent new market entrants from gaining a critical mass of content, could benefit the new broadband technology. 

Dec 3: The Telecommunications Commissioner's draft decision on access to switchgear on the copper telecommunications network is "very problematic" and the government will not rule out legislating to get the outcome it wants, Prime Minister John Key says.

His comments came as shares in the copper network owner, Chorus, fell 14% to $2.91, three cents lower than its listing price when it was separated from Telecom in November last year as a fundamental part of reforms associated with the government's $1.35 billion subsidy for an ultra-fast broadband network.

Telecommunications Commissioner Stephen Gale's decision is good for consumers, at least short term, because it requires lower than expected prices for access to the existing telecommunications network, which is based on copper wire.

But it threatens to undermine the uptake of UFB by making copper more competitively priced than the new fibre-based network.

Copper-based services are unable to deliver broadband speeds as high as through the UFB fibre network, but technology improvements make it very fast and lower prices could keep it competitive with UFB for longer.

The UFB network is a flagship government policy, but requires uptake of UFB to ensure rollout of the network continues to spread, as revenues from uptake will be funnelled back into further expanding the network.

If consumers stay with copper-based services for longer, the UFB rollout risks stalling for lack of demand.

Mr Key pointed out at his post-Cabinet press conference that an earlier draft decision from Mr Gale's predecessor, Ross Patterson, on pricing for the unbundled local loop had been substantially modified after submissions.

Both Chorus and Telecommunications Minister Amy Adams had indicated serious concerns about the draft decision on unbundled bitstream access (UBA) before Mr Key's comments, with Chorus warning it could cut earnings by up to $160 million a year.

With reporting by BusinessDesk

Comments and questions

One reason that there will be low uptake of ufb is that ordinary consumers have no need or access to the amount of data it would provide: copper is fine. Perhaps the Government should regulate Sky and internet content providers, and free up the overseas cables, all effective monopolies and doing very well thankyou.- if there was true freedom in what we can watch on broadband (let's face it, ufb will provide entertainment and nothing much else for the majority of customers) there would be a natural demand for ufb and Chorus would not feel so threatened. It is a better look to do this than start legislating protected niches for monopolies in the way Muldoon ran the country.

This is crazy. How much extra cash has NZ borrowed to build this lemon? UFB is only marginally faster than a well optimised DSL2+ connection nothing more, nothing less.

We've all been sold the lie that we desperately need this and when push comes to shove most of us realise we don't actually want it as what we've got is perfectly fine for typical day-to-day online activities.

What is missing here are services that will make use of fibre. What are these, and do any exist? These questions should have been asked up-front before those idiots in parliament committed a very large amount of taxpayer-paid debt to this white elephant.

In a nutshell, driving demand by price is shortsighted and will scuttle the economics underpinning fibre. Wouldn't a more realistic play be stimulating demand with HD video and other services that won't work over copper?

The average consumer, or small business, could easily chew through much more data, and benefit from much greater speed.

Most of them just don't know it.

Fibre boosters have to stop talking holographic telemedicine and start talking Apple iCloud and Google Apps.

Agree that tightly held content and international bandwidth are issues.

Fibre does not fix the main issue with those services, which is international bandwidth. I find that a NZ mirror is often around 1.5MB/s (ADSL2+, ~12Mb/s) compared to about 300kB/s for pretty much anywhere overseas. VDSL2 would be even faster for within NZ, but like fibre probably wouldn't fix the international data problem. One reason I'm moving to an ISP that doesn't do traffic shaping.

Pity Pacific Fibre (I think it was them - new submarine cable) fell through.

Korean academics are struggling to find any local economic benefit from use of their heavily government-subsidised fibre network. Recent research suggests that its sole positive economic contribution has been as a 'reference site' to demonstrate the use of all the appliances (smart phones, computers tablets etc ) that run on it and the Korean made network equipment used in it it so that Korean manufacturers can sell more of their manufactures offshore. As for unlimited bandwidth - the Korean regulators are now trying to work out how to stop some groups using it as they have become so addicted to gaming that it is now considered a public health hazard .

How much of Chorus does Huawei own?

Unlike Telecom, Chorus remains subject to Kiwishare-style restrictions on foreign ownership.

The organisation that does have a growing shareholding in Chorus is the NZ government.

The Crown is putting $1.35 billion toward the Ultrafast Broadband (UFB) rollout.

Of that $1.35b, $929 million is going to Chorus - half in the form of an interest-free loan (repayable between 2025 and 2036) and half in the form of the Crown purchasing non-voting shares in Chorus (which will be sold at the end of the 10-year project).

Of course, it's tricky (or very problematic, as it were) to be both a shareholder in a company and publicly mulling whether you'll overturn its regulator.

None - though they may buy some of their equipment. That's like saying HP owns you.

I jumped onto my brother in laws ADSL on Sunday and OMG - so slow to download anything. I'll stick to my fibre thanks.

And yes - multimedia is the bandwidth hog. Don't think I've watched live TV in months.

Odd. I watch Netflix all the time on my adsl. It copes absolutely fine. I can even have two separate streams running at the same time no problems. What on earth would I need fibre for?

Ditto. Netflix, BBC iPlayer, ABC, etc, with no issues at all via a transparent DNS tunnel.

9mb/s in my house build in 1945 ... which I doubt has been rewired in 20-30 years.

I, as a tech-savy consumer, have no idea what more I would need for my life or my small internet business.

Copper data services (and, indeed, 3/4g) are highly variable. What works for one may not work for their neighbour, regardless of ISP or data plan. Fibre will deliver a consistent last-mile experience for all users - indeed, an identical experience. With fibre, the variability will be down to a competitive market for ISP services (their network quality, upstream connectivity, customer support) and to a lesser degree the quality of one's in-home distribution.

The main reason for speed varying is in-home wiring. Whether it's copper to your house or fibre won't change that.

And if the content you want to access is hosted offshore, then moving it at the speed of light when it gets to NZ will not compensate for latency and jitter that arises from having to move it half way around the world first.

It would be absolutely outrageous if the government overturned the Commission's price setting.

By racheting up prices for copper services the govt would effectively be subsidising Chorus' roll-out of fibre by making all telecoms customers pay more. Why not just admit that $1.5b was never enough for fibre to the home. If need be give Chorus another hand-out, but don't distort the entire telecoms industry and disadvantage low-income consumers just to make sure that the govt's flagship policy is guaranteed to succeed.

"If need be give Chorus more tax payers money" but "don't distort the market". Come on, get with it. Giving the money is a market distortion. The problem is NZ is such a small market no investors will fund the web surfing lifestyle so many Kiwis want.

The govt may have to fund this, and if they do, pray what is the difference with regulating the price Chorus can charge to make area listing return on capital. No difference it still amounts to a distortion that the govt deems is in the interest of the majority of the country, just like modern hospitals.

Your example doesn't work. Hospitals are funded through general taxation, not by adding a surcharge to every GP visit - which is the equivalent to what would be happening here if the govt artificially increased the pricing for UBA. If the govt wants UFB, fine. But it's one thing to directly fund the infrastructure, and another to require all users of a completely different service to pay higher prices in order to subsidise the govt's favoured provider.

I thought National were all about letting the market decide. This nonsense about 'the consumer doesn't know what it needs' is ridiculous. I also find Chris' comment above condescending and I'm surprised he is taking the 'big brother knows what is better for you' side.

We run the risk of destroying NZ commercial credibility if the govt overturns the recommendation, especially as noted above. The govt, through Crown Fibre Holdings, has an equity interest in Chorus and other LFCs.

#7 comment is not a little ironic when it is the Commerce Commission interfering with a commercial pricing decision of a public company and wiping off millions of shareholder wealth with its decision. Hope the last investor leaving the country turns off the lights.

the government gets involved and things break. Oh sure we have cheaper this and cheaper that, but none of it really works properly.

Its cheaper but then all those staff that got laid off can't afford it now. This is the real guts of the situation. Regulation, more competition and faster plus shinier (and god knows we don't want to fall behind on some dodgy OECD benchmark designed to line the pockets of Cisco).

The reality once the last decades worth of political chest puffery is removed from the picture, what is left behind is just sad: A broken telco environment and more unemployment, less wealth creation. Funnily enough the same applies to every industry those walkshort wearing clowns have touched.

Yeah good on ya commerce commission

You want to bring back the good old days of the 1990s, when Telecom could charge more for less? Remember how good dialup was? Remember how slow the ADSL 1 rollout was?

Letting one company (Chorus) have both the copper network and a majority of the fibre network was a real duhh-eeee decision. This was always going to end in tears and now it has started.

But don't worry, Key is reprising Muldoon - he'll do what he wants until voters show him the door. So expect him to do whatever it takes to "fix" his perceived UFB problem. Content and international fibre - not a chance Key will address these issues. Key will not see a problem.

National has never been about markets - most Nats would not know a market if it hit them on the head. National is about protecting monopoly niches, as the first commenter noted. And in NZ, monopoly niches, or sometimes oligopoly niches, is what mostly passes for NZ's "market" economy.

I am not sure what Kiwis did to get stuck with such a brain-dead bunch of politicians the last few years. Truly sad.

I know exactly what they did, they listened to the journalists, pundits and the assorted media hacks.

Chorus won a competitive tender to get the contract. Far from being "given" it.
Now the goalposts are being shifted and those investors who risked their money to fund the build are being shafted. If the rewards are as lucrative as some of the incoming comments suggest why is the competition not building their own networks? Vodafone, for example, has the critical mass yet it elects to buy out the competition, Telstra.

National's 10 step plan for economic reform:

1. Take a minister's "Think Big" plan for fibre.
2. Add lots of taxpayer money.
3. Contract the person who owns the copper to build the fibre, so that copper and fibre competition can't happen.
4. Claim this is good because you got a really good price in your bid.
5. Insert UCLL averaging, so that UCLL competition is no longer cost effective.
6. Wait until incumbent comes begging for more money.
7. Take money from consumers (who are also taxpayers).
8. Neuter independent regulator on basis that not giving effect to government policy.
9. ???
10. Catch up to Australia.

Thanks for your comments, John. Hopefully, it will stop the haemorrhaging as I had been taking a bath.

Maybe John Key has discovered he has some Chorus shares.

He might not have any Chorus shares. But, more ominously, the Bhatnagar family, a massive owner of the Nat Party, clearly do.
Chris K, you put that in your intro and none of your readers thus far seems to have any concerns?
If Key doesn't interfere this could be the job creation strategy-by-accident he has been ducking and diving on.
Legislate against incompetence (leaky homes, etc) and don't mess with the market guardians who are there to protect us.

So the government may change the law to get the outcome they want - so has Jonkey just woken up and figured out he is in charge. Better late than never!
Now, John, do the same thing with the RMA!

Governments are elected to govern for the greater good of the nation. This time I agree with you, John. Start to govern!

Fibre is the future. Pricing and the content available to the masses will determine the success or not. If copper was too cheap the UFB is dead for 20 years.

Outside of commercial entities, the majority of UFB usage will go in multi-media volume (translate - illegal movie & music downloads). While there may be a business case for large organisations, the only way the infrastructure would go ahead would be with mass market uptake by retail consumers.

Also, the cloud computing environment just encourages a life-by-rent. Instead of owning software you are forced to pay by subscription every month. As with mega-upload, you still have no security around ownership and access to content.

It's still better than spending $53million on a bloody 'white-water centre' for Manakau...

I think that we forget what the legislation says here. This is the ONLY answer the commission could have come up with. It is written in legislation how they are to determine their initial price. So don't blame the commission, John, blame the law makers - oh, that's you dude.

Furthermore, the commission will likely overturn its own decision because that's what the consultation process is all about. It allows for stakeholders to have a say and for the commission to consider other factors in determining a final price.

The real problem here is the legislation, not the commission.

The real problem here is that a bunch of short-sighted idiots fell for vendor hype around fibre. Remember how NZ was going to be in the stone age if it didnt get fibre? No one listened to those asking the question who stood to gain the most from fibre being pushed.

Funnily enough, no one discusses any real and tangible benefits coming from UFB because there are so very few.

In the grand scheme of things our education system and hospitals could have delivered far better returns on the several truck loads of borrowed cash that has been plowed into this disaster.

You may get cheaper and faster internet which might make your Trade Me transactions happen a few seconds quicker, but don't complain about your taxes at the end of the day. Faster Trade Me has to be paid for by you and I.

Fibre vs Copper? Fibre all all the way, no argument. Same argument on gravel vs sealed roads.

Nope, it's more like having a gravel vs sealed DRIVEWAY, when you've got to drive from Kaitaia to Bluff.

UFB will give you faster access speeds, but ALL international traffic will face the same latency problem. When accessing international content (web browsing, video conferencing) it won't matter whether you are on ADSL2+ or UFB. You'll only notice a difference if you're dowloading p2p files or accessing cached content in NZ.

Making copper less profitable than fibre is bound to drive UFB uptake in Chorus UFB areas :-)

Not good for the other LFCs, though :-(

So let's destroy Chorus and then wonder why our capital markets are the pits, with less than a quarter of the listings of the ASX by population. That's really smart. We want more investors, so we punish those who do invest.

Why do we want to hear from a high-profile investor with a vested interest?? He wants to own monopolies and screw as much money as possible from consumers.

Consumers are the angels and investors are the devil, right?
Why should consumers not pay a fair price for what others risk their hard-earned money to build?

Here's an interesting concept.

Let the Commerce Commission do its job without political interference. If they set a final price the government doesn't like then the government can add a tax to copper-based broadband to offset the potential impact on UFB uptake.

That way the government is not seen as lining Chorus shareholders' pockets at the expense of New Zealanders. It can then use the proceeds of the tax to fund UFB, reducing the indirect burden on taxpayers. When the government is happy with the level of UFB uptake it can remove the tax.

Bottom line, though, is the government should not influence the Commerce Commission to deliver favourable outcomes on the government's own investments. Show some transparency and call a tax what it is.

Key should not interfere with the decision making of the Commerce Commission and stay out of trying to influence the market. Who would give credence to the views of a share punter like Bhatnagar ?
If anyone wants to encourage an uptake of fibre make the price competitive to the real value of copper. After all the grafters who are setting up have to make their prices attractive for a new product a draw.

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