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Telcos are waging a public relations war on Ultrafast Broadband. Reading between the lines of their public statements, they don’t like the regulated market model.

This was set-up over a decade ago by John Key’s first government. The government restructured telecommunications. It tilted the playing field in favour of customers. New Zealand businesses and consumers got a great deal.

Regulated separation

Reforms separated the market into two parts. Regulated fibre companies would build, own and operate the UFB network. They are regional monopolies. They can only sell wholesale services.

Retail service providers can sell broadband without geographic boundaries. RSPs all buy wholesale services on identical terms.

This model promotes competition. No single player can dominate in the way companies could before the restructure.

Chorus, Northpower, Enable and UFF are the fibre companies. There are 90 retail service providers. The biggest and best known are Spark, Vodafone, Vocus, Trustpower and 2degrees.

Consumers are happy with how the market operates. At least those in areas that can get fibre are. The fact that people in areas without fibre are grumpy about it speaks volumes about the model’s success.

Best broadband

Thanks to UFB New Zealand has one of the best and most affordable broadband networks in the world.

It is great for consumers. It is less wonderful for big RSPs. The biggest ones are not happy.

There are two main reasons they don’t like the UFB model.

First, from their point of view, separation does too good a job of promoting competition. RSPs fail to compete on anything other than price. They discount broadband to the point where, as Vodafone CEO Jason Paris says; “They compete away all the margins”.

Thin margins

Retail broadband margins are wafer thin.

A consumer might pay $80 to $100 or so each month for a fibre broadband account. Roughly half of that goes to the wholesale fibre company. RSPs have overheads and costs. The margin is often less than 10 percent of the monthly fee. It can be lower, some only make five percent.

They get that money 12 times a year. Yet regulated UFB is not as lucrative as the old ways of selling telecommunications.

This explains why Spark and Vodafone are keen on fixed wireless broadband. It’s an inferior product, but they get to keep a larger slice of the cake.

The second reason the bigger telcos don’t like the UFB model is they are not in control of their own destiny. This bothers them. They have few options, little room to manoeuvre.

Equivalence

Another, less obvious grievance is the UFB idea known as equivalence.

A supermarket chain like Countdown pays less for products than the wholesale price paid by a corner dairy. They get economies of scale. Countdown buys tins of baked beans from a wholesaler at a lower price than dairies pay.

Equivalence means the largest telco pays the same as the smallest RSP for a customer hook-up.

There are economies of scale when it comes to support, back-end services and marketing. Yet the aristocratic telcos resent paying the same price as the peasant RSPs.

Phoney war

All these aspects of the UFB model come into play as telcos wage a phoney war. It is a war that is being fought on a few fronts.

Last month there was fuss from big telcos about something known as the wall of bad debt. This sounds like something from the Pilgrim’s Progress.

Spark, Vodafone and 2degrees have been the most vocal. They say a recession is coming and they face large unpaid broadband bills.

They want Chorus, it’s always Chorus 1, to share the cost.

This is an unusual argument on two counts. Wholesalers don’t shoulder the risks of their retailers in other sectors.

What’s more, the debt risk facing the large RSPs is of their own making. When lockdown began the telcos said they would not cut off customers for non-payment.

Decent

It was a good and decent thing to do. Or at least it is a good and decent thing to do with your own money.

It’s not such a good and decent thing to be generous, then turn around and ask the fibre companies to pay half. It would be fine if they had gone to the fibre companies first and agreed something along these lines. But they didn’t.

This doesn’t mean their argument is unjustified. They have a case. It is not as clear cut as they argue.

It is not as if fibre companies don’t face their own post-lockdown financial risks.

First they had to keep contractors ticking over when there wasn’t much work. What’s more, they face their own potential wall of bad debt if RSPs go bust in the looming recession. Having an RSP fail to pay would be far more serious than an individual consumer missing a payment.

Moral hazard

There is a moral hazard aspect to the wall of bad debt. If telcos get wholesalers to carry half of the risk, they have an incentive to take more risks.

Companies have a tendency to be reckless when protected from consequences. Among other things, they might not chase bad debts as hard if they know they face half the loss. They might be less fussy about who they give credit to.

It doesn’t help Chorus’ case that it is now enjoying the financial light at the end of the UFB-build tunnel.

That said, Chorus agreed to pay $2 million towards the bad debts. In round numbers that’s about half the cost if 7000 New Zealanders fail to pay for six months of broadband. Around one million New Zealanders connect to the UFB. So if seven percent default on payment, Chorus pays RSPs half the cost.

Telcos don’t think that’s enough. Remember here that Chorus has no legal obligation to pay anything.

Minor regulatory risk

There is a small danger here to the idea of regulated separation. If the fortunes of wholesale fibre companies depend on RSP performance, they could play favourites. A bigger danger comes from another battle: fibre unbundling.

To understand how fibre unbundling threatens UFB, let’s go back to the original plan. The government decided fibre companies would sell layer 2 services. It left open an option for layer 1 services at a later date.

In this context layer 1 is an unbundled service.

That later date is now. Or, to be more precise, it was January this year.

Layers

You don’t need to know the technical nuance about layer 1 and layer 2 to understand what is at stake. Here’s the simple version.

In effect layer 2 means fibre companies sell RSPs a complete service from a home or office to a network node. This includes the network connection hardware at each end of the link. Fibre companies wrap all the parts needed to do this into a bundle and sell it as a whole.

If they sold layer one, RSPs would get a fibre connecting the home to the node. They pay for the hardware on the ends of the line. Hence unbundled.

The problem with unbundled fibre is that all the costs in a network are in the civil engineering. Stringing fibre around the country is expensive. The hardware on the ends of the fibre cost peanuts in comparison.

Wholesale UFB prices are regulated. The price depends on the cost of building and supporting the network. The bundled hardware turning layer 1 into layer 2 is a small percent of the total. The input cost difference between bundled and unbundled fibre is tiny.

In other words, in the UFB model unbundled fibre doesn’t make economic sense.

Economics

Big telcos know how the cost structure works, but don’t accept the economics. They continue to argue and lobby for lower unbundled prices. If they get their way, fibre companies would sell connections at below cost.

The entire regulated UFB model would collapse. And future governments would struggle to raise private capital for infrastructure projects.

This connects to another way telcos are waging war on UFB. Last week, a Vocus press release said the latest round of Chorus fibre price rises is: “cynical, money grabbing and unwarranted”.

It’s an opinion. UFB regulations say fibre companies can raise prices in line with inflation. That’s a step away from “cynical, money grabbing and unwarranted”.

Inflation is tiny, around one percent, so the rise is small. It reflects the increased costs fibre companies pay for maintenance. Without it, a fibre company’s margins would ratchet down each year.

Futureproof

Government choose this price rise as part of the regulated UFB model when it feared investors would not want to fund fibre. It needed this clause to attract investors. It still needs this clause to attract private investors for future infrastructure projects.

Vocus, like the other telcos can choose to pass this cost on to customers. As we’ve seen, competition is tight, if a telco raises prices customers may move elsewhere. But that’s how market economies work.

And that’s the story here. Price increases, unbundling and, to a lesser degree, the coming wall of debt are all hardwired into the UFB. Government designed market regulations that way for a reason.

Regulated competition

UFB has been a success, in part, because there is a competitive market. Unpick the regulations and the whole UFB fabric unravels.

The challenge facing telcos is that the market is too competitive. As Paris says, they have competed away their profits. Corporations might pay lip service to free markets, but they don’t like them.

Mobile means Spark, Vodafone and 2degrees have alternative paths to profit. Enterprise services, adding value through content deals or power billing are other paths. Being better at what you do is always an option. Market consolidation might help.

Attempting to repair margins by chipping away at the foundations of UFB is not a wise strategy. There was a time when Telecom thought it could defy government policy and regulation. Look how that ended.

Disclosure: I do freelance writing and editing for Chorus, but the company doesn’t tell me what to write. 


  1. Telcos have figured out it is easier to bash the biggest fibre company. Criticising Chorus gets more media attention and more sympathy, than disrespecting “fibre companies”. Yet almost every accusation made against Chorus applies to the other fibre companies. If, say, Northpower was the target of anger, that would look like bullying. ↩︎

Regulating termination rates introduced ten years ago kick-started mobile market competition in New Zealand. Now it’s time to review the rules. Don’t expect to see much change.

To no-one’s surprise the Commerce Commission’s draft review of mobile termination rates recommends they stay regulated.

A termination rate is the price one phone company charges another when a call from one network is made to a customer on another network. Mobile termination rates affect calls between the Spark, Vodafone and 2degrees networks.

Until a decade ago mobile termination rates were unregulated. Carriers could charge what they liked. And they did. New Zealand termination rates were high.

This stifled competition and meant mobile calls were expensive by international standards. That in turn meant people here didn’t use their phones as much as people overseas.

Calls between networks

Before regulation Telecom NZ, now Spark, and Vodafone, would charge customers less to call others on the same network than the cost of calling another network.

In the jargon of the time they offered have different prices for on-net and off-net calls.

Mobile termination rates mean customers on the least popular network end up, over time, paying more to use their phones.

This acted to stop people choosing 2degrees, in part because potential customers feared friends might call less often.

In 2010 the government stepped in. Termination rates have been regulated since then.

The move triggered a dramatic drop in call prices to the point where New Zealand moved from being an expensive place to use a mobile phone to a relatively cheap place.

Flat playing field

Most of all, the regulation flattened the playing field. This meant the third mobile network, 2degrees, could grow beyond being a niche player.

In turn this further boosted competition and paved the way for cheaper calls more innovative price deals.

Today we have a vibrant, competitive and innovative mobile market.

Mobile termination rate regulation almost didn’t happen. Ten years ago Telecom NZ and Vodafone negotiated a voluntary agreement with government to lower charges. The Commerce Commissioned agreed.

It was all set to go. Then Vodafone began selling the most aggressive on-net plan ever seen in New Zealand. The Commerce Commission reversed its earlier decision.

The case against mobile termination rates

Fast forward to today. The Commerce Commission now says there may be a case for dropping regulation of termination rates for SMS text messages. That’s because of the popularity of alternative over the top services like WhatsApp.

This external pressure has reduced txt prices to the point where many plans offer customers unlimited texting at no extra cost. High charges are unlikely to return.

The Commerce Commission says voice call termination rates should remain regulated because there are few competitive alternatives.

That’s true on one level, but it’s not straightforward because today’s mobile battleground is all about data. With lots of data, customers can make voice calls using free or cheap over the top services.

And anyway, voice calls are not as popular as they were ten years ago.

If, in a world without regulated mobile termination rates, a carrier attempted to charge higher voice call rates, the move to data calls would accelerate. The trend away from voice calls would speed up. So, it’s possible we no longer need to regulate.

On the other hand economist Donal Curtin thinks the regulation needs another look.

The Commerce Commission now wants feedback on its MTAS draft review findings.

At the end of September, fibre companies had 880,000 premises connected to their networks. There were 581,000 copper connections. Fibre connections were up 31 percent on the year earlier. Copper connections were down 23 percent.

These numbers come from the Commerce Commission’s Annual Telecommunications Monitoring Report. Last year fibre officially overtook copper as New Zealand’s connection technology.

This happened a couple of months before the first phase of New Zealand’s UFB fibre build was completed. When the project started a decade earlier the plan was to have 20 percent of connections. The planners thought fibre overtaking copper would happen sometime in the distant future.

Commerce Commission Monitoring Report - Fibre overtakes copper

Fixed wireless broadband

Fixed wireless broadband is also up. It climbed 14 percent in the year to September 2019 to reach a total of 188,000 connections. What the Commerce Commission does not reveal is that Spark back-pedalled on fixed wireless sales in the run up to the Rugby World Cup. Without that, the growth would have been higher.

Telecommunications Commissioner Dr Stephen Gale says; “New Zealanders are increasingly moving to the fibre broadband network. This trend is set to continue with nearly three-quarters of a million homes and businesses yet to switch in areas where fibre is available to be connected”.

There’s a curious section in the media statement about broadband prices. Gale says; “…Prices for a medium use fixed-broadband plan (150GB/30Mbps) and voice bundle have remained at $75 in 2019. As the OECD average price has dropped since last year, New Zealand is now more expensive than the international average.”

Well yes, but the plan in question is a strange one to choose. Few New Zealand customers have 30Mbps plans and the most popular plans have unlimited data. You can buy an uncapped gigabit fibre plan for $85 a month. I’ve no international comparative data to quote, but this is lower than the average price around the world.

Competitive mobile plans

Elsewhere in the report the Commerce Commission notes New Zealand’s mobile plans remain competitive by international standards.

Gale says; “New Zealand’s mobile plan prices are below the OECD average for all plan types we measure. For instance, a medium use plan of 100 calls and 2GB of data costs $28, 24 percent below the international average”.

NZ mobile phone prices compared with international

The Commerce Commission also looks at telco market share. It notes smaller companies are growing their share of fixed broadband at the expense of the big names.

“Increased competition in the market is good for consumers. In the past year we’ve seen encouraging signs with small retailers like MyRepublic and Stuff Fibre growing their market shares. Overall, smaller retailers’ market share grew from 8 percent to 11 percent in 2019, with customers largely being wooed over from Spark and Vodafone.”

In the UK, the Labour Party plans to nationalise part of the telecommunications network if it wins this year’s election.

To cover costs, a Labour government will tax multinational tech giants including Google and Facebook.

Let’s put aside the idea of nationalisation1. Instead, let us focus on the idea of making tech giants contribute towards the cost of telecommunications networks.

Not ridiculous

The idea isn’t ridiculous. Google and Facebook made their fortunes on the back of telecom networks. In effect they had a free ride.

People who invested in building Spark, Vodafone, Chorus and the rest of New Zealand’s telecommunications networks have, up to a point, subsidised the tech giants.

A decade ago there was talk in telecom circles about recapturing some of the value taken by over-the-top companies.

That battle was lost before it started.

It could be impractical and difficult for a small nation like New Zealand to force tech giants to pay all the costs of our telecommunication network.

That would remove price signals. These are important. They help the industry squeeze value from the assets. They tell planners where to invest.

Jangling the gold

There is one area where we can hold Facebook, Google and maybe other tech giants upside down and jangle the coins out of their pockets.

We could get them to contribute to our Telecommunications Development Levy.

This is the money collected by the government to help subsidise rural telecommunications. It also pays for things like the services that help blind and deaf people use phones.

At the moment the TDL is $50 million a year. It’s called a levy, but it’s really a tax on telecommunications companies. They each pay a share roughly based on how much they earn from sales.

As things stand today, Spark, Vodafone and Chorus pay the lion’s share.

How it might work

Suppose, for one minute, we decide to treat income the digital giants earn from New Zealand on the same basis as local telco revenue.

We’ll forget the smaller firms for now and focus on only two tech giants: Google and Facebook.

It’s hard to know exactly how much these companies make in New Zealand. The Commerce Commission would be have a job extracting this data, but it is doable.

This NZ Herald story estimates Google made around $600 million here in 2017. The number for Facebook is hard to estimate. For the sake of argument, let’s say it is much the same.

The total qualified revenue for New Zealand’s telcos is $4.1 billion. If we add in the tech giant revenue that gives us $5.3 billion.

In round numbers that puts Google and Facebook’s share at 20 percent of the total.

This means we could reasonably ask the two giants to stump up $10 million towards the TDL.

If we add in the other large companies who earn revenue on the back of New Zealand having a decent digital network that could take the total contribution from over the top money earners up to around a third of the TDL total.

Fair dealings?

It would be hard for anyone to argue such an approach is unfair. The amounts are, in comparison, tiny. A $10 million charge on $1.2 billion is less than one-tenth of one percent. It wouldn’t even feature as a budget line item.

Tech giants make huge margins on their revenues. The charge need not have any effect on prices.

In comparison the profit margins for New Zealand’s telecommunications companies are slender. Putting $15 million or so2 back into their hands wouldn’t make a huge difference. It would ease their burden.

So there you have it. The company’s that benefit most from investment in telecommunications can return a tiny trickle from their rivers of gold so that more New Zealanders can access their products and services. Is that so unreasonable?


  1. Maybe until another time. Maybe not. ↩︎
  2. This presumes an expanded programme where more than just two tech giants contribute ↩︎

July 29 (BusinessDesk) – The $3.4 billion Sky-Vodafone New Zealand transaction the Commerce Commission rejected in 2017 was the most difficult of the vertical mergers former chair Mark Berry had to consider.

Source: Sky-Vodafone merger decision challenging – Berry | Scoop News

Would the Commerce Commission make the same decision today?

It could go either way.

One of the reasons the deal was turned down was Sky’s iron grip on sporting rights. Since 2017 Spark has entered the market with Spark Sport, yet aside from this year’s Rugby World Cup, it doesn’t have rights to any of the major NZ sporting codes.

Sky has gone from owning 100 percent of the sport market to something less than that. Yet it’s market presence remains substantial. It would be hard to argue things have changed enough to alter the merger decision. This could change if Spark Sport achieves lift-off.

Spark, you may recall, was one of the main objectors to the Sky-Vodafone merger. Its lobbying paid off.

2degrees featured prominently in Mark Berry’s deliberations:

“There was particularly a concern about what the future of that market would look like if we let this merger go ahead, and if that kind of effect happened – with customers being taken away from 2 Degrees such that it would no longer have the incentive or the ability to invest and compete.”

Former Commerce Commission chair Mark Berry

It’s worth reminding yourself that in some ways 2degrees is a talisman for mobile telecommunications market competitiveness. While 2degrees is a force, the market can be seen to be working. The company’s position is no strong today.

One other change since 2017 is that Vodafone now looks to be in a stronger position since its part-acquisition by Infratil. This would play into any Sky merger decision in a subtle way.

Infratil also owns a substantial share in Trustpower, the fourth largest internet service provider. It has told the Commerce Commission that Trustpower and Vodafone would remain separate.

There has to be some concern about this. Since the acquisition Trustpower has joined with Vodafone and Vocus’s unbundled fibre campaign. That could be a coincidence.

Yet given Trustpower’s strength in building bundles of services around broadband, the possibility that company might have preferred access to Sky content would set off all kinds of alarms at the Commerce Commission.