IDC supports government's telecommunications review

"It is critical for the government that Telecom ... has well-balanced incentives to invest in copper or in fibre"

Research firm IDC says the government has done a good job of balancing everyone’s interests in its telecommunications review discussion document.

"Many look back and wish the government had invested in better public transport during the sixties and seventies, but at the time such investments were deemed unnecessary or too expensive," says Peter Wise, research manager, IDC New Zealand.

"The government is taking the equivalent of that investment step in fibre now and ensuring that New Zealand is well set up to achieve the economic benefits and provide new services that advanced broadband enables."

The discussion document, released on August 7, outlines the government's proposed approach to reviewing the telecommunications regulatory environment. The review has essentially been split into two stages, with the first stage addressing the critical issue of wholesale pricing in the market. The second stage, set for some time in the future, will address fibre demand and migration challenges, which IDC notes are complex policy issues.

"The Commerce Commission's announcement last December of a Draft UBA price of NZ$8.93 exposed a gaping hole in the government's broadband policy," says Wise. "It would have resulted in lower wholesale prices for copper and potentially lower broadband and voice retail prices that could undermine the government's investment in fibre.

"Our international research shows that relative pricing at the retail level is a major factor impacting successful fibre uptake."

Currently copper and fibre wholesale prices are similar and result in relatively similar retail prices. The Commerce Commission's draft decision for pricing may have resulted in a wholesale price decrease of NZ$12.53 per broadband line per month, wiping up to NZ$160m off Chorus's bottom line and transferring this to the retail companies such as Telecom, Vodafone and other players like Slingshot and SNAP Internet. Wise says this may in turn have passed through to lower retail prices for end-users but it also had the potential to wreck the fibre rollout initiative.

“The Government's discussion document puts forward a pricing structure that will result in a much smaller discount to current wholesale copper prices, down from the current price of NZ$44.98 to a range between NZ$37.50 and NZ$42.50. This brings the prices into line with the basic introductory fibre wholesale prices.”

The options put forward are in IDC's opinion relatively balanced. "All retail service providers are likely to be faced with a more financially attractive solution than they have today and Chorus is faced with a much lower impact to its bottom line," says senior analyst Glen Saunders.

The EBITDA impact on Chorus will be negative but the range of approximately NZ$6 – NZ$103 million less EBITDA per annum is much less than what the ~NZ$160 million that would have resulted under the draft Commerce Commission determination of December 2012. Under the government proposed options, Chorus stands to lose the least in a "High Total Price (NZ$42.50) and Low UBA Price (NZ$8.93)" scenario, he says.

“It is critical for the government that Telecom, which has the largest share of voice and broadband connections, has well-balanced incentives to invest in copper or in fibre. Get this balance wrong and Telecom's shareholders are not likely to want it to invest in fibre as quickly.

"The government's discussion document has a number of solutions to help tackle this – including separating the wholesale input prices Telecom pays for voice-only lines from lines used for voice and broadband and removing the ability to unbundle lines from Chorus cabinets.”

IDC says its analysis suggests Telecom is faced with a broad range of outcomes under the government proposals – it can save approximately NZ$83 million per annum under a "Low Total Price (NZ$37.50)/ High UBA Price (NZ$19)" scenario. But it could also see its overall costs rise by approximately NZ$35 million per annum under an extreme "High Total Price (NZ$42.50)/ Low UBA Price (NZ$8.93)" scenario.

For the other retail providers, IDC is predicting overall market savings in their wholesale input costs. The level will depend on the number of UCLL (Unbundled Copper Local Loop) and UBA lines they purchase but they will not be worse off than they are today.

IDC expects heavy lobbying by all parties involved in the market. It believes the government is looking for a short- term solution to bring stability to the market for investors.

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