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The Commerce Commission and the New Zealand backhaul review

By Brendan Ritchie
Wed 24 Aug 2016
FYI, this story is more than a year old

New Zealand’s Commerce Commission recently announced a study of telecommunications backhaul services, so I am going to throw the little insight I have into the mix.

Two actions by Chorus have acted as catalysts to get us to this point:

  • It announced plans to reduce the number of required UFB points of interconnect to 5, from the current 20+. I have covered this in a recent post.
  • Chorus Regional Transport (CRT) was released, which provided 10Gbps links between major centres at significantly reduced prices.

Many ISPs are seeking to understand what Chorus’s role in the market is, and that seems to be a key underlying question behind this discussion paper.

Should Chorus be allowed to compete in the wholesale backhaul market? Yes, absolutely they should.  Chorus have (or soon will) provide backhaul services in the form of UFB tail extensions, Chorus Regional Transport (CRT), and dark fibre (DFAS). A number of other carriers have the ability to compete just as effectively between major towns and cities using existing infrastructure, so Chorus competing with them is a non-issue for me.

This is set apart from allowing Chorus to sell retail services to end users, as no other provider could rollout fibre to end users in the same way, or for the same cost, given Chorus has funds provided care of the tax payer.

So to summarise:

Retail = no.

Wholesale = yes.

Chorus is certainly a valid player in the wider wholesale market, but there are some questions on its backhaul services that do need answering:

  • Is Chorus only offering low cost CRT prices on heavily competitive routes? I don’t see an option for Ashburton to Christchurch for example. Is that because they didn’t see the need to drop their prices on that path due to a lack of competitive pressure? Or, is it simply a lack of available assets in the ground between those locations? If it’s the later, no issue exists. Chorus has plans to increase its CRT footprint, so if they are continuing to invest and adding fibre where there currently isn’t any, they seem on safe ground.
  • Are the prices they are effectively setting for the entire market fair? Chorus dropped its CRT price by as much as $10,000 p/month (and that’s being conservative) between Auckland and Wellington for a 10Gbps service, and every other provider had to follow. Were other providers, and Chorus, charging excessive rates up until that point and Chorus were just the first to adjust it down to a more reasonable rate? Or, are they utilising scale gained through Government investment to distort market pricing?
  • Do equivalency laws extend to the wholesale space? I believe prices are universally applied at present, but we need to ensure that remains the case.

The primary concern I have with Chorus is simply that it is so big that when it makes a move in our small NZ pond, waves are created rather than ripples.

Chorus dropped its backhaul prices and that market segment instantly became significantly less profitable for a number of players. Speaking on behalf of DTS, the result was great, we now have a 10Gbps national ring at significantly lower rates than we would have had otherwise, but for ISPs that put a number of eggs in the wholesale backhaul basket, the move from Chorus would have hurt badly.

The move by Chorus to reduce the number of UFB interconnects essentially ensures they will take a section of the backhaul market, which they will call UFB tail extensions and sell in tiny chunks per circuit. Other providers can do the same thing, DTS for example, can give national access to UFB and hand it over to a wholesale client in Auckland. The difference is that Chorus owns the infrastructure and can therefore beat every other provider on price. This move will decrease demand for backhaul in regional areas and further focus demand on Auckland, Wellington, Dunedin, Hamilton and Christchurch.

If the Commerce Commission is looking to understand the effects of allowing Chorus unfettered access to the NZ wholesale market, I can tell them that it will be fewer (if any) entrants into the market, the decline of the 3rd party aggregator model, lower wholesale prices, and arguably lower retail prices. With Vodafone, Spark, Vocus and Kordia in the mix, competition isn’t going anywhere, so I don’t fear a monopoly/duopoly evolving.

The reality is that with so much pressure on retail price points, pressure has to inevitably come on all aspects of a competitive wholesale market as well. Chorus are highly incentivised to add non-regulated revenue, and applying competitive price points in unregulated market segments enables that to happen.

Again though, I want to be transparent, I am glad Chorus forced backhaul prices down, and UFB tail extensions will save us money as well. Retail margins are down, wholesale prices need to follow.

No market is without change, and all of us operating within this one need to ensure we are planning effectively and take responsibility for the direction we take our companies in.

One last point to finish on; the Commerce Commission must ensure that the same restrictions that currently exist to deny Chorus access to the retail market continue to exist post 2020. There isn’t an operator in NZ that could compete effectively if that were to be relaxed. This may seem off topic, but if we are looking for key rules to enforce in an environment where Chorus is aggressively looking for ways to increase revenue, that is number one.

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