Why Chorus investors are scared

Chorus' share price has taken a battering over the past week after the Commerce Commission released a draft decision which some feel could dampen enthusiasm for the Ultra Fast Broadband (UFB) initiative.

Critics of the Commission's new proposed Unbundled Copper Local Loop (UCLL) service pricing regime, including Chorus, say it will reduce demand for UFB because it will make copper-based DSL internet services cheaper and therefore more attractive to consumers.

"At a time when New Zealand is making a very significant investment in building a fibre world, Chorus is concerned that the Commission's draft decision creates a potential disincentive for retail service providers and end customers to transition to fibre services," the company said in a statement.

Any customer "disincentive" to embrace fibre is bad news for Chorus given it has a significant contract with the government to build a majority of the UFB network.

Given the recent stock price drop, the company's shareholders clearly share Chorus's concerns, as do market commentators.

Amongst the analysts to react to the news has been Goldman Sachs, which has downgraded Chorus in a report to clients. Goldman Sachs adds that the proposed lower copper pricing could also impact on Telecom, the business Chorus was spun out of last year.

Telecom is already facing a number of challenges. According to the Commission's recently released telecommunications annual monitoring report, the company's share of the telco market slipped from 61.3% to 52.7% in the six years to June 2011.

Other telcos are also unhappy with the Commission's UCLL proposal, although for different reasons. Orcon CEO Scott Bartlett is concerned the Commission's plan will lead to less competition for internet users because the price decreases are phased over too long a period.

"They [the Commission] have admitted the price is wrong and that it needs to come down, but then have staggered that reduction over three-years. That's, in our view, a terrible move that I sincerely hope is removed in the final [decision]," he says.

"In fact the only winners out of today are Chorus, their revenues have been protected at the expense of lower prices and better broadband for consumers.

So are Chorus, and the company's investors, being too pessimistic about the impact of the UCLL proposal? Craigs Investment Partners broker Chris Timms has since been reported as saying the market over reacted to the news and started buying Chorus shares again once they had had a chance to digest the implications properly.

Timms points out that this is not an uncommon situation in the complicated world of telecommunications. Investors are prone to panic if they don't understand the impact of regulatory change and other market developments.

Chorus shareholders will be hoping the company will be able to shed more light on its plans and prospects when it holds an investor briefing day on May 23.

In the meantime punters have the option to buy into the company at a much cheaper price than a few weeks ago if they believe the business charged with delivering almost $1 billion of fibre broadband infrastructure has a rosy future.