Chorus chief executive JB Rousselot. Photo / File
Pundits see Chorus' latest play in the UFB fibre market as politically and commercially savvy on two counts.
The network operator said it was working to triple the download speed of its most popular UFB fibre plan, used by some 600,000 customers, while keeping the same wholesale pricing for two years (bar adjustments for inflation).
Chorus is working with retail internet service providers to bump the speed of its 100Megabit per second down/20Mbps up plan to a 300Mbps down/100Mbit up plan, which would launch from December at no extra wholesale cost.
ISPs will get both the 100/20 and 300/100 wholesale products from Chorus for $47.87 - so why not offer customers the faster plan?
Why is Chorus being so generous, offering much faster speeds for free?
Jarden analyst Arie Dekker notes the most obvious reason: to put competitive pressure on mobile network operators Spark and Vodafone (and to a less extent 2degrees), who have been cutting Chorus out of the loop as they've moved around 200,000 customers to fixed-wireless products. In performance terms, 300/100 fibre will have a clear performance edge for many customers, especially at peak times (and it's particularly potent given Spark recently conceded that it missed a fixed-wireless target in FY2021, in part, because of 4G capacity constraints; like its peers, it has a 5G upgrade underway.)
But then there are the wheels within wheels.
Under a new telecommunications regulatory regime, which is being phased in from December, only one UFB fibre product will be directly price-regulated by the Commerce Commission: the 100/20 plan, known as the "anchor product."
When the anchor product was set as the 100/20 plan a couple of years ago (this has been a very extended political arm-wrestle), InternetNZ submitted that the market regulator had set the bar too low. History and the market would soon pass 100Mbps by as households sucked down even more streaming video, at higher and higher video quality, and our overall data use continued to grow exponentially.
And certainly today, while 100./20 remains the most popular plan, the most popular type of connection for new UFB customers is a 1000Mbps (or 1Gbps or "1 gig") plan, which offers 10 times the speed. And Chorus recently launched an 8Gbps fibre product.
And if ISPs do offer their customers the 300/100 plan come December (and why wouldn't they, given it'll offer more bang for buck, and they're in a competitive market) then there will be a surge of people upgrading from the regulated 100/20 to the faster plan with unregulated pricing.
They'll be gaining speed, yet losing the Crown's protection against price increases above inflation.
As Dekker noted in follow-up comments to the Herald, the 300/100 product will be a purely commercial product, while the 100/20 will remain the only Chorus product with pricing controlled by the Commerce Commission.
At the end of the day, there's nothing to stop Chorus increasing the price of the 300/100 plans.
But a Chorus spokesman told the Herald there were strong reputational reasons. "JB [Chorus CEO Jean-Baptiste Rousselot] has put it out there in the public domain," the spokesman said. "You'll keep us honest."
The spokesman noted that the anchor 100/20 product would continue to be available.
After Chorus delivered its full-year result on August 23, Rousselot touched on the issue when the Herald asked him what was the point of 100/20 plan being the only directly price-regulated product when a majority of customers were choosing faster plans that were free from price regulation (a trend that now seems set to accelerate from December, when there will be no reason for punters to choose a slower 100/20 plan over faster 300/100 plan if their retail ISP offers them at the same price).
Rousselot noted that anchor pricing is only one of many elements that will be regulated by the ComCom under the new regime. The market watchdog will also set a maximum allowable annual revenue (or "MAR") for Chorus. Although the amount has been finalised, Rousselot noted the revenue cap would inhibit his company's ability to raise prices across the board.
Dekker said the CEO was right, the revenue cap will limit Chorus' ability to raise prices (the final cap has yet to be decided, but Chorus is on the back foot. A ComCom draft was 4 per cent below where figure Chorus had submitted).
And the Jarden institutional research head said there it was also likely that competition from the mobile network operators' fixed-wireless products would probably grow and "putting pricing up to increase revenue in the face of stronger competition is unlikely to be a sustainable response."
And InternetNZ appears to be won over, and happy to take Chorus at its word that it will keep the 300/100 product at the same price as the 100/20 offering for at least three years.
(InternetNZ administers the .nz domain, and uses the money it raises from wholesaling local domain names - internet addresses - in part to advocate for internet users.)
"We welcome this change, " InternetNZ CEO Jordan Carter told the Herald this morning.
"The UFB network had always been capable of lightning speeds so we are very pleased Chorus will share that with customers at the same wholesale price.
"This will help boost the internet experience of many people. With sharp competition between Chorus and other broadband options, we expect the trend of more gains for consumers to carry on."
A key point is that Chorus' maximum allowable revenue has yet to be finalised. After a series of delays, the regulator is now not expected to finalise the new regulatory regime until June next year.
Chorus knows that lifting the price of its 300/100 product would invite more regulation. Similarly, keeping the price tied to the100/20 plan for three years would be a good strategic move, potentially helping to the company avoid further price regulation further down the track.
Telecommunications Commissioner Tristan Gilbertson was not taking fright today.
"The regime is designed to be flexible, and we have the ability to review anchor services and other regulations to respond to changing technology, market dynamics, and customer expectations. We will continue to monitor the need for this," he told the Herald.
With the heavy-spending years of the UFB rollout largely behind it, Chorus has promised to pay out the majority of its free cashflow in dividends in the years ahead - although how fat the increased profit payout gets will depend on the ComCom's final decisions.
In an August 20 research note, issued on the back of the commission's latest draft determination, Forsyth Barr analyst Matt Henry maintained his outperform rating but cut his 12-month price target from $7.60 to $7.45.
In mid-afternoon trading, Chorus shares were down 0.4 per cent to $7.06. The stock is down 16.1 per cent for the year.
'[This is]...an incredibly difficult decision, felt deeply across our small organisation.'