What is Spark's motivation behind its Chorus pricing campaign?


Our concerns

Spark has launched a campaign to get New Zealanders to put pressure on the Commerce Commission to reduce how much Chorus charges for access to its copper network.

The Be Counted campaign encourages Kiwi to “say no to higher internet charges” by sending a submission to the Commerce Commission, asking it not to increase Chorus’ monopoly charge for broadband.

This comes after Spark released its submission to the Commerce Commission opposing proposed Chorus wholesale pricing in February.

Last December, the Commerce Commission released a draft proposal recommending Chorus could charge a wholesale price of $38.39 a month on a copper phone line – up from the $34.44 that came into force the day before. It is this proposed increase Spark and other large ISPs are now opposing.

Setting aside jibes about the entity previously known as Telecom raising concerns about another organisation’s protected monopoly status, what does Spark aim to achieve with this campaign? Is it really that interested in saving its customers money or is this a move to limit customer churn?

Any change in pricing or market dynamics is naturally very disruptive for a dominant player like Spark and can cause a significant percentage of people to change provider.

An increase in access fees by Chorus would leave Spark and other ISPs facing a tough choice – charge customers more or wear the additional cost.

In recent years prices for telecommunications services have dropped or at least increased in value with faster broadband speeds and larger data allowances. So any increases now would not be popular with customers.

But absorbing the costs would be a bitter pill to swallow for executives incentivised on short-term profits.

As much as we would like to believe otherwise, we suspect Spark’s motivation behind the Be Counted campaign has more to do with protecting its own market share – and profits – than fighting for savings on behalf of its customers.

Reality bites

Conversant’s position is that Chorus has a strong incentive to make money out of the copper network as long as possible since the capital cost has long since been spent. This is a huge money earner for Chorus and is the cash cow underpinning a significant part of the UFB business case. Spark on the other hand wants a low copper price to maintain the status quo and in turn reduce the significant number of people cancelling landlines and churning away to other providers.

There is little incentive for Chorus to make copper an attractive option when its targets – and contract with the Government – are linked to getting customers to sign up for UFB connections.

The Commerce Commission would be well aware that the Government does not want Chorus to fail – it needs it to deliver UFB to most of New Zealand.

It is therefore unlikely that it would dictate that Chorus cuts its access charges and thereby reduce the incentives for switching to UFB – no matter how many signatures Spark can muster for its campaign. Unfortunately this is a bad outcome for consumers since it increases the price they pay for internet and telephone access beyond what is necessary.

The Conversant Approach

Conversant’s approach would be radically different – it will aim to incentivise all industry participants to rapidly move away from copper, whilst preserving the copper network where appropriate. We would propose that:

Unbundled copper local loop (UCLL) price reduces from the current price ($23.52) to zero by 2025. Telecom had previously committed to phasing out the PSTN by 2020. Since there is currently no incentive for that to happen, the date will continue to slip because of “circumstances beyond our [Whose control Spark/Chorus?]control”. The best way to make sure that happens is to massively reduce the revenue from copper.
After 2025, the copper network would no longer be subject to regulated price setting. Chorus would be able to set whatever price it chose, but would be required to demonstrate that no cross-subsidisation occurs between its legacy services and fibre-based service.
This would have the effect of strongly incentivising Chorus to encourage wide-spread adoption of fibre. It also allows Chorus to make use of its assets to provide legacy services for customers that require those, and to charge accordingly. Customers wanting such services would be able to make an economic decision about their value.