Unbundling the Chorus saga

A sharemarket plunge, calls for government intervention, accusation and counter-claim, threats of legal action and the announcement of an independent inquiry: it's been a busy week for the country's broadband internet providers.

Since the Commerce Commission's shock determination on Tuesday to cut the amount Chorus can charge for access to its services by 23 per cent, all hell has broken loose.

The country's major internet infrastructure company has seen its share price tumble by almost the same amount, wiping more than $200 million off the company's value.

Chorus has claimed it'll go broke if it can't charge as much as it does now and has asked the government to step in.

International ratings agencies have downgraded the company and Telecommunications Minister Amy Adams has announced an independent investigation into Chorus' finances.

Internet user groups and internet service providers want the commission's decision to stand, describing the price cut as "an early Christmas present" that will lead to lower broadband prices for all.

In true internet style, here are some FAQs about Chorus.

What is Chorus?

Chorus is a private, NZX-listed company that owns the copper lines that connect your house to the telephone exchange. It used to be part of Telecom but was spun off in 2011 following local-loop unbundling in 2006.

What the heck is local loop unbundling?

Ever had a peek inside a telephone exchange? Seen all those thousands of wires in pretty colours? That's the local loop. When Telecom owned it, it could charge what it liked to provide access to internet providers. The Government legislated to put a stop to this by allowing any provider access to the copper wires.

So what's the Commerce Commission doing setting the price Chorus can charge? Good question. The problem with local loop unbundling is internet and telephone service providers complain the price they're forced to pay Chorus for access - $45 a month - is too high. The Government threatened to intervene and regulate the charges but the Commerce Commission got in first with its own determination, setting the price at $34.44.

Great, that means I'll soon get cheaper broadband? Yes, but only if providers decided to pass the cut on to customers rather than pocketing some or all of it. And assuming the determination isn't appealed by Chorus. And always assuming the Government doesn't step in and over-rule the commission.

Why would the Government do that?

This is where it gets a bit complicated. The Commerce Commission's decision has created a bit of a headache for the Government. One of the issues is that it has lent Chorus $1 billion - yes, $1 billion - of taxpayers' money at a very generous interest rate. Well, actually, at no interest whatsoever. If Chorus goes belly-up because it can't pay its bills because it can't charge as much for its services then the Government stands to lose your money.

Why would the Government lend a private company $1b?

Because Chorus is the lead provider in the Government's much-ballyhooed Ultrafast Broadband network (UFB), a fibre-optic cable network that is being rolled out in major towns and cities around New Zealand. And that leads us to another big headache facing the Government, as Chorus is claiming it won't be able to meet its obligations to the Government as the principal provider of the UFB network if it has to charge less for its copper-wire network.

The amount of the shortfall, according to Chorus, is funnily enough around $1 billion. This could leave the Government swinging in the wind on one of its major policies in election year.

Was it a smart idea for the Government to contract the provider of the copper wire network to also build the new fibre-optic network?

No, it wasn't.

Are you saying Chorus isn't capable of providing both?

It's not that it's not capable. It's just strange the Government chose to leap out of one monopoly situation straight into another. Plus there's an additional problem: Chorus isn't exactly incentivised to drop its copper network prices because it wants to sign more customers up to its more expensive fibre system. Which won't happen if "traditional" copper network broadband is priced too cheaply.

I'm happy enough with my current broadband connection. Do I really need UFB anyway? Well, that's the problem. Not only is UFB extremely expensive to install (the Government has budgeted $1.5b) and time-consuming to roll out (it'll take another 10 years or so to finish) but only 75 per cent of homes will be covered by fibre in any case - and none in rural areas.

There's also the question of whether most people either want or need the speed UFB is offering. Meanwhile, the old copper wire just keeps getting smarter - there's a new type of ADSL being rolled out now called VDSL that can give fibre a run for its money.

So how fast are we talking here?

There's no argument that the UFB fibre network is pretty darn quick. If you want numbers, up to 100Mbps (megabits per second) downstream and 50Mbps back up.

Compare that to your current copper wire broadband, which is probably ADSL2 at up to 11 Mbps. Fibre is seen as more stable and reliable, too. However, to put that in perspective, even ADSL is still nearly 200 times faster than good old dial-up, and plenty fast enough for streaming video and internet television, Skype, music, etc. Plus, mentioned above, there's now VDSL as well - which claims speeds of up to 70 Mbps downstream over your old-fashioned telephone wires.

Are there any disadvantages of going to UFB? Apart from the higher price per month, and not being in a big centre, there's likely to be higher connection fees associated with getting linked into the fibre network.

Plus, something that hasn't had much coverage - once you ditch the good old telephone lines, stuff you're used to like caller ID and using the toll provider of your choice will no longer be available. Telecom's fine print states if you're on fibre you can't use anyone else for cheap tolls.

So what should I do? Nothing. Let the telcos and the Government fight it out with the Commerce Commission or in the courts. When the dust settles, if we still have a UFB network, you can decide whether the extra speed is worth the money.

In the meantime, you can impress your friends with how much you now know about the current debacle.

Sunday Star Times