Monday, 12 May 2014

Chorus's conundrums in a single chart

There was a nice graph in Chorus's latest half year investor presentation (links to it here, download here), which I've reproduced below (it was tucked away at the back in Appendix B on p39). Note that the vertical axis starts at $30, which has the optical effect of making the $34.44 price look very low indeed. I'm not being critical - I use non-zero vertical axes all the time, I usually don't bother with that squiggly little sign we're supposed to use to indicate a non-zero start, and I'd likely have started the axis at $30, too - but just be aware that's how the graph comes out looking.

If you ever wanted a very simple explanation of Chorus's various predicaments, here it is.

First of all, the Commerce Commission's proposed drop in the wholesale copper-based internet access price means that Chorus stands to lose a slug of revenue, revenue which it says it needs to keep rolling out the ultra-fast fibre-based broadband network to the planned timeframe.

And second, the drop in the copper price upsets the nice relativities between copper and fibre that Chorus (and the government) had been counting on. Swapping copper ($44.98) for faster fibre (only $37.50) would have been a no-brainer. Trading up from cheaper copper to more expensive fibre is less obviously a great deal.

But I'm still largely unmoved by Chorus's plight. From a demand side perspective, the Commission's lower copper price stacks up as it should: you'd think the older, slower technology ought to be priced less than the new whizzbang one. From a supply side perspective, I'm pretty sure that the old $44.98 for copper was well above cost, thanks to (a) Telecom-as-was rarking up the line rental year after year in line with the CPI and (b) the impact of substantial depreciation of the copper network on the revenue stream required to earn Chorus its fair rate of return on capital invested.

I hadn't thought too much about the proposed pattern of fibre pricing but looking at the graph I was struck by the large price premia heavy fibre users are expected to pay - which, as I've noted before, imperils the innovative uses that underpinned the case for a national fast fibre network in the first place - and by the odd pattern of the falling high-speed price and the rising slower-speed price.

Maybe there's something in the engineering or the economics that says this is how things ought to play out, but damned if I know what it is. Until put right by people who know better, I think I'm going to assume that these prices are not as fully cost-related as they might be, either.

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