How competitive is NZ’s residential ISP market? This quote from Orcon’s recent submission to the Commerce Commission offers some insight:
Margins in the broadband world are incredibly slim. Currently, Orcon needs to retain a UBA customer for 27 months to recover setup and marketing costs, before it makes a single dollar off that customer.
A comment like that really does make a mockery of the recent claims by Axe the tax campaigners that any reduction in Chorus wholesale UBA costs would be passed through to consumers.
With margins this slim would any ISP realistically pass these through in full? Any smart business would be pocketing some (or even all) of the reduction in the hope of reducing that insane 27 month period down to something a little more realistic.
Other related posts:
Spark Paging network shutdown – the event nobody cares about? Not quite.
UFB voice, power cuts, copper invincibility and mainstream media FUD.
New Zealand’s growing BUBA problem (AKA I feel sorry for you if you’re on a Conklin)
Comment by Cymro, on 30-Oct-2013 22:39
Whilst I agree with your sentiments on the "Axe the tax" campaign, I think Orcon might be bending the truth ever so slightly to make a bigger impact with their submission.
Given a $75 plan and a clothed UBA price of $44(ish) I can see them having $10 allocated for costs and clearing $10 margin, which over 27 months = $270 - Probably about right for COGS with free modem, connection and some sort of 1 month free.
What they don't seem to be counting is calling revenue, arguably they could claim naked UBA so no calls, but on average I'd still expect another $5-$10 per month margin if POTS is included.
Comment by ajobbins, on 31-Oct-2013 16:08
A couple of things. Firstly, I strongly suspect that the 27 months figure comes from a 'worse case' customer scenario. Ie. A customer on a low end plan who has also taken a free modem or other concessions. Ironically, it's these low margin customers who are probably the most expensive to support as well (More likely to need tech support, but the support costs per user are likley an average. I doubt the 27 months figure is the 'average', and would like to see that number.
Secondly, as we know, the margins are so low because of high competition in the market, and I don't agree with your sentiment that the market wouldn't pass on the reduced wholesale costs. If we were in a mono/duo/oligopoly market sure, but I suspect that if the current players are willing to operate in the current low margin market, that competition will continue and we will see players pass on much or all of the reduced costs in order to stay competitive. Someone will start, and the rest will follow. The more competitive the market, the faster this happens. It's a bit of a race to the bottom - but that's the current market.
This is an interesting issue, because on the one hand if you lower the price of copper services (or allow them to fall too much) you risk stifling the uptake or more expensive (but far superior) fibre services. But at the same time, is it fair to effectively prop up one private company (Chorus) in order to achieve better UFB uptake?
I'm more in favour of letting Chorus run the copper into the ground (pun not intended) under a more realistic cost based pricing model, and pushing the benefits of fibre to increase the uptake. If we absolutely HAVE to have an effective copper tax, it should be collected and passed back to the government for reinvestment into UFB, not into the hands of private shareholders.
Comment by Ragnor, on 4-Nov-2013 15:48
Your logic simply doesn't make sense to me.
A competitive market will more than likely result in a wholesale cut (at least partially) being passed on, there will always be a low cost operator like Slingshot who wants to fight a race to the bottom.
Orcon likely has a high costs of operation (legacy of recently being state owned) compared to other providers.
Comment by michaelmurfy, on 5-Nov-2013 23:47
You've also got to see the fact of the cost of deploying cabinets etc for Chorus, I did some maths and found it takes on average 5 years to make the money back on their investment of putting a cabinet in (based of 60 customers). Now, if we lower wholesale prices it's going to take them much longer to gain their investment back resulting in areas where Conklins will serve to serve small community's for the foreseeable future due to the cost of upgrading them.
In this drive of lower broadband prices I think NZ should suck up and just pay their ISP money instead of expecting everything for close to free. I'm happy with paying extra to a provider like Unleash because I know I'm getting a premium service out of it.
If the ComCom lower wholesale costs, the provider won't necessary lower the plan prices but if they do the fact the plans are so low margin means the provider will cut costs elsewhere (international bandwidth for example) leading to slower broadband.
I think it's fine where it is, as long as a provider like Orcon doesn't play superman in order to drop the prices down, I quite like my internet working quickly and reliably.