Telcos earning too little on big infrastructure spend, warns Spark's Moutter

Thursday 11th February 2016

Investment in the telecommunications sector has hit $1.7 billion annually but could shrink in future if returns don’t rise, warns Spark New Zealand chief executive Simon Moutter.

The Telecommunication Forum today released a Sapere research report on the state of the local sector which found it was investing at one of the highest rates in the OECD - the so-called 'rich countries club' - as a proportion of revenue, was one of the most innovative sectors, and provided services that are competitive on price and quality compared to other developed economies.

TCF chief executive Geoff Thorn said the level of investment was huge for a country the size of New Zealand and meant the country is was now "ahead of the game”, with the fastest uptake of broadband in the world and among the fastest 4G mobile download speeds globally.

The report says the sector faces both opportunities and challenges from rapid growth in data consumption, fueled by fast-growing use of on-demand video services. Consumers' expectations have risen, which has required more investment on infrastructure, but at the same time they want to pay less for it.

Statistics New Zealand data shows the sector earned an average 2 percent return on its assets in the five years to 2013, with high fixed costs and a small and low income customer base.

The sector’s lower revenues and earnings pose important questions about where the cash for on-going investment will come from, the report said.

Spark’s Moutter said one of the report’s salutary reminders was the “bits on return to the industry”, with the $5 billion earned by the sector relatively unchanged in the past decade.

“It’s not a rising revenue. That’s supporting an investment level of 30 percent of revenue which is stunningly high,” he said. “Investors around the world talk about a global benchmark for investment to revenue of around 15 percent so we’re running double of what investors think is a rational level to invest in this sector.”

“At some point, we need to a stronger revenue performance to validate it, otherwise the inevitable will happen and the level of investment will shrink,” he said.

Vodafone New Zealand chief executive Russell Stanners said there was still a lot of money being spent by consumers on things like smartphones and other gadgets.

“If you look at the end-to-end value there’s still a lot of money going into the industry. It’s just going to different places in the value chain,” he said. “As we build this infrastructure we have make sure we get a fair share of value on what consumers and enterprise want to spend.”

The Sapere report said telecommunication prices have fallen in real terms for nearly all of the last 13 years. While fixed line and broadband pricing tend to be more costly than the OECD average, this may be in part because the input costs of access are above average, it said.

New Zealand’s mobile pricing has reduced 46 percent over the two years to 2014, the second greatest reduction in mobile prices in the OECD.

The Ministry for Business, Innovation and Employment is currently reviewing the legislation governing the sector, which looks set to align regulated prices for fibre and copper-based services, using a similar framework to the electricity sector.

Chorus chief executive Mark Ratcliffe said while it supports the move to a utility-style model for fibre, he had concerns about how that is implemented so as not to generate a price shock to any part of the market.

Spark’s Moutter said he was “bored with regulation, to be frank” and would rather see the industry set out on a commercial path. He said the predicted roll-out of 5G (fifth generation of mobile networks) by 2020 would constrain fibre pricing.

The Commerce Commission made a final decision setting Chorus’s regulated prices on its copper wires and landline prices late last year and Ratcliffe said it was hard to feel a winner when the outcome after three years was lower prices than it started with.

All the parties have agreed not to challenge the decision any further and have drawn a line under the issue, which had caused some bitter industry discussion, he said.

“That wouldn’t have been the case four or five years ago. Somebody would have found a reason to drag it through the courts for another three to four years. It’s a sign of the industry maturity that they’ve decided to move on,” he said. “That’s a great disappointment to lawyers.”

BusinessDesk.co.nz

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