Eight months ago I wrote this post about the announcement Chorus had made to create tail extensions as an add-on for UFB services. In case you haven’t got the time to click the link above, here is some background I gave back in August 2015:
Tail extensions are an industry term used to describe the cost Chorus charges RSP’s for handing a tail circuit off to an RSP when that RSP doesn’t have a presence in the town/city where the end user is located. For example: An RSP has a client in Taupo, but has no infrastructure or handover in Taupo, and the nearest handover that RSP has with Chorus is in Hamilton. Chorus will carry the circuit data 300km or so back to that Hamilton handover and charge the RSP an additional cost on top of the standard circuit cost.
As an aside, I use the terms RSP and ISP interchangeably, both basically mean the same thing in this context.
The table below shows how regions are broken down and where each point of interconnect (POI) connects to.
The cost of asking Chorus to backhaul a 1Gbps Business Max UFB circuit from a remote POI to your handover in a core region is an extra $8.59 p/month, and the cost of running a 200Mbps symmetrical Business Evolve service from any remote site to a core region is $2.59.
Why is Chorus doing this?
Revenue. This has nothing to do with driving uptake of UFB. It will have zero impact on uptake levels. Chorus is not making much money from the few ISP’s connecting in each region at $100 p/month plus the few rack footprints purchased in the exchanges, but this move will allow them to make 4-5% more on each tail sold where the ISP doesn’t have a local handover.
From a Chorus perspective, it is the right move by them on behalf of their shareholders.
Small ISP’s currently purchasing services from the likes of Kordia, Voyager, Vibe and others will be able to reduce costs by purchasing direct from Chorus.
Several ISP’s in NZ have made the ill-fated move to position themselves as UFB wholesalers, often referred to (by me at least) as 3rd party aggregators. Chorus has seen this market evolve and realised it could service this segment more effectively, but in doing so is putting some of its clients, already running with very low margins, at significant risk.
Domestic backhaul providers will have less demand for their fibre services connecting smaller towns to major centres. If ISP’s aren’t setting up in regional exchanges, they won’t need to connect back to their core points of presence PoP’s).
What does it mean for DTS?
I am pretty happy right now that the UFB wholesale market is not a key pillar for DTS, but we have put equipment into 22 UFB regions around NZ to ensure we have direct access to Chorus/Enable/UFF and NorthPower. The reality is that these regions give us access to more than just UFB. By having a presence in each region we can connect to any carrier with a presence, e.g. EAN in Ashburton, Unison in Napier/Hastings/Rotorua/Taupo, etc.
My job now is to conduct a review of regions we have a PoP in and ensure that the monthly cost to the business is justified based on any other access requirements and the volume coming out of that region. It is early days, but it may make sense to pull out of a couple of smaller regions and utilise Chorus UFB tail extensions in their place.
Bitstream4/HSNS looks to be excluded from the tail extension offer, so anywhere where our clients have a requirement for that service will require a continued presence by DTS.
Where is the detail?
Chorus’s clients are getting far more effective at communicating with each other, and one senior executive from one of their bigger clients made a good point to me last week when he said that his concern was what hasn’t been said. The TCF product forum discussion document from late last year suggested the tail extensions will only be useful for “low volumes” and that Chorus expects service providers will still want to establish local handovers over time for “economic and performance reasons”. So, what restrictions will exist and what performance issues are expected? No dramatic issues have ever been experienced by DTS with tail extensions on VDSL/ADSL2+ services from copper, so will UFB tail extensions perform tot he same standard?
Why has this angered many in the industry?
Basically for all the same reasons I mentioned eight months ago in the post linked above. This puts serious strain on an industry already dealing with a rapid adjustment in revenue and cost structures. ISP’s that have tried to innovate and invest, which is something the Government loves to highlight as a positive, will now be the most negatively affected by this move from Chorus.
When a single company has as much power over a market as Chorus does in NZ, moves such as this have a massive impact.