Chorus doubles down on fixed network as outlook dims

Chorus chief executive Kate McKenzie. Spark's dwindling reliance on the copper lines is feeding Chorus' cloudy outlook. Photo / Peter Meecham

Chorus is beefing up its defence of fixed line telecommunications as the country's premier technology as Spark New Zealand's dwindling reliance on the copper lines feeds into the network operator's cloudier outlook.

The Wellington-based company hired consultants to review developments with new technology and industry trends in New Zealand's telecommunications sector, where data usage has soared on the public embrace of streaming video services, something envisaged as crucial for fibre uptake by the Commerce Commission in a 2012 report on likely drivers of demand for the network.

The strategic review was against a backdrop of changing market dynamics, where retailer Spark aggressively sought to switch customers from copper-based services onto the retailer's fixed wireless, sidestepping the cost for wholesale access to the network, and as local fibre companies complete their own infrastructure builds, pitching the superior fibre against Chorus's copper line service.

"Fibre is clearly the best technology to meet ever increasing and changing data demands," Chorus chief executive Kate McKenzie said in a statement. "Given the likely infrastructure requirements and service characteristics of future wireless technology, and the extensive nature of our fibre to the home network, we believe wireless will continue to be a largely complementary access technology."

In fact, Spark's fixed wireless technology relies on Chorus's direct fibre access service, which will fall under price regulation from 2019 because of the competing nature between the retail service provider and the network operator. That component is also a key component to five-generation mobile technology, known as 5G, which will drive demand for backhaul services that allow interconnection with the fibre network.

In its annual report, Chorus noted the "uncertainty about the economic case for mobile network operators to undertake the small cell 5G deployments needed to deliver higher mobile speeds" in addition to the spectrum and backhaul assets needed.

"We, therefore, envisage a potentially important and complementary future for shared infrastructure operators such as us in a 5G future," the company said.

Chorus's total fixed line connections fell 7 per cent to 1.6 million and its broadband connections were down 3 per cent to 1.19 million. Over the course of the year, the LFCs lifted their broadband connection numbers to about 140,000 as at June 30 from 85,000 a year earlier, while Spark's fixed wireless attracted 84,000 customers.

That's meaningful for Chorus, whose biggest customer accounted for $541 million of its $1.04 billion in revenue for the year ended 30, down 5.1 per cent from $570m a year earlier, despite an increase in regulated copper prices from what was initially going to be a much steeper cut. Chorus's second two biggest customers paid more in the year, with revenue from its second biggest client up 3.9 per cent to $212m and its third up 3.5 per cent to $122m.

Chorus chief financial officer Andy Carroll told analysts the company anticipates "some further losses of connections" in the 2018 financial year, and when compounded with increased expenditure meant earnings before interest, tax, depreciation and amortisation would fall in the year ending June 30, 2018 to between $625m and $650m from the $652m it report for 2017.

If not for changes in accounting rules, where some labour costs were pushed on the capital spending line from operating expenses, 2018 ebitda guidance could have been lowered by another $60m.

Chorus shares dropped 4.1 per cent to $4.46, a two-and-a-half week low. Spark shares slipped 0.5 per cent to $3.90.