Beyond the utility

Kate McKenzie plans a modern Chorus

When all the UFB fibre has been laid, Chorus’ CEO aims to use it to leverage Internet of Things apps and artificial intelligence, as well as run Netflix movies. Chorus will not be a boring utility, she tells Bill Bennett

Chorus chief executive Kate McKenzie has customers in the front of her mind. She says knowing what people value and understanding their experience when they deal with the company is vital.

This is not an unusual sentiment for someone running a large New Zealand business. Yet, Chorus has few customers in the usually accepted sense of the word. By law, it can only sell wholesale services.

Chorus' customers are retail service providers or RSPs. There are around 90 or so of these. They buy wholesale broadband services from Chorus. RSPs then wrap these services into their own packages, sell them to consumers and provide the support.

As McKenzie points out, RSPs pay Chorus’ bills, which is something customers do. So, on one level, her customer focus is all about meeting RSP needs and expectations.

But there's another level. McKenzie says the end-customers, that is the home-owners and businesses who buy from RSPs, are also important to Chorus.

She says: “End-customers get our product; we are the ones who handle its delivery. This means we need an understanding of what’s important to them. How we design systems, build processes and work with RSPs can make a big difference to an end-customer. You have to think of it as an entire customer ecosystem. In that sense, they are all our customers.”

McKenzie says she learnt about meeting customer needs early in her 12 years working at Telstra. Her first job at Australia's largest telco was running the regulatory group. By the time she left Telstra she had managed almost every part of the company.

It was, as she points out, a great grounding for a chief executive. She says: “During my time at Telstra I saw all the different aspects of the company. I was fortunate compared with my peers; I worked on a wide variety of functions.”

As well as the regulatory role, McKenzie worked in mergers and acquisitions, along with strategy, products and pricing. She ran the operations environment and spent three years running Telstra's wholesale operation.

McKenzie says it’s helpful now she is a CEO to have this hands-on knowledge of all aspects of a telco.

When McKenzie first joined Telstra it was a different organisation to the one you see today. The majority of Telstra's shares were still in public ownership. Soon after she started with Telstra it switched from public to private ownership.

This led to a cultural change. Overnight, Telstra had to worry about winning and retaining customers. This was something that had, in the past, been largely taken for granted.

She says: “At that time I went to Stanford and did a strategic marketing course. There I got a bunch of new skills. I first learned how to segment customers, and how to think about what customers value.”

Like any privately owned business, Chorus lives or dies by serving customers. But it has to cater to another constituency: the New Zealand Government. The company de-merged from Telecom NZ, now Spark, as part of a government-led industry restructure in preparation for the fibre roll-out. This means the Commerce Commission regulates much of Chorus’ business. Among other things the regulations say it can only sell wholesale broadband services.

McKenzie says: “We have a contractual relationship with the government. In effect, it has given us some interest-free loans; they all have to be repaid. Attached to these loans are obligations about how the [UFB] build gets done and to what standard it gets done. At some point, we have to start paying a dividend if we don’t repay the loan. It's a good set-up. That’s why the regulatory environment is so important to us.”

There’s a gulf between the New Zealand Government’s hands-off approach to the fibre network build compared with what happens in Australia. McKenzie says the fact that telecommunications has never become a partisan political issue is a huge difference between New Zealand and Australia. She also admires the NZ Inc approach to doing what’s best for the nation regardless of politics.

She says: “You have to congratulate governments here of both political flavours. They’ve made a decision and successive governments have followed it through. They haven’t changed their minds every two years or so about what they want built and what they don’t want. If you’re creating long-term infrastructure you can’t afford to have continual change. This bi-partisan support has meant Chorus could focus on what it was supposed to be doing: getting on and building the network.”

Coming to Chorus, a wholesaler, was something of a leap for McKenzie, despite her time running Telstra’s wholesale business. “I spent 12 years in the telco industry explaining to everybody why structural separation was a terrible idea and should never happen. I’ve definitely changed my view on that,” she says.

The New Zealand regulatory model makes a huge difference, she says. “We now have a set-up where an organisation like ours is open access. It’s agnostic about how the retail service providers operate. This creates a completely different market dynamic.

“It gives us a real focus. It’s one that you don’t have in a vertically integrated organisation.”

McKenzie jokes that the downside is that the structural model makes it easy for all the RSPs to gang up on Chorus. And the lack of vertical integration brings challenges. “There is nowhere for us to hide; we’re transparent,” she says.

Yet, she looks to the positives: “On the plus side, they all get the same inputs. It means they have to think about what it takes to become better retailers. They have to look for points of differentiation to be able to compete with each other. It’s a good model.”

So far much of the competition has centred on price. McKenzie says this is one of the biggest challenges for the industry. “People are consuming enormous amounts of what we produce. Growth is very high. Eventually, price competition is not sustainable because we are spending a motza building these networks. There has to be some way of adding value that customers are willing to pay for that will stop the whole thing from becoming a race to the bottom.” Hence the focus on differentiation.

She says “differentiation can come from different places, that’s perfectly valid. In some ways, the network is so good now that it’s hard to differentiate on network-related features.” She points to moves by Spark and Vodafone to value-add with Lightbox and Vodafone TV as one kind of differentiation. Then there is Stuff Pix. Less obvious are the moves by brands in the Vocus Group to offer power alongside broadband. And then there are the power retailers who now offer broadband.

Meanwhile, she says Chorus’ main job is to stay focused on getting the various stages of the UFB build completed on time and on budget. “We aim to make sure our processes and systems are fit for purpose, and that the customer experience is good,” she says.

The network build will be complete in about four years’ time. However, McKenzie has no intention of sitting back then and managing a steady-as-you-go network utility.

She acknowledges the U-word describes where the company is today. She says: “We’re the fourth utility. For where we are in history that’s right. These days our broadband services are as essential as water or electricity.” The company’s shareholder base reflects this. “Compared with Spark, the former parent, we have a different shareholder base. Most of our shareholders are longer term infrastructure investors,” she says.

Utilities are often seen as slow-moving compared with other industrial sectors. Chorus doesn’t have that luxury. It plays in the fast-moving telecommunications sector. The technology has already changed a lot since the company de-merged from Telecom NZ in late 2011. Fibre and wireless networks are both much faster.

The key for Chorus once the UFB build is complete is innovation. McKenzie uses this word often. “We’re starting to turn our minds to what else people can do with the wonderful fibre application that we’ve been creating. I’m optimistic now that I can see more opportunity.”

She says one aspect of technology is that it changes customer behaviour, and business models. Areas singled out for attention in the near term are how the fibre network works with the coming 5G mobile world, and how to use fibre to get more from the Internet-of-Things. McKenzie is also bullish about technologies like artificial intelligence. “Gaming, Netflix, artificial intelligence and so on all need networks to support them.”

The network is a fantastic asset for Chorus, its shareholders and for the nation, she says. “It’s been very well done and will reach 87 percent of the country by 2022. It was, for the most part, financed by private investors.”

It’s easy to forget that seven years into the UFB project the fibre companies, not only Chorus, have exceeded the expectations set down before the start. Many more people have chosen to connect than the planners anticipated. The build is ahead of schedule and the fibre footprint is about 20 percent bigger than was mapped.

McKenzie says: “Today, we have 61 percent of customers on the 100Mbps plan; it’s by far the most popular plan. Data consumption is going through the roof. Ten years ago, people wondered if any of this would ever happen.”