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New Zealand’s Ultra-Fast Broadband Initiative

Our journey to delivering a national FTTP network

July 2014

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Who is Chorus?

> New Zealand’s largest telecommunications infrastructure company with 1.8 million lines connecting homes and businesses

> Standalone, publicly-listed company

> We build and operate a wholesale-only, open access network, supporting ~90 retail providers nationwide

> Can deliver VDSL to 60% of broadband lines – higher in urban areas

> Forefront of building a new fibre network to more than 830,000 homes and businesses in partnership with Government

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UFB Vision: Fibre to the premises to 75% of New Zealand

Approach:

> Open access to all

> Layer 1 & 2 fibre

> 33 Regional Tenders

> Low wholesale pricing

> Access only

> Wholesale only

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On December 1, 2011, Chorus was separated from Telecom NZ via demerger

The total separation between the network and the services is transforming the

industry

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LAYER 0 Ducts, poles, civil works

LAYER 1Dark fibre, unbundled local loop, co-location

LAYER 2Fibre, xDSL copper broadband

VALUE ADDED SERVICES Field services, SLA’s

Transparent, open access, equivalent

Retail Services

New Telecoms Industry Structure

Wholesale services

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UFB: slow start but gaining ground

Jun-12 Jun-13 Jun-14 Jun-15 Jun-16 Jun-17 Jun-18 Jun-190

200,000

400,000

600,000

800,000

1,000,000

1,200,000

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

76,311

229,633

413,450

550,000

711,000

847,000

973,000

1,170,000

10%

UFB build and uptake 2012-2019

UFB Premises passed % uptake

Source: MBIE UFB Quarterly Progress Update

Industry launched retail fibre plans in 2013

Initial deployment is in CBD & priority sectors

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July-11 July-12 July-13 July-14 July-15 July-16 July-17 July-18 July-19$30.00

$35.00

$40.00

$45.00

$50.00

$55.00

$60.00

$55.00

$49.90

$37.50

$42.50

Fibre: 100/50Mbps

Fibre: 30/10Mbps

$34.44 copper price based on Commerce Commission benchmarking

$44.98 copper price today

We face significant regulatory uncertainty

> Our revenues are mostly regulated – the commission decides what we charge> A review of regulated copper pricing led to a significant reduction in

Chorus’ core copper broadband product to $34.44> Leads to a $142 million EBITDA impact per annum for Chorus

> Equals a $1 billion funding gap over the life of the UFB rollout.

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Journey so far …

> Cost to build/ connect

> Regulatory uncertainty

> Funding uncertainty

> Industry disruption

> Poorly aligned industry

incentives

> Ahead on build targets

> Emerging fibre demand

> Increasing service innovation

> Cost and build efficiencies

> Increasing competition

Opportunities Challenges

• Seek a cost-based regulatory review • Reshape the business• Commercial focus • Earn right to the customer’s business• Help New Zealand understand UFB opportunities

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Drivers for fibre demand

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NZ has been one of the highest-growth broadband marketsWe are extending our lead on the OECD average for uptake

Dec-03

Jun-04

Dec-04

Jun-05

Dec-05

Jun-06

Dec-06

Jun-07

Dec-07

Jun-08

Dec-08

Jun-09

Dec-09

Jun-10

Dec-10

Jun-11

Dec-11

Jun-12

Dec-12

Jun-13

Dec-13

0

5

10

15

20

25

30

35

Wired Broadband Penetration Rates

Bro

ad

ban

d C

on

necti

on

s p

er

10

0 p

op

ula

tion

May 2006:Governmentannounces

separation ofTelecom and

regulatory change

March 2008:first launchof local loopunbundling

December2010:

UFB officially launched

September2007:

Broadbandovertakes

dial-up

NZ Dec 201330.2

broadband penetration

OECD average

27.0 broadband

penetration

Estimated1 77% of NZ households have broadband today

15th in OECD – ahead of US, Australia and

Japan

Source: OECD Broadband Portal (http://www.oecd.org/sti/broadband/oecdbroadbandportal.htm)1: Chorus estimate based on growth. Statistics NZ estimated household broadband uptake to be 75% at June 2013 (Household Use of ICT survey).

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Demand is being driven by connected devices

Source: IDC New Zealand Consumerscape 2014

OTT video1-2 Mbps

Browsing 3-5 Mbps

SD TV2 Mbps

HD TV6-8 Mbps

Smartphone1-2 Mbps

Online gaming1-2 Mbps

HD gaming6-8 Mbps

VoIP0.1 Mbps

Streaming music0.3 Mbps

Video sharing2 Mbps

Photo sharing1 Mbps

HQ Video Calling1-2 Mbps

Average # of smart devices in NZ homes increased from 2.9 to 5.2 in 3 years

Smartphones have grown from 13% penetration in 2011 to 68% in 2014

Tablets have grown from 4% penetration in 2011 to 39% in 2014

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… and use of videoChorus Network Analysis• Location = Auckland; Connection = 70Mbps VDSL• Netflix on Apple TV with wifi to standard router, Light Box on IPAD (Gen 2)• Experience – no perceived quality issues

7:00 7:08 7:16 7:24 7:32 7:40 7:48 7:56 8:04 8:12 8:20 8:28 8:36 8:44 8:52 9:00 9:08 9:16 9:24 9:32 9:40 9:48 9:56 10:0410:1210:2010:2810:3610:4410:520

2

4

6

8

10

12

14

16

18

Time (h:mm) on the evening of Thursday 12th September

Thro

ughp

ut a

t Lay

er 2

(Mbp

s)

Web browsing (2 people)

Netflix

Lightbox

Average = 290kbps 6.26Mbps 8.42Mbps 6.32Mbps 230kbps

Lightbox using 2Mbps on IPAD2

Netflix using 6Mbps on AppleTV

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Chorus data: high speed broadband demand is growingAveraging 5,000 VDSL and 2,200 fibre net additions each month

Source: Chorus quarterly volume reporting, Sept 2014 (http://www.chorus.co.nz/investor-news)

Unbundled copper Standard broadband (basic & enhanced)

High speed copper (VDSL) Fibre (GPON)-15,000

-10,000

-5,000

0

5,000

10,000

15,000

20,000

25,000

03,000

1,000

-11,000

16,000

10,000

Chorus Broadband Lines: Quarterly Net Additions

Sep-13 Dec-13 Mar-14 Jun-14 Sept-14

Broadband growth remains strong

Standard mass market broadband is in decline

Growth is in high speed broadband

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Chorus response

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1. Innovate to get deployment/connection costs down

New underground fibre closure used for all connection types

>Focus on simple, consistent methodology for connection

New air blown fibre cable more reliable greater blowing distance

New air blown connection tube Cheaper, stronger, smaller

New practices where existing duct or aerial is not available: Use new hardened tube for SDU in

line with other utility practices multi-storey building cabling to

support simple installation practices

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2. Meet market demand via commercial products

Emails and browsing

Social networking

TV and movies on demand

Video calling

Real time gaming

Cloud services

3+ simultaneous users

Regulated UBA

Boost VDSL

Fibre 100

Fibre 200

Pragmatists = Value and Info Seekers

Connected Matriarchs = Seek Connectedness (video calling)

Digital Natives = Entertainment Seekers, Gamers

Affluent Families = Entertainment, Efficiency

More UsersFewer UsersMainstreamUsage

Heavy Usage

Home Business = Certainty, Cloud

> Boost VDSL: with a 10Mbps service commitment to deliver HD video

> New fibre plans – 100Mbps at $40 ($5 less than copper)

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- - -UFB Year 1-3

- - -UFB Year 4-5

3. Share more information about our network

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Gigatown: Competition for a town to connect to the fastest internet in the Southern Hemisphere

>Eligible posts to date: 2.3 m.>Facebook community pages likes:

41,500>Gigatown Supporters network:

46,200

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We are on a transformative journey

>New Zealand will get FTTP to 80% of its population It will drive social, economic and productivity gains

>Fibre represents a unique opportunity for RSPs to reinvent their portfolio New value proposition to meet changing market demands

>However transition may lead to more consolidation and disruption Structural separation of the industry plus technology shifts is

changing business models

>We believe we can create global broadband envy!!

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Thank you