WHERE TO FOR UNIVERSAL SERVICE – PART 2

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In Part 1 of this post (link) we look at the historical approach to universal service. Part 2 looks at the future: and in particular at rural broadband.

To its credit, the government has recognised that access to broadband in rural areas is a serious economic and social issue. The Rural Broadband Initiative (RBI) is the response: an industry-funded, government-led programme building faster broadband infrastructure in rural areas. When it is finished 86% of households outside the cities and most rural schools, health centres and public libraries will be able to access fast broadband, mostly within the next two years. Vodafone is building around 150 new sites and securing fibre to more of its towers, and Chorus is building 3,100 kms of new fibre.

The RBI was a big and welcome change in approach on how to to encourage telecommunications companies to provide services in hard to reach areas.

  • The TSO simply imposes the obligations on Telecom (and from 2001 to 2011 required other operators to pitch in to the costs). A similar model operates in Australia, where Telstra has the obligations and the other operators compensate it to the tune of around 50m each year (see the article on Universal Service Obligation here.
  • The RBI is a competitive subsidy model (the money actually comes from the industry itself through a levy), rewarding Chorus and Vodafone, who won the tender, for building networks and providing services in rural areas. The German government has done something similar, requiring bidders for new generation cellphone spectrum to commit to build their networks in rural areas before they are allowed to build them in urban areas (see that story here), implicitly accepting a lower sale price for the cellphone spectrum as the price of universal broadband coverage.

Not only is the RBI a better approach in terms of actually getting services rolled out in rural areas, but it sets a simple and clear standard for minimum broadband services which:

  •  will reach 86% of rural customers, over half of whom will have access to multiple competitors and a choice of technology (copper or wireless)
  • will deliver a peak speed of at least 5 Mbps over wireless (a bit quicker than average fixed broadband services today) and 20 Mbps for copper-based services
  • *will be priced so that services cost the same in both urban and rural areas. 

Four challenges for the review

First, there will be continued pressure from rural customers for better broadband services (see paras 164 to 167 of this Commerce Commission summary. 

This could take the form of a minimum guaranteed broadband service that must be available to all New Zealanders. There was much debate around the RBI as to whether 5 Mbps was fast enough for those customers relying on fixed wireless services (although of course it is a whole lot better than the no broadband at all that many ruralcustomers faced before the RBI came along). The UN has defined broadband as a basic human right, and Finland in 2010 made a rule that all telecommunications operators were required to offer broadband access of at least 1 Mbps.

Competition over the RBI-funded infrastructure should mean that customers willgradually get more bang for their buck – in urban areas competition has meant growing datacaps with broadly static prices. Wireless services have smaller data caps than copper-based services reflecting the higher costs of data on wireless technologies. But new mobile technologies should allow faster wireless data speeds and bigger data caps in due course.

Second, the government’s review will need to consider updating the TSO requirements for the internet age.

Certainly free local calling is heavily utilised – accounting for 29% of all voice minutes in 2011 (see page 11), but if the Commission is right it is holding back competition.

For the growing number of customers who use mostly or only their mobiles,”free” local calling is rather expensive. Other elderly TSO requirements – like not charging more in rural areas than in urban areas, and ensuring Chorus does not shrink its network seem superflous given the developments of recent years.

What to do with the ineffective price cap on basic voice services is trickier. It does not seem to serve customers very well, although clearly it is helpful for the industry to be able to put up prices every year. 

Third, the obligations could be extended beyond just Telecom. With Chorus, the network company, now split from Telecom, the retailer, it doesn’t obviously make sense that the TSO obligations should rest only on Telecom. If Telecom is required, say, to have a standard plan that offers free-local calling as an option, there is no obvious reason why this rule should not apply to other operators as well.

The fourth challenge is ensuring everyone can get decent broadband.

Even after the completion of phase 1 of the RBI there will be coverage and competition black spots. There is a phase 2 of the RBI ably explainedby the Commision in para 159 of this report to reach schools and other priority users that are not at present covered by the RBI or the government’s fibre network (the UFB).

Systematic, public, up-to-date data on remaining areas of trouble could also help – it seems like it would be an easy extension on the government’s broadband map to show people who do not have service at present. This would help operators to figure out the value of network extensions, sharing infrastructure where it makes sense in remote areas. Satellite solutions will work for many. Community self-build solutions like those from Wiz Wireless can also help in some parts of the country.

Over to you

So the ball lies fairly firmly in the government’s court. Its review is required to be completed by the end of 2013.

We wait to see the outcomes with interest. A bold answer would consign the outdated TSO requirements to the dustbin, and ensure a sensible alignment between the TSO and the RBI as we continue to work towards universal broadband.

Hayden Glass is a consultant specialising in telecommunications with the Sapere Research Group, one of Australasia’s largest expert services firms

Citizens and Video Watchers Arise!

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New Zealanders have long suffered due to a lack of legitimate online video options. Alert readers will recall that we have looked
at these issues in a blog post  The Ins and Outs of Online Video, and the next step is to get some better data on how our options compare with more fortunatate isles.

We want to do this by creating a list of legitimate online video options and their key characteristics. If you are a user of online video options willing to share your knowledge with the world, feel free to contribute what you know, or correct what is there in thisspreadsheet.

We also want to gather information on how New Zealand compares. So if you are using the US iTunes, Hulu, Netflix, Lovefilm or some other major online international video service, please fill in the sheet that explains how it stacks up. We promise not to tell anyone if you are breaching their terms and conditions.

With your contributions the idea is that this table can become a trusted source of information, and TUANZ and others can use it in their ongoing lobbying on these issues.

Guest blog – Where to for universal service

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Guest post from Hayden Glass from the Sapere Research Group.

And broadband for all

Now everyone has access to a telephone, the question is how to get everyone great broadband.

Next year, the government will review the rules about universal service, ie, the questions of what minimum level of telecommunications service should be guaranteed to everyone, and how best to make that happen.

The legislation requiring the review is quite specific about what to cover, including whether existing universal service rules are still needed, how they should be delivered on, and funding arrangements.

Successive governments have required Telecom to make basic voice services available to everyone. These historic requirements are now out of date, overtaken by competition and by technology (especially mobile). The real questions for the future are about broadband, as the government’s Rural Broadband Initiative (RBI) recognises.

Part 1 of this post looks at what the universal telecommunications services are, and how the requirements have fared over time.

Part 2 will consider the future, explain why the RBI is a big improvement, and looks at what remains to be done.

What is universal service

The universal service programme in New Zealand suffers under the moniker of the Telecommunications Service Obligation for Local Residential Telephone Service (TSO). Fundamentally its job was to ensure that everyone had access to a fixed-line telephone that they could afford. (There are also separate arrangements for a text relay service for the deaf, confusingly also called a TSO, that are not the subject of this post.)

The latest incarnation of the TSO is a deed (WARNING: PDF) agreed in December 2011 as part of the separation of Telecom and its network arm, Chorus. The TSO imposes four main requirements on Telecom.

* Never raise the price of basic fixed-line phone service for residential customers faster than the rate of inflation, unless Telecom can show its profitability is “unreasonably impaired”.
* Never charge more in rural areas than in urban areas for “basic residential service”, which in effect means Telecom’s standardHomeline service .
* Continue to offer fixed-line phone service to all customers who were connected in December 2001, and
* Provide free local calling as part of the basic phone service for residential customers. Via an exchange of letters with the government in 2000,  Telecom was also required to provide slow-speed dialup services to most customers.

Chorus, the network company, has obligations to maintain its fixed network coverage to ensure that Telecom can continue to meet its obligations.

These obligations have changed only slightly since they were put in place on Telecom’s privatisation in 1989 despite radical changes in the industry in the meantime. The slow-speed dial-up data requirements were put in place in 2001, when Telecom was given the ability to bill its competitors for some of the alleged negative profit impacts of having to meet these obligations. The Commerce Commission checks each year whether the obligations have been met .

The 2001 requirement for the industry to compensate Telecom was never going to be a popular policy in the industry. It led to a verylong-running legal dispute eventually won by Vodafone, although as between Telecom and Vodafone the case had already been settled before the last court decision came out. Vodafone was essentially arguing that the Commission had not followed the law properly and as a result had substantially overstated the cost of the TSO obligations for Telecom. Soon after, the government announced it would get rid of the contribution system, particularly in light of evidence cited by the government that Telecom had not spent the money it had been given by Vodafone and others on rural network infrastructure in any case.

Universal service anyway

The TSO obligations have worked so far as they went, ie, the fixed-line network is as no smaller than it was in 1989, the price of basic fixed-line phone has gone up at almost exactly the rate of inflation, and free local calling remains part of Telecom’s Homeline package (as seen in the Commerce Commission’s helpful report).

But thanks to competition and technological change, these obligations are now chronically out of date.

* Ensuring access to a fixed-line telephone is no longer the problem. Just about everyone has access to a fixed line and a mobile phone, coverage continues to expand through competition, philanthropy (Vodafone’s community tower build programme), and the RBI, and local calls are cheaper and cheaper on prepay mobile plans with no minimum spend.

* The price cap on residential phone service was insufficiently tough in the first place. The Commerce Commission thinks that free local calling has retarded competition, and that New Zealand has one of the highest prices for standard residential service in the OECD. The price of standard residential phone services has risen even while prices for other phone services have collapsed.  Local calling is only “free” for customers who pay the high monthly fee, which might be why the now-renamed Ministry of Economic Development calls it “charge-free local calling“.

In short, the existing TSO is a solution to a problem that no longer exists. The real issue now is broadband for everyone. As we shall see in Part 2.

Hayden Glass is a consultant specialising in telecommunications with the Sapere Research Group, one of Australasia’s largest expert services firms.