The industry left in limbo

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The minister has announced a major change to our telecommunications industry with a view to ensuring certainty for investors.

In her announcement, the minister has made three decisions:

1: Bring forward the TSO review to start immediately;
2: Bring forward the review of the regulation to start immediately;
3: Extend the UBA wholesale review (in effect freezing it until after this review takes place).

TUANZ has always supported an ongoing review of the regulations that bind our industry. Having seen the massive changes in technology and customer use over the past five or six years it would be foolish not to. Our regulation must reflect both the industry and our users’ needs, so ongoing review is essential.

We also support a review of the TSO – that pernicious beast has caused more trouble than it’s worth and it’s high time we implemented a universal service obligation that focuses on end users rather than network builders.

Extending the UBA review means we have a half-house regulatory regime in place until after this new review has been completed and that troubles me.

In December I wrote about the regulatory process and why it’s important to ensure politicians don’t meddle in an ongoing process. Regulatory certainty only comes about via an arm’s length process where investors can be sure the rules of the road are dictated by the regulator and not by the politicians of the day with one eye on the polls.

All this has come about because a rule the government put in place when it last revamped the Telecommunications Act has proved unsavory. Chorus makes its money today from wholesaling copper services, yet by the end of the decade it will have built a fibre network that makes its copper lines surplus to requirements. Chorus (and Telecom before it) knew the rules going in. In exchange for separation, Chorus would win the UFB project and would expect to have the copper regulation set once and for all and left alone. That regulation would include moving from “retail minus” pricing to “cost plus” and that’s exactly what the Commerce Commission has introduced.

The government has chosen in effect to freeze that process and to leave the industry in limbo. We don’t have new pricing for wholesale services and we now face an intensive round of lobbying on our new regulatory process, something which in an ideal world would be as bloodless and clinical as possible but which now will no doubt be rather more exciting than that.

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TUANZ submission on wholesale pricing

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Unbundled Bitstream Access (UBA) Service Price Review

The Telecommunications Users Association of New Zealand is a membership-based, not-for-profit organisation that represents business users of telecommunications in New Zealand.

Established in 1986, we work to encourage investment in the New Zealand telecommunications market, better regulation to deliver increased competition and improved access for all New Zealanders.

We thank you for the opportunity to submit on the matter of wholesale pricing for copper services. For the purposes of releasing to the public, none of this submission should be deemed commercial in confidence.

Executive Summary

TUANZ has long argued for certainty in regulation; increased investment and lower prices for users of broadband.

TUANZ submitted on the amendments to the Telecommunications Act introduced in 2010, arguing strongly against the so-called “regulatory forbearance period” and in favour of a level playing field for all investors, overseen by the Telecommunications Commissioner and the Commerce Commission.

Comments made by both the Minister of Communications and the Prime Minister would seem to undermine that independence in favour of the company charged with building most of the country’s Ultra Fast Broadband (UFB) network.

TUANZ is gravely concerned by the level of political interference in the Commerce Commission process. The Prime Minister won’t rule out changing the law to ensure the draft determination from the Commerce Commission doesn’t become a final ruling and the Minister of Communications has also voiced her concerns over the draft determination.

The Commission is required to follow the law which clearly states the Commission to set a forward-looking cost-based price for UBA. The industry as a whole has known about this part of the Telecommunications Act, and has discussed it at some length, since it was enacted and it should come as no surprise to either government or industry participants.

TUANZ shares the Commission’s view that benchmarking against such a small group of comparable countries is problematic, but is entirely opposed to the idea that the Commission’s final determination be treated as some kind of recommendation to the government, rather than the legally binding determination that it is.

The government is, of course, entitled to introduce a new Telecommunications Bill to parliament and to make changes to the way in which the law works, however under the current law, the Commerce Commission has little choice in the matter but to use a cost-based model as it has in the draft determination.

TUANZ believes that wholesale UBA services will diminish over the next few years being replaced initially by VDSL services and ultimately by fibre – however, it is vital we get the settings right for both retail service providers and network operators, for investors and users of the service.

Submission

The Telecommunications Act

The Telecommunications Act makes it quite clear in section 77 just what is required of the Commerce Commission in this instance.

Review of standard terms determination for unbundled bitstream access service before expiry of 1 year from separation day

•    (1)The Commission must make reasonable efforts to do the following before the expiry of 1 year from separation day:

o    (a)review the standard terms determination for Chorus’s unbundled bitstream access service under section 30R for the purpose of making any changes that may be necessary in order to implement the initial and final pricing principles applicable after the expiry of 3 years from separation day; and

o    (b)give public notice of the result of the review.

(2)To avoid doubt, no variation of, addition to, or deletion of terms specified in the standard terms determination as a result of the Commission’s review in accordance with subsection (1) may take effect before the expiry of 3 years from separation day.

The Act goes on to explicitly define the methodology which the Commerce Commission must use to reach thisdetermination:

The price for the designated access service entitled Chorus’s unbundled copper local loop network, plus benchmarking additional costs incurred in providing the unbundled Bitstream access service against prices in comparable countries that use a forward-looking cost-basedpricing method  

Schedule 1 goes on to require the Commission consider its pricing for UCLL (Unbundled Copper Local Loop) service when assessing the price for UBA:

The Commission must consider relativity between this service and Chorus’s unbundled copper local loop network service (to the extent that terms and conditions have been determined for that service)

The Commission released its final determination on LLU pricing on 3 December 2012.

So the rules by which the Commission must work are clearly outlined – UBA must be determined on a forward-looking cost-based assessment, and benchmarking with similar regimes around the world must be taken into account. The starting point for pricing must be based on the price already determined for UCLL.

There is no room, in TUANZ’s view, for the Commission to deviate from this model. Any changes to this model must be made at a political level rather than by the regulator.

Consequently, TUANZ supports the Commission’s approach and its draft determination. 

UBA price

TUANZ supports the Commission’s conclusions on price, based as they are on both cost-based services and its benchmarking efforts with regard to similar jurisdictions overseas.

Unfortunately, as the Commission has pointed out, with only two countries to compare ourselves against, the result is less than ideal. TUANZ would support the Commission broadening its brief or potentially looking to model costs rather than compare, given the limited nature of the market. That will, however, require a change to the Act itself.

Copper versus fibre

 Section 19 (A) of the Telco Act says:

In the exercise of its powers under Schedule 3,  the Commission must have regard to any economic policies of the Government that are transmitted, in writing, to the Commission by the Minister.

In this instance that must surely mean the Commission must consider the government’s Ultra Fast Broadband (UFB) project. Much has been made of the need to migrate customers from the existing copper network over to the fibre-based network once it becomes available.

Chorus is the lead network partner on the UFB project, as well as being the owner of most of the country’s copper lines, and so is placed in the interesting situation of having to earn its income predominantly from copper lines at the same time as it rolls out a replacement network.

Clearly this economic tension must lie at the heart of the government’s concern over dramatic changes to the price for copper services. Chorus has stated that the Commission’s draft determination would, if introduced into practice, lower its revenue by $160m a year, equal to 40% of its earnings.

TUANZ has to believe that Chorus must have known about the UBA review for as long as TUANZ has known and that any move to a cost-based model would result in the sort of drop in revenue seen here. Chorus investors must have been aware of the potential for this kind of move in a similar time frame.

Similarly, if TUANZ and Chorus both knew such a review was forthcoming, surely investors in other telcos would have known as well, and priced their investments accordingly.

TUANZ is very concerned that political interference at this point in the process will lead to yet more instability in the market as investors see long-signalled intentions cast aside at the last minute. TUANZ would like to see more investment in telecommunications in New Zealand and a robust regulatory regime is critical to that investment. Changing the rules when they become unpalatable simply isn’t acceptable.

Additionally, TUANZ does not see the copper network competing with the fibre network beyond the transition period.

Currently speeds over the copper network are constrained by the nature of the technology involved. ADSL (the family of technology deployed on Chorus’s network and which UBA uses) is “asymmetrical”. That is, the upload speed is only a fraction of the download speed. 

While home users generally don’t upload that much content, although that is changing rapidly, business users do and require much faster upload speeds than are found on the ADSL services, such as UBA.

The UFB rollout is scheduled to continue for most of this decade and most New Zealand homes won’t be able to be connected until 2016 at the earliest. Internationally, uptake rates of no more than 20% are the norm for fibre rollouts of this type and so for the foreseeable future New Zealand’s broadband will be delivered predominantly over copper lines.

TUANZ fully expects to see new DSL services rolled out in the months ahead, especially VDSL-based services, which provide a much faster upload and download speed over short-run copper. Chorus’s existing “fibre to the node” network means far more New Zealand households are within  reach of a fibre-fed cabinet than ever before and TUANZ is confident New Zealanders will avail themselves of faster speeds when they become available.

Rather than stopping the migration to fibre, TUANZ believes faster copper services will help drive that demand.

Today a home user connected via ADSL will see relatively modest speeds – 12Mbit/s download and 1Mbit/s upload would not be uncommon.

For an individual user that is quite acceptable in today’s broadband world, however as we connect more devices to our business and home broadband services, as more of us use broadband more frequently, that level of speed will rapidly become unacceptable. Ironically, connecting schools and businesses to the UFB first will help spur on families and employees who are used to fibre-like speeds at school or work and will want more at home.

In the next three to five years TUANZ expects most of Chorus’s income will continue to be received from customers of its copper network, but the vast majority of those won’t be UBA customers but rather VDSL customers. This interim migration– from basic broadband to faster speeds – must be considered as well as the migration from copper to fibre. Indeed, TUANZ believes the move to faster DSL services will encourage customers to take up fibre in much greater numbers when it finally does become available. 

None of that will eventuate if the price of copper services in New Zealand is kept artificially high in order to satisfy the needs of one company’s income stream – even a company as important to the future of telecommunications in New Zealand as Chorus.

Conclusion

The Commission has acted appropriately with its UBA determination process, following the law as it’s written.

TUANZ is gravely concerned that political interference in this process will undermine the good work of the regulator and impact on future investment in the telecommunications market.

TUANZ is also concerned that putting the earnings of one company ahead of the reduction in price will see consumers (both business and home users) disadvantaged.

TUANZ does not believe the impact on Chorus’s business model will be as severe as indicated in the press, as customers will predominantly move to faster copper speeds and so be migrating away from UBA in the short term. In the longer term they will, of course, be encouraged off copper and on to fibre anyway.

TUANZ thanks the Commission again for allowing us to comment on the draft determination. If the Commission does hold a conference to discuss these matters, TUANZ would like to be involved.

Open networks

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Sitting alone on the stage in front of a crowd of about 100, Sir Tim Berners-Lee did what any self respecting geek would – he got out his laptop and disappeared behind the screen.

For some reason, this made me irrationally happy and despite promising the assembled crowd that I wouldn’t, I had to tweet about it.

Sir Tim was in town (albeit briefly) to talk about openness and what it means and while clearly he had enough material to conduct a lecture on each of his various aspects of “open” (source, network, data and government among others), he managed to condense the whole lot down into an hour-long session of windmilling arms, anecdotes, side tracks and sudden bursts of enthusiasm, not to mention Maori.

It was his final point, on open networks, that struck me as most important. In effect it’s the net neutrality debate in which Berners-Lee says we must stand firm against telcos and ISPs that want to degrade or promote service to one part of the net based on commercial relationships. All telcos shape traffic and do a myriad of other things to keep the data flowing but when it comes to providing a better grade of service to one provider over another (he spoke of Netflix, as an example, being slowed to a crawl because of a commercial relationship with another movie provider) then we must demand an end to such nonsense. The power of the web, says Berners-Lee, comes from its agnostic approach to all bits on the network – prioritise voice or video or email as you will, but do it equally for all voice, video or email services. Do not promote one service over any other.

Which raises some interesting questions in the New Zealand context because of course our ISPs already do this. We’ve seen Sky content “zero rated” by some ISPs which means users don’t pay for traffic to and from that site.

Strictly speaking that’s at the very extreme end of the net neutrality debate. It’s not an inhibition on any other service, it’s not a prioritisation of Sky content over and above Quickflix (for example) but nonetheless it sits on the spectrum of net neutrality issues and must be considered as such.

Telcos will, naturally, follow the money when it comes to such things. If I had content I wanted to share as widely as possible I’d go in with a big cheque to make sure mine was top of the search terms, promoted on the broadest possible platforms and of course the easiest to access. What is needed in this space is clear guidance as to what’s acceptable to users and what’s got a longer-term prospect for skewing the market (the network itself) for future use.

The last thing I want is an internet where I have to buy service off multiple providers because ISP A has BBC content but ISP B has access to the movies I want.

Thanks to InternetNZ, Department of Internal Affairs, Chorus, Google and Catalyst for sponsoring and making it all happen and to Sir Tim for a thoroughly enjoyable and engaging evening.

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Denial of Service attacks – who pays the piper?

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Denial of service attacks are nothing new. I first wrote
about them in 2001 and even then they didn’t need much explaining – the electronic
equivalent of ringing the doorbell and running away.

Typically they’re used to shut down a website or knock a
service offline for a while. In the old days accidental DOSing became known as a
“Slashdotting” after the US-based geek-centric website renowned for posting
news stories that included (gasp) links to source material which would then be
completely inundated with viewers and thus crash the system.

I managed to Slashdot the New Zealand Herald’s Australian
parent company once by interviewing Ben Goodger, the Auckland-raised software
engineer behind Firefox. The Aussies had decided to host most of its
Aussie-based content in New Zealand but after the Goodger interview made it to
Slashdot, most of the international capacity they’d booked was soaked up with
US viewers clicking through to the Herald site. Hilarity ensued, I can tell
you.

These days of course it’s quite an underpowered website that
gets slammed in such a fashion. Most have nimble IT teams that can scramble
some extra resources if needs be and with mirrors, caches and content farms dotted
around the planet, it’s unlikely that most sites will suffer the embarrassment
of being crushed like a bug under the weight of overwhelming demand.

Individuals and small organisations, however, are not as well-endowed
and unfortunately if someone wants to slam them with more traffic than they can
handle, they’re likely to be knocked offline for a while.

And it doesn’t stop there because then there’s another
problem – who pays for the data sent to you?

Typically you pay because you’re the one with the internet
connection. Normally, you or your staff would be requesting content to be
delivered to you (websites, email, cat videos) or sending stuff out yourself –
but when the traffic is unwanted you may find yourself on the wrong side of a
steep bill.

The ISP billing engine can’t differentiate between unwanted
traffic and someone at your end downloading something large, which means it’s
all delivered to your door whether you want it or not.

One TUANZ member has been slammed in such a way and received
a hefty bill to boot – thankfully the ISP in question is willing to go halves
but even so, it’s a nasty surprise (and wouldn’t any reasonable ISP either wipe
the charges completely or just bump a valued customer up to the next plan size
for the duration?).

I’d expect to see more of this once we are all moved over to
fibre and the kiddies find out they can cause this kind of havoc.  As our correspondent notes:  “A DOS attack pinging people using 50Mbit/s each way can consume
10MB per second – 600MB per minute, 36GB per hour, 864GB per day” which would
soon hit a multi-thousand dollar phone bill for an unwary customer.

The
problem is that even if you as an end user take all the relevant precautions
(antivirus up to date, no unauthorised apps allowed on the network, firewall
blocking such traffic) you’ll still get stuck with the bill for traffic being delivered
that you probably don’t want.

TUANZ
encourages members to talk to your providers about what obligations there are
on both sides with regard to this kind of activity and to make sure you’re
covered in such a situation.

Have
you been stung for excess charges in this kind of situation? Let me know.

Happy New Year – how’s your phone bill?

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Shoes, eh? What’s that all about.

Another year begins and I hope it finds you all fit and well and raring to go. If you had half as much fun as I did over the New Year then you’ll have had a great break and learned a few things to boot.

One of the things I’ve learned is that while I might like going on holiday in a place with no cellphone coverage, not everyone is so easily pleased. I’ve got a handful of complaints to chase up with network providers from my time on the Coromandel and beyond – hopefully we can meet in the middle somewhere with a good solution for all.

I’ve tried my best to avoid the news over the last few weeks as well but some of it does leak through. Mostly it’s been about cats, from what I can tell, but TUANZ member Alan sent me a link to a story from Australia about that perennial problem – pass through.

Vodafone Australia claims Telstra is reluctant to pass on savings from lower termination rates, instead pocketing the savings to the tune of A$1.3 billion since 2004.

The Aussie regulator has lowered mobile interconnection fees to A$0.048 per minute, a reduction of 77 percent,but the cost of calls of Telstra’s fixed-line services have not fallen only 28 percent since 2004, The Australian reports.

Telstra denies this, of course, and points to the mystery of “the bundle” and says all the savings are there, they’re just invisible.

I’m not sure about you but invisible savings are a bit like the emperor’s new clothes to my way of thinking.

Over here we also have seen dramatic falls in the cost of terminating a call on a mobile network – have we seen a similar fall in the price of calling a mobile number? Certainly we have much better pricing in our mobile to mobile space, predominantly due to 2Degrees Mobile making waves. Telecom also has sharp any-network pricing and Vodafone’s latest business offers are also pushing the “call anyone on any network” line which is great to see. But pricing itself – has that moved? As with most things telco-related, it’s hard to tell. For my own use I know we’ve reduced my mobile phone bill from around $300-$600 a month when I started to no more than $150 a month these days, but I put that down to competition more than anything else, both between mobile providers but also between landlines and mobile.

I’d like to see the Commerce Commission conduct a post-implementation review of its MTAS regime to see just what has happened since the changes came into effect. It’s important we understand what impact our regulatory intervention has on the market, particularly in light of how much time and money went into the whole thing.

What do you think – are your phone bills smaller now than they were five years ago? Was the regulatory intervention worth the effort?

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The Greens rev up the ICT sector

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The Green Party has posted a discussion document aimed to
raise the level of debate about ICT and its role as economic driver in New
Zealand. My hat is off to them, in no small part because the document reads
like it was pulled from TUANZ’s policy section.

The document is broken down into three recommendations:
increasing government support for our ICT industry; encouraging youth into the
ICT employment market and taking a cornerstone shareholding in any future
international capacity provider.

Let’s look at each one in turn.

I’ve long held the belief that New Zealand government
agencies (at all levels, local and national) should be using more
locally-developed ICT services. There seems to be a belief that unless you’ve
spent hundreds of millions of dollars on an internationally sourced product, it’s
worthless.

Yet here in New Zealand we have the same needs for our
government departments and agencies that they do in Holland or Germany or
Canada or Australia or just about any other country in the first world. Better
than that, our needs are on a much smaller scale so we shouldn’t have to pay
quite as much as we do for these things. Our datasets are smaller, our
databases more easily managed and analysed. Do we need bespoke, handmade
systems developed by IBM or the like? I’d wonder.

Instead I’d much rather see our local developers given a
ready supply of local opportunities. All too often they’re told they’re too
small to bid for any particular tender – that attitude has to stop. Government
buys a lot of ICT related services – let’s give some of that money to local
developers.

Getting kids into the industry is a passion of mine and goes
back to my time at Computerworld. It’s vital we have the right staff at all
levels of the industry, from layer 1 (actually from layer zero I suspect) all
the way up the stack. The Greens are talking about including ICT in our
apprenticeship schemes and that’s already begun, albeit in a small way. But I’d
like to see more flesh on the bones of this proposal – tax breaks,
encouragement into training, course credits and so on. There’s a lot we can do
to encourage our young people to take up ICT related employment over and above other
areas in which we suffer a surfeit.

Which brings us to the most controversial part of the
discussion document – the $100m cornerstone shareholding in a second
international cable.

Already the naysayers are out in force. We don’t need one,
it’s totally redundant, it’s a white elephant.

Sorry, but I disagree. We don’t need one if we carry on
pottering along at today’s rate, but I want to see a step change in terms of
our economic use of the internet. I want to see data centres built in New
Zealand using our clean, green power supply. I want to see IT firms basing
their R&D labs here, growing their developer bases here and generally using
New Zealand as a hub to take on the digital world.  I want to see ICT grow from being worth 6% of
our GDP to being 25% – I want to see it match the primary sector in so far as
revenue goes, because then I’ll know we’ve done what we could to take our place
in the digital economy.

So full credit to the Greens for raising the bar and I’m
hoping we’ll see more of this kind of thinking from all the parties. Currently
we seem to have a “yes yes, ICT is important too” attitude that frankly won’t
change the world at all. I’d like to see us try and who knows where we might
end up.

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The Prime Minister versus the Commerce Commission

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The Prime Minister’s level of engagement over the Commerce
Commission’s draft determination on wholesale prices raises many questions. I’m not a lawyer but here goes.

John Key has taken the lead on this – aside from her initial
press release, minister Amy Adams has said little – and has repeated his
willingness to change the law in order to protect Chorus’s shareholders.

A change in law is indeed what would be needed because the
remit of the Commerce Commission and the Telco Commissioner has little to do
with shareholders and, in the instance of a regulated determination, does not
allow for political intervention.

The Commerce Commission primarily relies on three Acts to
make up its remit with regard to the telco sector: the Commerce Act, the Telecommunications
Act and the Crown Entities Act.

The Commerce Act (1986) makes it quite clear in Part One (8)
paragraph 2:

the Commission must act independently in performing its statutory
functions and duties, and exercising its statutory powers

The Crown
Entities Act (2004) defines itself (Part One – Preliminary Provisions) as:

to reform the law relating to Crown entities to provide a consistent
framework for the establishment, governance, and operation of Crown entities
and to clarify accountability relationships between Crown entities, their board
members, their responsible Ministers on behalf of the Crown, and the House of
Representatives

Which again,
speaks to this idea of independence from the Crown and the relationship between
Commission and the government of the day.

Finally, the
Telecommunications Act (2001) has plenty to say on the role of the Commissioner
in overseeing the industry, not least of which is the Commissioner’s ability to
deal with various service either as “designated services” or as “specified
services”.  I won’t bore you with the
detail but in essence a designated service is one in which the Commission sets
the price.  Chorus’s wholesale price is
one such designated service.

The Commission
gets to make the final determination – it doesn’t then refer it as a
recommendation to the Crown for approval. It weighs up all the factors, holds a
conference, uses its best judgement, compares the local market with international
markets and delivers a final decision.

There is no
appeal to the minister in the Act.  It’s
quite clear – the Commission must deliver the decision and the industry will
abide by it.

Part of the
Commission’s decision making is shaped by the government of the day, however. Section
19 (A) of the Telco Act says:

In the exercise of its powers underr Schedule 3,  the Commission must have regard to any economic policies of
the Government that are transmitted, in writing, to the Commission by the
Minister.

Although it does
then go on to say this isn’t “a direction for the purposes of Part 3 of the
Crown Entities Act” which seems to imply a certain amount of fudging going on
by the drafters of this piece of legislation. In essence, I read that as the
Commission must consider the broader economic agenda of the government when it
makes its rulings but isn’t to be directed by the government on its particular
decisions.

Which is of
course precisely what the Prime Minister has said he’ll do.

In an exchange
with Labour’s Clare Curran in the House yesterday, the Prime Minister made it
clear that the government can and will intervene if it wants to.

From the Hansard
draft transcript:

Clare Curran: Does he believe that it is a fundamental
principle of our telecommunications regulatory regime that the regulator is
independent to carry out its role without interference or undue political
influence?

Rt Hon JOHN KEY: Of course. They are free to go about their
work. The Government then is free to decide whether it wants to adopt that.

Unfortunately for
the Prime Minister, the Telco Act as it stands doesn’t allow the government to “decide
whether it wants to adopt that” at all. Far from it – the Act requires the
Commissioner to make the decision.

This was all
introduced to ensure that governments don’t simply overturn the decisions made
by their hand-picked, trained, informed decision makers. They’ve handed over
responsibility for the industry in large part to the Telecommunications
Commissioner under the auspices of the Acts mentioned here.

Over the years
the Commissioner has not always handed down rulings I’ve supported or even
remotely agreed with, yet in recent years we’ve seen a Commission that is
willing to painstakingly guide all the parties on a journey through its
decision-making process. Tediously transparent, is how I’ve described the
Commission’s work in the past and I’ve suggested to other government agencies
they might like to adopt the same approach.

You can talk to
any of the telcos and they’ll all tell you the same thing – they want certainty
from the regulatory process. They want to see what the problem is, see how the
Commission will address it, see where the outcome lies and plan accordingly. Independence
and transparency are critical to providing that certainty. Now that
independence is being challenged, not by the industry itself but by the Prime
Minister.

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A bouquet for Telecom

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Telecom has jumped into the roaming issue with both feet and
I’m very pleased with the result.

TUANZ has been lobbying hard to get data roaming rates
reduced. While the price of mobile data in New Zealand varies in price from
nothing to $30/GB, travellers heading oversees will find that price can balloon
out to $30,000/GB which makes for an unhappy homecoming, as I’m sure you’re all
aware.

We’ve all got horror stories of roaming gone wrong, whether
it’s having a piece of software update itself in the background or using the
wrong SIM card and paying casual rates. The issue’s got so bad the governments
of Australia and New Zealand have put together a trans-Tasman roaming review and
the future looks like being highly regulated.

Our telcos have responded the right way, by addressing
pricing directly. Australian customers should be so lucky – Telstra still
charges nose-bleed rates for travellers coming into New Zealand and the others
aren’t far ahead.

Vodafone New Zealand has launched its “data angel” service
for travellers alerting them to usage and requiring customers to make contact
before using excessive amounts of data, but Telecom has just changed the game
again with today’s announcement.

From December 21, Telecom customers travelling abroad will
pay a flat-rate, per day rate for data and so long as their usage is similar to
their usage at home, that’s all they’ll pay. In Australia, that’s a $6/day
price – in the UK, USA and China (among others) it’s $10/day.

This kind of offer goes a long way towards saving customers’
sanity when they’re roaming and is especially good for business users, whose
usage doesn’t vary that much whether they’re working in New Zealand or working abroad.
You’ll be able to do all the things you do locally without breaking the bank
and that will go a long way towards making data roaming a viable business tool.

If we can avoid the spectre of government agencies setting
prices, I’ll be happy and so I’m sure will the telcos. This kind of thing goes
a long way towards that goal and I for one am very pleased to see it.

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Initial Pricing Principle

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The Commerce Commission is coming in for considerable flack
for its role in determining the price of Chorus’s wholesale service and it’s
worth reviewing what the Commission is required to do and why it’s doing it.

The Commission is governed by several acts of parliament not
least of which is the Commerce Act itself, which has been since 1986 and has
flaws enough but which allows for the creation of the Commerce Commission
itself.

A relatively new part of the Commerce Commission is the
Telecommunications Commissioner’s role, something which was created in 2001 to
oversee the telco sector in New Zealand. Prior to that, we had no industry
specific regulation, no regulator and for those of you with a long memory, no
real competition in the market.

The Telco Commissioner was required to conduct periodic
reviews into a number of areas, one of which was the price Telecom charged its
competitors for using its network. This service, unbundled bitstream access
(UBA) was assessed on a “retail-minus” basis. That is, Telecom told the
Commission what its various retail plans were, the Commission took an average
number from those plans, removed a margin and presented Telecom with its
wholesale price. This price was reviewed regularly but generally speaking it’s
been the primary product most ISPs in New Zealand re-package and sell as their
own broadband service.

In effect, for many years we had no choice but to buy the
Telecom product, either from Telecom or from an ISP that simply changed the
name and re-sold the same product.

I’ve long argued that this isn’t wholesale per se – it is in
fact resale. The ISPs had limited control over the product, couldn’t specify
changes they’d like to see introduced, couldn’t really differentiate at all.

In 2010 the newly appointed Minister of Communications
Steven Joyce introduced a new version of the Telecommunications Act (the third
in a decade) as part of the sweeping changes the government would be
introducing. The main plank of the policy was the introduction of the UFB
project and the promise of government funding to any provider that built the
network.

The minister also introduced a Supplementary Order Paper
that added in a few caveats including the infamous regulatory holiday for the
company that built the UFB, but as part of that SOP the Minister also required
the Commission to do two other things: firstly, to average the price of
unbundled services between rural and urban New Zealand (previously we had two
prices) and to stop this constant round of assessing the price of wholesale service.

The Minister ordered a change to the “initial pricing principle”
(IPP) which governs the way the Commission must assess pricing. Out went retail
minus and in came “cost based” pricing. To quote from the Telecommunications Act itself (Part 2 –
Designated Services):

Initial pricing
principle: Benchmarking against
interconnection prices in comparabl countries that result from
the application to networks that are similar to the access provider’s fixed PSTN of— 

(a) a forward-looking cost-based pricing method

Bearing in mind this is in the law itself – there’s no room
for the Commission to say “we don’t think this is a good idea”. Far from it –
the Commission has expressed its concerns about retail-minus as a model for
many years, as has TUANZ. The ability for any incumbent to game the system by
introducing a handful of very expensive plans and so skew the average was
always too much to endure and we saw ISPs complaining bitterly that some of the
retail plans Telecom offered were priced below the wholesale cost to its
competitors.

As I said yesterday, there’s no way to use retail minus when
your network operator is structurally separated and has no retail arm. What
would you do – assess prices right across the board from all ISPs and work
backwards from there?

The only option is to move to a cost-based model, and as that’s
what the law requires, that’s what the Commission has done.

I’ve called the Commission on mistakes in the past: the original
TSO decision was a travesty that lumbered the market with an utter nonsense for
nearly a decade. The decision not to unbundle in 2003 was poor and did not
serve us well.

I even question the price point for LLU services announced
yesterday – it seems odd to me that prices for connectivity haven’t fallen by
more than $4 in five years.

But on the matter of using a cost-based analysis to
determine the wholesale price of service from Chorus, the Commission has no
choice – it is the law.

'>

Commerce Commission ruling on copper

/2 Comments/in /by

This morning’s announcements from the Commerce Commission
suggest we need a major rethink on the way we price regulated services in the
telecommunications industry.

We’ve had two recommendations handed down today – the first
around the price of unbundled local loop lines and the second around the
wholesale price of the product most ISPs resell – UBA (unbundled bitstream
access).

It’s important we step back a little and compare the two
product sets. On the one hand, wholesale isn’t really wholesale – it’s resale.
In effect, every ISP that sells the Chorus UBA product sells a virtually
identical product to every other ISP. You can change the colour of your
advertising campaign, but the product is basically the same. There are some
variations – enhanced UBA versus basic UBA – but in essence it’s one size fits
all. It’s what we’ve always had – a re-badged product based on a standard set
of inputs.

On the other hand, unbundled services leave far more up to
the individual ISP or telco. They can define parameters like contention rates,
committed information rates and so on. They also get to pay less money to
Chorus, meaning they can invest more in the hardware or offer these differentiated
products at a competitive rate.

All of the competition we’ve seen in the fixed line
broadband market in the past five years has come from the unbundled players and
it’s precisely because of this competition that any changes to the pricing structure
need to be closely examined. I want a competitive market that has energy and
which delivers products and services that customers want. I don’t want a
government-mandated product offered at a government-mandated price because
that’s not going to deliver the drive we so badly need.

Let’s look at the prices. Unbundled access was de-averaged –
that is, urban folk paid less than rural. Actually, that’s not quite true –
customers in urban areas cost the telcos less than customers in rural areas –
the customers themselves all paid the same price, assuming they could get
unbundled service.

The Commission was told to average the prices and come up
with a new price point for all services, rural and urban. Chorus argued that
the existing prices should simply be added together and divided by two – the
competitors argued that the Commission needed to compare our figures with
services offered overseas and that the price should come down considerably.
Given this is the only opportunity to review prices for the foreseeable future
(once they have been introduced the Commission will stop its annual price
assessment regime), the ISPs and telcos are very keen to make sure the price is
right for the remainder of the decade.

Chorus argued that we need to consider uptake of UFB and
that too low a price-point for copper would mean customers have no incentive to
move to fibre. TUANZ believes the opposite is true – that if customers are to
be encouraged to take up fibre they need a reason and that reason will be found
in the kinds of products and services that will be developed firstly on a
faster copper network and then (once it’s available) on fibre. Without those
drivers, the only way we’ll see mass uptake of fibre is if customers are forced
to migrate. There should be no need for that if the incentives are set
correctly.

The Commerce Commission draft decision set the price at
$19.75 per line, but in the final report it sets the price at $23.53 a month
per line – a reduction of 3.85% on the average price set in 2007.

This is clearly a huge win for Chorus and could potentially
cause problems for those telcos and ISPs that have unbundled and wanted a lower
price to extend their unbundled offers further into the network.

It’s not much of a change, however, so taken in isolation we
must shrug our shoulders and move on.

Let us turn to the wholesale pricing and what’s going on
there. Instead of continuing with the current “retail minus” approach, the
Commission has moved to a cost-based model, something TUANZ heartily agrees
with. Retail minus means we never really see the real price for a wholesale
service on the grounds that it’s relatively easy to game. Prior to separation,
all Telecom had to do was maintain a couple of high-end products that nobody in
their right minds would buy and the retail-minus approach meant competitors
were forced to pay more for wholesale service .

Of course, now Telecom is separated, Chorus doesn’t have a
retail service to consider and so the move to cost-based services is entirely
appropriate.

Here the Commission has dropped the price from $21.46 to $8.93
for the basic service (basic UBA) . Enhanced UBA services receive a similar
price drop.

This will be great news for ISPs reselling Chorus’s
wholesale product and means we should see more aggressive pricing in the
wholesale market from the various ISPs assuming the price point is introduced
in two years’ time as expected (there’s plenty of debate on the wholesale price
yet to come I’m afraid and the Minister’s press release makes it clear we may
need to develop a uniquely New Zealand methodology for wholesale pricing).

What’s not to like about that, you say? Well, again, taken
in isolation it’s a great outcome. Prices will fall for UBA-based services in
two years’ time when it’s introduced. But this isn’t an isolated market –
instead we have to consider what will happen with both wholesale and unbundled
products.

On the one hand we’ll hopefully see a huge fall in prices
for wholesale service while unbundling will continue for those that have it but
not be extended out any further. 
Instead, we will likely see those plans for increasing the number of
unbundled exchanges and cabinets come under threat as the business case for
unbundling becomes squeezed by better pricing in wholesale.

There is still plenty of life left in unbundling as we know
it. Not only are there more lines yet to be served in existing exchanges (I’m
told unbundling accounts for only a relatively small percentage of the total
lines running through those exchanges) but there is still revenue upside to the
service in terms of offering VOIP services instead of the plain old telephone
service.

But it does smack of the end of unbundling’s brief but
glorious day in the sun and as customers we should be unhappy about that.
Unbundling offers a leg-up to those companies that do make the effort to
install their own equipment and has done tremendous things for the customers of
New Zealand who have been able to get it. I’d like to have seen that run
extended, but it’s not to be.

Most residential customers won’t be getting connected to the
fibre network for the next four years, which means these prices are going to be
our guiding light until 2016 or so.  If
that’s the case, we’ll need to look very closely at the VDSL product set and
work out whether that will be an acceptable substitute for the time being.
Currently Chorus charges a premium for the service (around $20 extra per line
per month) which discourages ISPs from offering it. If that’s the case that may
well be the next job for the Commerce Commission.