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Election wish list for a digital economy

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Dear politicians,

You’re heading into an election cycle (actually, if I think
about it, you’re always in an election cycle) so here are some things we at
TUANZ would like to see in your policy portfolio.

They’re in no particular order and we’ve mentioned some of
them before but it’s worth getting them all in one list for you to peruse.

1: International cable made a priority

Let’s be blunt – there’s no capacity problem on the Southern
Cross cable, and as a user of international capacity New Zealand isn’t that big
a customer. But we’d like to see the next government offer a significant amount
of support for any new cable operator because more cables mean more choice and
more opportunity for the broader ICT industry.

We’d like to see New Zealand become a regional hub for
content and in order to do that we need to have more cables. NZ to Sydney, NZ
to LA, NZ to Japan, NZ to South Africa, anywhere and everywhere. That all costs
money and it’s the sort of “roads of future significance” spend that only a
government can drive.

Our potential in the digital economy can only be achieved if
we have the connections to the rest of the world and that means stepping up.
I’d be looking for at least $100m of commitment in one form or another to make
a second and third cables a reality.

2: Commerce Commission given back its role as regulator

This is essential. Stuffing about with our regulator means a
lack of investor confidence and that means we as an economy stall in the
market.

An independent regulator, working to a set of rules that we
all know about in advance is the only way to achieve investor confidence in the
sector. You mess with that role at your peril – customers don’t like it,
investors don’t like it and the participants in the industry don’t like it at
all. It’s poor practice and should be shunned.

3: ICT training emphasis increased – ICT courses added to
schedule of those we value

We need to encourage our youth to take up the ICT skills
we’ll need to build this digital economy. At the moment there is little
emphasis placed on any of the IT or telco related disciplines and that has to
change. Government needs to signal that it wants more computer science
students, but also designers, network managers, even cable layers and jointers.
We don’t have the resources in New Zealand today to roll out the UFB
efficiently, if Chorus’s costs are anything to go by, and part of that is
because of the lack of emphasis on this sector in the education market.

Government should make it easy for the kids to pick up these
skills and to realise that ICT is a viable career choice for them.

4: : Support for Pt England/Manaiakalani Trust deployment on
broad scale

All of which starts at a much earlier point in the education
system than we have today.

One Google software engineer discovered Vietnamese primary
school children learning the basics of coding at age nine. The story of
Vietnam’s move into ICT is a compelling one and while we’d probably struggle to
reach the level they have today, we have a tremendous opportunity to learn from
both the Vietnamese example and from our own Pt England Primary School.

As you know, Pt England equips its older children with
netbooks and ensures that all classes make use of these devices as an
integrated part of the curriculum. The results are astonishing, yet we still
have not rolled out a national programme to encourage this kind of thinking.

That is the role for the Ministry of Education and I’d like
to see the next government take the Pt England model and roll it out nationwide.

Don’t forget, Pt England is a Decile 1 school – its parents
are among some of the poorest in New Zealand, yet they realise the benefits of
these devices and can see the improvement in their children’s education. It’s
time we all got on board.

5: Government as the country’s largest buyer of ICT

No other sector buys as much technology as the government,
in all its forms. Why aren’t we encouraging small New Zealand businesses to bid
for contracts? Why isn’t there a clause in every government tender that says
New Zealand companies get priority? Everyone else favours their own products,
why are we so shy about it?

One.Govt is the government project to streamline the
tendering process, yet all too often I hear horror stories of local developers
being shut out of the process.

Take the IRD computer system as an example. The figure of
$1.5bn has been bandied about – an astonishing figure – but imagine what that
spend could do to the local software industry if it was spent on New Zealand
owned and operated companies. Wouldn’t that give us a kick start like nothing
we’ve ever seen? Start talking to the NZ Rise guys to find out how to encourage their members.

6: Content inquiry

It’s high time the government of the day realise the
elephant in the UFB room isn’t the price of copper but the lack of high
bandwidth services that consumers want.

Currently we have two or three relatively small players
offering content locally and that’s not enough to drive demand. We need to see
if there are any impediments to providing content online, and we need
government to get in behind this key driver for uptake.

6: UFB review

We need to understand whether this project is working as it
should, whether the right governance structure is in place and whether the
whole project is being gamed. Currently we face cost blow-outs, low uptake,
expensive and unpleasant installation processes and a raft of other issues that
limit both consumer and retail providers’ interest in the UFB.

It’s too important a project to be allowed to glide gently
off the rails like this – we need to make sure the UFB delivers on its
potential.

7: RBI review

Similarly, we cannot allow rural New Zealand to become a
backwater. It’s high time we started talking about RBI 2.0 and what that means.

Under today’s regime fully one quarter of the population
won’t ever get fibre to the home. Of all the countries in the world –  dependent as we are on the primary sector for
our income – we need to solve this problem. Cost is a major issue, naturally,
but we can’t rest on our laurels with a two-tier internet where I can get
100Mbit/s symmetrical but the backbone of the economy has to make do with a
peak speed of 5Mbit/s.

89: Regional economic development plan off back of UFB and
RBI

We need to encourage people to move to New Zealand and we
need to encourage more New Zealanders to live anywhere but Auckland.

I say this as a JAFA and as an import. I’m here in the city
of sails (don’t mention the sailing) because that’s where the work is, but for
most of us knowledge workers we could and should be based elsewhere.

The UFB and RBI should mean we can all work from Hamilton,
Whangarei, Whanganui, Invercargil or just about anywhere else we care to name.
Coromandel springs to mind. Let us dream of what might be seen in Johnsonville
and Geraldine, because we run the risk of becoming a giant version of the
smaller Pacific Island nations – one city and a collection of under-resourced
villages.

10: Reform of infrastructure consent process

To build this shiny future we need a shiny network and all
too often I hear about projects being delayed because of problems with the
consent process.

Roads are supposed to be utility corridors, yet all too
often the roads get dug up and re-laid without any thought given to UFB
deployment.

Cellphone towers are in desperate short supply in rural New
Zealand yet in urban centres deployment can be held up by local NIMBYs and
their unsupported science of fear.

We need to grow up, realise the benefits these technologies
bring, and make them a priority.

Ten items designed to raise our standard of living and to
ensure you get at least one more vote (mine) if not a few more besides.

What else would you like to see in a political party’s ICT
policy?

The political agenda

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So David
Cunliffe has taken the ICT portfolio for himself.

This is
quite significant – I can’t recall any other party leader paying this much
attention to the portfolio or the sector itself before.

Cunliffe of
course was Minister of Communications and IT during the previous Labour
government and so is very familiar with the industry, the regulation and the
potential of the sector.

All too
often in the past decade we’ve seen politicians pay lip-service to the idea of New
Zealand being a digital economy. All too often we’ve seen them utter pat
phrases about New Zealand’s potential and how we are standing on the cusp of a
new era.

TUANZ
strongly supports any move to promote New Zealand’s digital capabilities. We’ve
worked alongside organisations like the IITP and NZ Rise to promote New Zealand
companies and New Zealand innovation and we’d love to see our next government
get in behind as well.

We need to
encourage youth into the industry. We need to encourage investors to spend
their money on New Zealand ICT companies. We need to build the infrastructure
to deliver on those services.

ICT has huge
potential for the New Zealand economy and a renewed focus on the sector will be
very timely. If nothing else, Cunliffe’s decision to take on the portfolio
himself will bring the sector into sharp relief and hopefully it will make the
other parties sit up and pay attention.

If nothing
else, it’s put ICT firmly on the political agenda for the year ahead and that’s
great news.

 

Transfield

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Transfield is, apparently, responsible for building out only 10% of Chorus’s commitment to the UFB project, but entirely responsible for UltraFast Fibre’s work.

UFF is currently tracking ahead of the projected completion date and by all accounts is doing very well indeed with its deployment. I’ve heard none of the complaints about delays to connect up homes, astonishingly high failure rates or any of the rest of the noise associated with the Chorus build and although the Local Fibre Companies (LFCs) are reluctant to talk publicly about either costs or connection targets, both are said to be tracking well ahead of the averages reported by CFH.

I find the mix of businesses in the fibre world intriguing.

On the one hand we have a telco – Chorus – spun off from Telecom and in many respects the heir to the Telecom role of network provider of last resort. Chorus is responsible for the lion’s share of the UFB but also owns almost all the copper lines in the land and is uniquely conflicted as a result.

UFF, Enable and Northpower are all wholy-owned subsidiaries of the local power companies.

Chorus is listed on the stock market and must return money to its shareholders.

The LFCs are all owned by trusts and are more used to investing returns back into the networks they run.

Chorus claims its costs are around $3000 per connection – double what it expected and double international standards in such instances. The LFCs don’t report their figures but I’m told they’re a lot more in line with what you’d expect.

It puts me in mind of the TUANZ conference held many years ago in Napier. We had a guest speaker visit from Canada – Bill St Arnaud who, at the time, ran CANARIE, Canada’s advanced research network.
Bill was an affable chap who talked about MUSH networks (Municipal, University, School, Hospital), about building advanced networks and what students were doing with them as a result of having a 10Gbit/s wavelength all to themselves.

He also talked about who you get to build your networks and why choosing a telco is the worst mistake a country can make.

Canada gave each province a bunch of money to deploy these MUSH networks to connect state-owned organisations together. Some provinces hired companies that owned diggers. That’s all – they were just very good at digging trenches and putting the pipe or the duct or the cable or whatever you wanted in the hole. They weren’t interested in running networks, they weren’t interested in clipping the ticket on all the traffic that passed over those pipes, they were just interested in putting pipes in the ground.

Other provinces got in the experts – the telcos – who were interested in clipping the ticket for all those things, were interested in ongoing costs of raising capital, were interested in returns on investment to their shareholders and who ultimately gave the provinces a wavelength on existing fibre lines already in place.

The digger guys simply laid the fibre and got out of the way. The telco guys hired digger guys and got them to do the work, with a nice margin on top, of course.
Currently we have a situation where presumably CFH has paid Ultra Fast Fibre for its deployment. UFF has presumably paid Transfield for its work, Transfield has not paid its contractors and the contracts have not paid the sub-contractors who have stopped working.

The amount of money flowing down this particular waterfall is not inconsiderable but there’s a lot of money not making it to the guys doing the actual work.

Even if this model works with 100% efficiency, we’re losing a lot of money in overheads, margins and the such to each player along the way. Surely a better model would be for CFH to hire the contractors and subbies and just get them to dig in the network we want. Lighting and running it can be left to the LFCs and RSPs and we’ll save a bunch of money in the process. St Arnaud estimated that in Canada those areas that deployed using utility providers rather than telcos achieved higher uptake rates at a third of the cost because they just provided the service.

Chorus has launched its “Gigatown” initiative which I whole heartedly support. 1Gbit/s service would dramatically change the way SME businesses operate. My question is, if we can offer this as a service today, why are we still talking about 30Mbit/s download with 10Mbit/s upload and why are we still paying telcos to dig ditches?

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Gigatown

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Chorus has launched a promotion that will give one town in New
Zealand gigabit speeds on the Ultra Fast Broadband network.

One gigabit per second is fast. OECD rankings suggest that only
four countries in the world offer national 1Gbit/s plans – Turkey, Slovenia,
Sweden and Japan (this was in 2011 so there may be more by now) and that most
top out at about half that speed.

We’re talking about 1000Mbit/s. Today I get 15Mbit/s
download so to call it a step change is something of an understatement. My
upload speed is barely 1Mbit/s.

We tend to get complacent about the fantastic advances
technology makes each year. A doubling of capacity, a tripling of speed, these
numbers become run of the mill and users are blasé about them. But a thousand
fold increase in my upload speed would be startling to put it mildly, so good
on Chorus for trying this out.

The economic potential of offering such a service is
astonishing. Think what having such a speed would do to the way we think about
remote working or having to live in the main centres. Think about what access
to the world at those kinds of speeds would mean for start-up software
developers and to our migration patterns. Software companies should be lining
up for our cheap housing and staff with no fear of us being too removed from
the world.

Movie studios would look more to New Zealand for filming opportunities
than they do today – getting the rushes sent back to LA or New York or further
afield to the UK or Germany is a major problem and it’s not the international
leg so much as getting the footage out of Wellington and up to the Southern
Cross Cable.

But I have a question. Given this capability is clearly
available today, why are we talking about an entry level product of 30Mbit/s
download speed? Why are we talking about an upload speed barely ten times what
I get today?

Why aren’t we talking about an entry level plan of 100/100
followed swiftly by 250/250 and 500/500? Why aren’t we offering 1000/1000 at
launch?

Speeds like these would help encourage people to move to
fibre in a way that talking about 30/10 plans simply won’t.

The entry level price point is on par with copper and the
entry level speed is on par with copper so why on earth would I shift over?

No, the real lesson from Gigatown is that we should all have
that kind of capability and we should all have it sooner rather than later.
Only then will we see all those nice things in the video come to fruition.
Economic development, e-health initiatives, educational opportunities, rural
regeneration, population increase, regional development.

Suddenly, the entry level product is the barrier to uptake,
not the enabler. It’s time we revisited the UFB’s promise if we’re ever to
achieve the future depicted in the Gigatown promotion. 

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All together now

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Last week InternetNZ organised a forum to discuss the Telecommunications Act discussion document. The document proposes setting the price that Chorus charges for access to the copper network above the Commerce Commission’s recommendation; meaning we all pay more.

The discussion was held under Chatham House rules, and TUANZ CEO Paul Brislen described it as “a remarkable meeting”. He provides his take on the issues confronting the industry as discussed at the meeting.

NOTE: This piece first appeared in the TUANZ This Week newsletter and in IITP’s Newsline

It takes quite a bit to get every telco, ISP and user group to agree on something and while I’m sure there are a couple of businesses that don’t mind the ICT Minister’s copper tax, for the most part there was outrage.

Outrage that after building a regulatory system that provides certainty and incentives to invest the government will override it for such a flimsy reason.

The upshot is that the only reason that the Minister has directed the ministry to come up with these prices is because Chorus’s share price will be affected.

That’s it.

If we give Chorus an extra $100 million a year (the amount its estimated Chorus will earn if the higher copper price, as suggested in the discussion document, is approved) it won’t result in a faster network build. It won’t result in a better network. It won’t result in a larger network – it will simply result in Chorus meeting its contractual obligations to build the Ultra Fast Broadband network (Chorus has argued it needs higher copper prices to fund the fibre rollout).

In the meantime, investment in unbundling is not only stranded, but actively penalised with an increase in the costs for unbundled lines in one of the “options” put forward, and the risk to the Local Fibre Companies (LFCs) is increased because Chorus will be allowed to aggressively lower its prices for copper broadband in those areas where someone else is building the fibre network (Chorus has about 70% of the UFB build).

The incentives to invest are removed, the ability to compete by differentiating is removed and everyone in the industry aside from Chorus is left wondering just what the rationale is for this decision.

One thing we did learn is that the discussion document’s three options are not the only options. TUANZ will be submitting that the status quo should be restored, that the Commerce Commission should hold sway over telco regulation and the Minister should stick to policy work.

There’s another reason why this should happen – the World Trade Organisation.

New Zealand is a signatory to the WTO and its “telecommunications annex” clearly says that governments should have an independent regulator so as to avoid conflicts around government investments. It should also avoid cross-subsidisation like the plague.

The good news is, there’s an enforcement arm in Brussels. Perhaps it’s time we wrote them a letter.

On Monday Chorus reported a higher than expected net profit of $171 million on revenues of $1.057 billion in its first full financial year. In commentary posted on the NZX website, Chorus pointed out that the outcome of the regulatory review will result in a reduction in future earnings.

“While these regulatory headwinds remain, management is pleased with the principled approach the Crown is taking to the regulatory review”, said CEO Mark Ratcliffe.

“We’re seeking a clearer, more aligned regulatory environment that delivers the right incentives to encourage the transition to our fibre network, and help New Zealand realise the productivity and economic benefits UFB and RBI can deliver.”

 

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Having your cake and eating it too (and creating a monopoly along the way)

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Lost in the noise of the Telecommunications Act Review
discussion document is a rather alarming paragraph about Chorus’s copper lines.

The review usurps the Commerce Commission’s role as
regulator and gives the job to the minister on the basis that the minister
wants the fibre uptake to be successful.

In order for the fibre rollout to be successful it has to
have lots of users signing up for it. Fair enough – I agree entirely with the
outcome, just not with the process by which we’re being pushed down that path.

The minister argues that in order for customers to move to
fibre the price of copper lines can’t be dramatically lower than the price of
fibre, otherwise nobody will move.

I disagree – fibre and copper aren’t the same product and
while my copper line might be adequate for my use today, by the end of this
year it’ll be straining at the edges and by the end of next year it’ll be intolerably
slow.

That’s because my kids are now both of an age where they
have serious homework and that homework is delivered online. As soon as they
get home from school they want to use the computer. My wife uses that downtime
to catch up on last night’s Shortland Street and so she too is using my
internet connection.

Copper barely copes with this. As it always has been, user
migration is dependent on there being a reason to move and content is that
reason. Fibre is not the same product as copper.

But let’s put that aside for the moment. Let’s assume the
minister’s goal is to have as many customers as possible moving to fibre and
that in order to do this we must artificially mark up the price of a copper
line.

The discussion document lays it out in just these terms. It
describes the fibre roll out as a “once-in-a-generation” upgrade and says the
real benefits to New Zealand come from those applications that use UFB speeds.
It goes so far as to quote the Alcatel-Lucent report that suggests economic
benefits of nearly $33bn over a 20-year period.

Clearly then, we need to usher users over to the fibre world
as quickly as possible for the benefit of the economy as a whole.

All of which makes me wonder why the minister is so keen to
stop that happening in those parts of the country where Chorus isn’t building
the fibre network.

Chorus has the lion’s share of the network build, but
Northpower is rolling out fibre in Northland, UltraFast Fibre is doing it in
the Waikato, Bay of Plenty region and Enable is doing its work in Christchurch.

All three Local Fibre Companies (LFCs) are ahead of
schedule. All three expect to finish sooner rather than later and all three are
signing up more customers than the average sign-up rate would suggest.

Yet the minister makes it clear in her discussion document
that Chorus will be allowed to pocket price its copper wholesale service to
compete for those customers who live outside its fibre region.

“Chorus can set wholesale prices below the regulated price
cap to match competition from fibre in those areas, if necessary to compete
effectively with the LFCs.”

We’ve already seen Chorus overbuild existing fibre networks
such as The Loop in Nelson and Inspire.Net in Palmerston North, and now it gets
to use its existing network to compete for customers against the government’s
fibre network around the country.

Surely if the drive to move to fibre is so great that Chorus
must be given a leg-up in terms of its copper pricing, the same rule should
apply in favour of the LFCs and Chorus not be allowed to compete by reducing
its copper prices?

And conversely, if it’s OK for Chorus to reduce its price in
these areas, why is it not OK for the rest of the country as well?

Don’t forget, the Telecommunications Act explicitly allows
Chorus to buy up the three smaller LFCs without triggering the Commerce
Commission’s anti-monopoly alarm. The Commission is barred from investigating
any such purchase on the grounds of lessening competition by law.

I can picture a scenario whereby Chorus depresses the market
for fibre in the three LFCs’ home territories while keeping copper prices high
for the rest of us. Once the LFCs start to struggle, Chorus can buy them up for
a song and before you know it we’ll have one network operator for the country
as a whole.

As we said during the ten-year regulatory holiday debate, we’ve
just spent a decade ensuring that one network operator play nicely with the
rest of the market, do we really want to create another monopoly asset with no
regulatory oversight?

 

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Collateral Damage

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Hat tip to former InternetNZ Chief Executive Vikram Kumar
for his discovering that the TICS and GSCB bills include forcing telcos to
install backdoors into their networks.

This goes a long way past “making sure the data can be
handed over to the authorities” which we’re still unhappy with and goes a long
way out of my comfort zone, especially given the way international intelligence
agencies are using their powers around the world.

So what’s driving the government rush to enact these laws?
Can it be that New Zealand is a hot bed of international terrorists and that we
need to severely curtail public freedoms in order to ensure our on-going
security?

Clearly this isn’t the case. Nor was it the case when the
Urewera raids took place under the auspices of anti-terrorist activity –
charges that were later withdrawn and eventually dropped entirely from the
case.

But even that wasn’t the start to all of this. An online
chat with Judge David Harvey reminded me of the Crimes Amendment Act,
introduced in 2003 which took away our right to remain silent.

Sorry, did you not realise?

If you own a computer (roughly 110% of the population these
days) you’d better know exactly what’s on it, including those pesky system
files that you’ve neither seen nor looked at, because under the Crimes
Amendment Act, you’re entirely responsible for files on your computer.

In addition, if you have encrypted files (I presume I have)
then you’re required by law to hand over the encryption keys to those files.

So if, for argument’s sake, you have a system file somewhere
that you’ve never seen and which you’ve no way of decrypting, you’re still
responsible for it and if a nice policeman taps you on the shoulder and says
“decrypt that file” you’re up for three months’ jail and a fine of $2000 if you
don’t comply.

Harvey described that as synonymous with a police officer
asking you where you were “on the night in question” and you refusing to answer
– something you’re perfectly entitled to do 
– and then ending up in the cells for three months.

Even with that level of intrusion we aren’t quite at the
source, because I remembered an even earlier conversation about the
International Law Enforcement Telecommunications Seminar (ILETS).

In 1999, ILETS was telling police representatives from
around the world that what the world really needs is a terrorist event of grand
enough scale that the citizens will clamour for police intervention on a
massive scale. Indeed, ILETS (of which New Zealand was a member) encouraged
participants to draft legislation and PR strategies ready for the day when such
an event would occur and which would then give these agencies the support
needed to get bills passed in the various parliaments.

ILETS was set up by the FBI in the early 1990s and included
representatives from New Zealand, Australia, the UK, US and Canada (sound
familiar?) to promote a “universal wiretap ability” in the newly emerging
internet world.

Governments would be encouraged to gradually allow police
and affiliated agencies more powers to monitor and track movements online so as
to ensure police agencies were able to keep up with criminals. Terrorists were
just an excuse.

From there we moved on to the Search and Surveillance Act, introduced in 2012 and the expansion of police powers that included. 

Today we face the introduction of the badly flawed GCSB bill
and shortly, the TICS bill. Both will enable relevant security agencies (and
the police, and potentially IRD and potentially all manner of other government
agency) to access our most secret data and indeed track our real-world
movements thanks to those handy GPS-enabled tracking devices we all carry.

I’m all in favour of the police having the right tools for
the job. If there was evidence that nefarious agents were using encrypted
pathways to communicate and to plan illegal activities, that massive online
money laundering were taking place, that terrorist cells were active or even present
in New Zealand and that we faced a clear and present danger, then I would
support giving the right agencies the right tools. But no such evidence has
been presented or even hinted at, and the badly-drafted laws mean our nascent
cloud computing industry might well be snuffed out before it gets off the
ground in a commercial “blue on blue” incident.

New Zealand needs access to world’s best IT practices if
we’re to compete. We can and should grow our own businesses to take part in the
global economy. We should be able to buy in the best of breed hardware and
technology needed to enable our economy to grow.

Yet these laws mean we won’t be able to do that. Local
businesses won’t be able to deploy internationally because our laws mean
they’ll have to hand over sensitive customer data to New Zealand officials, and
who would buy such a product? International businesses will have to decide
whether or not to operate in such an environment locally, and some businesses
could potentially be excluded from New Zealand because of the laws themselves.
Will Apple or Google chose to operate in New Zealand under laws that contradict
and are explicitly outlawed in the US? Will Huawei be able to build world class
infrastructure here if they’re not on the “friendly” list?

The collateral damage from these bills has the potential to
be huge. The cost of implementation alone is likely to be massive and will be
borne by the telcos and network operators who will, of course, pass it on to
customers, but the lost opportunity for our ICT industry could potentially
dwarf even that price.

Ian Apperley, an independent cloud computing consultant who blogs at whatisitwellington.com, has written a great piece about the potential size of the market and the cost if we miss out.

It’s a quick and dirty economic analysis but I suspect that’s more than we’ve undertaken at government level.

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Intervening to keep prices high

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The Commerce Commission is pressing on with its
determination of copper wholesale pricing.

I’ve been asked why the Commission would waste everyone’s
time and money on this when the Minister, Amy Adams, has decided to ignore it.

The answer’s simple – it is legally required to undertake
the review. The Telecommunications Act was amended in 2010 by the current
government to include the move from “retail minus” pricing to “cost plus”
pricing for wholesale service.

The expected drop in price was considered enough of a risk that
it was outlined in both the Ministerial Regulatory Impact Statement and Chorus’s
own float prospectus document (page 80).  On top of
that, the minister of the day, Steven Joyce, included a three year delay so as
to allow Chorus to get its house in order in plenty of time.

The difference in approach between the Commerce Commission
and the Beehive is quite extreme.

The Commerce Commission is comparing our pricing regime with
others around the world, benchmarking against those countries that have similar
approaches to wholesale. There aren’t many, only two in fact, but they are
pitched at about the same price as the Commission’s draft determination. That
is, somewhere in the $8 to $10 per line per month bracket.

The Minister has ignored international comparisons
altogether.

The Commerce Commission then asks for submissions, puts out
a draft determination, holds a conference, accepts inputs from various parties
(including user group representatives as well as the various telcos and ISPs),
considers all the views and then comes up with a final determination.

The Minister has decided the cost of copper wholesale will
equal that of fibre.

One of the more compelling pieces of information to come out
of the Commerce Commission’s conference came from Graham Walmsley of CallPlus.

CallPlus is one of our tier two telcos – that is, it’s not a
Telecom, Vodafone or Chorus but is a leader of the next tier down.

CallPlus has spent a lot of money on unbundling Chorus
exchanges so as to better control the product that it delivers to end users but
also so as to build a wholesale business of its own. CallPlus sells access to
its network to a variety of other providers and is a very good proxy for Chorus’s
own network costs.

How much does CallPlus charge? It charges between $8 and $10
per line per month.

The Minister thinks that price should be between $13 and
$33.57 and if she chooses the lower price, she’ll increase the cost of an
unbundled line to ensure the overall total matches the price of a fibre line –
$40 a month.

The Minister has intervened in a legally required process in
order to ensure costs don’t come down for users.

 

The Copper Tax

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This month’s After Fives saw the Telecommunications
Commissioner tell us about the state of the industry, revenue trends,
investment and what the future could hold for the industry.

Unfortunately, I’m less sure the future of the
Telecommunications Commissioner role itself.

The government’s stunning move to make pricing decisions in
the Beehive means the role of the Commissioner is, to all intents and purposes,
surplus to requirements, at least as far as the government is concerned.
Suddenly it’s the 1990s all over again.

For close to a decade the government of the day dithered
while Telecom (as it was – Chorus now) sent most of its earnings offshore to
its US shareholders, failed to invest in basic infrastructure, blocked
competitors coming into the market (remember Clear taking them to the High
Court?) and generally offered a very poor service to its customers.

The change in government saw regulation introduced for the
first time, albeit at the light end of the scale. Eventually we empowered the
Commission with teeth to do the job at hand and the industry has flourished
ever since.

More importantly, the consumer has also benefited. We’ve
seen prices tumble as speeds and data caps increase. Increased investment means
we have three cellphone network operators each with extensive networks and more
to come. We have a fibre network deployment underway to satisfy pent up
customer demand. We are addressing rural New Zealand’s broadband needs, and
while I’m clearly in the “more, better, faster, sooner” camp, we are heading in
the right direction.

Unfortunately the government and in particular minister of
communications Amy Adams has derailed all the good work of the past decade with
one announcement.

Chorus’s shareholders’ needs 
are now the key driving force behind the government’s approach to
telecommunications, not consumers.

The side-lining of the Telecommunications Commissioner means
we have no way of ensuring users’ needs are first and foremost in our
regulatory landscape. In effect, the minister will be setting the price of
service directly, with little or no regard for either international
benchmarking or the contract her government signed with Chorus.

The fibre rollout will only ever reach 75% of the population
and most of those users won’t be signed up until after 2020. That means the
quarter of the population who won’t get fibre will forever more be subsidising
fibre users. It also means that most of us will be paying the Chorus tax for at
least the rest of the decade.

This, then, is the heart of the matter – we have a contract
with Chorus that has now been renegotiated without input from the rest of the
industry, without reference to international best practice, without even a
tender process to see what’s available in the market today.

The minister is now entirely responsible for the regulatory
regime in which the telcos operate without the safety net that the
Telecommunications Commissioner brings to that regime. Not only is the
government the investor in the network, it has now taken over as regulator and
that’s an appalling position for the industry to be in.

What next? Will she decide that Vodafone’s 4G network is a
threat to uptake rates on the UFB and regulate Vodafone? Will she decide that
the price of UFB is too low to ensure returns to the shareholders and put up
the price? Will she allow Chorus to pocket price in areas where the other LFCs
are building our network? Will she encourage Chorus to buy up those LFCs on the
basis that having one network operator is better than four?

Governments that invest in infrastructure should stay out of
the business of regulating the same investment. They can’t wear two hats, they
can’t be both investor and regulator. They can set policy directions and try to
encourage investment all they like but if they’ll also regulate to protect
their own investment the whole thing will come apart at the seams.

We now face a monumental struggle to ensure the Chorus tax
is repealed, that the government reinstate the Telecommunications Commissioner
as the regulator and that the Beehive stops introducing more uncertainty into
this sector. It’s too important to leave it up to the politicians.

 

Unprecedented

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When I started at TUANZ nearly three years ago we immediately jumped in to the debate around the government’s new Telecommunications Bill and its ten-year regulatory holiday for whoever built the fibre network.

We pushed hard for the Commerce Commission to have oversight of the industry. TUANZ and various other organisations had worked too hard to get a regulatory regime in the first place to let it get thrown away as a bargaining chip.

The reason we fought so hard is because the previous decade had seen government after government gamed by the incumbent to the point where investment was at an all-time low, competition was non-existent and customers were paying some of the highest prices for the poorest services in the world.

Direct government ownership of the industry had been replaced by complete lack of involvement, to the detriment of both competitors and customers alike.

Finally, in 2001, we saw an inquiry, a review and the introduction of an extremely light-handed regulatory regime that didn’t really work, but was a start. In 2006 the regime was beefed up and finally given the teeth it needed to ensure competition was robust but fair and that consumers were the beneficiaries of the telco sector rather than the victims.

Today, all that has been swept aside. The government has introduced three options for the regulation of the fixed-line copper network for the rest of the decade and all of them involve the Beehive setting the price for wholesale service.

In many ways this harkens back to the 1970s when MPs would debate the price of butter in the House, only this time there will be no debate. The price will be set by the executive and that’s that.

Chorus will be very happy about this. It ensures that the pesky Commerce Commission with its pesky “cost based” pricing model doesn’t get a look in. Instead of reducing the cost of copper broadband to ISPs, the price will remain roughly the same or drop by a couple of dollars.

Telecom will be happy because the government allows Telecom’s homeline service to continue as is, unmolested by change. That means other ISPs, that don’t own the PSTN (ie everyone else) will end up paying more for the same service. Telecom won’t have to unbundle because unbundling is deemed an inefficient use of resources but still gets to sit pretty while its competitors costs increase.

The smaller ISPs, CallPlus, Orcon and the like, who have unbundled will end up seeing their investment derailed completely. The government’s three solutions are a nightmare for these guys as the government will potentially put up the price of an unbundled line.

Customers see no change to their pricing whatsoever. No ISP will pass on a saving of a couple of dollars and that’s the best you could hope for out of this.

The government is the major investor in the UFB and has now usurped the role of regulator as well. Instead of having an arm’s length, independent Commerce Commission, we will have prices set by the minister or, at best a Commission that can only act in a manner that can only be described highly prescriptive.

Instead of an international benchmark, the Commission would only be allowed to set copper pricing by directly comparing with the UFB pricing model, putting aside any consideration of the different service speeds, capabilities, network age and all the rest. The price would be limited to a range set around the cost of the entry level fibre price and that’s that.

I wonder what Vector’s view of this sudden renegotiation of the terms will be. I wonder what international investors think of a government that is willing to usurp the regulator in such a stellar fashion. I wonder what our trading partners think of a regime that allows politicians to replace regulators at a time when the government is also the investor.

I wonder what customers think the outcome will be if we allow the needs of one company to override the needs of both the industry and the users.