Posts

The government and the big corporation

/in /by

For the better part of a decade, we watched as one
government after another chose to back the needs of Telecom over and above the
needs of the broader industry or the voters of New Zealand.

Time and again we heard from Maurice Williamson, minister of
communications for most of the 1990s, that if Telecom continued to step out of
line he would be forced to act. In the end the voters acted and a new era of
regulation began.

I often wondered why a political animal like Williamson
would get so far off side with his voting constituents. Why he couldn’t see the
constant growl of angry customers and a brow-beaten industry. Williamson isn’t
stupid – he’s played the parliamentary game for a very long time and knows that
ultimately the voters will conduct his performance review and if he wants to
retain power, that’s all he should be concerned with.

He was also one of only a handful of MPs to have a
smartphone (a BlackBerry if memory serves) and one of the few who would answer
emails. I remember one outraged journalist at the time being told he couldn’t
be added to the press release email list because the government wasn’t made of
money. These days it’s getting the buggers to stop adding us to the lists
that’s uppermost in mind.

Reg Hammond, over at InternetNZ, has an interesting take on
the matter. He suggests that for the big decisions Telecom sidestepped the
minister and went straight to the PM and that something similar may well have
happened with the furore over Chorus’s wholesale price determination.

Chorus denies this, as does the current minister of
communications, Amy Adams, but on the day the Commerce Commission announced its
draft determination the first responder from the government was indeed the
Prime Minister, who suggested that the Commission could make all the
recommendations it liked and that it was up to the government to decide whether
to go with those recommendations or not.

Sorry, but that’s not how the regulatory regime works – the
Commission gets to decide the price point because that’s the only way to keep
governments at arm’s length.

You need to keep governments out of such regulatory matters
because governments are typically compromised – they are large-scale investors,
they are large-scale customers and they are the policy makers. To include
‘regulator’ in that line-up is to court disaster as we saw during the 1990s in
both New Zealand and Australia.

The regulatory regime set up in 2001 was extremely light
handed and it failed to deliver results for quite some time. Spectacularly, it
saw New Zealand receive the dubious honour of being the only country apart from
Mexico to reject unbundling of the local loop. Mexico, let us not forget, is
home to the richest man in the world – Carlos Slim – who made his money out of
telecommunications. Currently Slim controls 70% of the mobile market in Mexico
and 80% of the fixed line market and the Mexican government is hoping to
introduce some kind of regulation that will reduce his control of what they
have belated realised is the backbone of the nation’s infrastructure.

If we had one provider with that level of control you’d hope
it would incur the wrath of the regulator because one player at that level is
tantamount to disaster for the users and for the country as a whole. Australia
saw Telstra rise to that level and beyond in the 1990s but because the Aussie
government retained ownership long after it should have divested its
shareholding, the regulator was unable to break Telstra’s stranglehold on the
infrastructure. The reign of CEO Sol Trujillo is best remembered for his hiring
of a team of former colleagues to produce a strategy for the company which was
paid for by Telstra and which ensured he received his bonus for delivering said
strategy on time. Oddly, it looked remarkably like the strategy of his
predecessor and after four years of declining revenue (Wikipedia claims he
underperformed the Aussie stock market by 20% costing the company A$25bn) he
left with a grand payout as only telco bosses can receive.

Today the Australian market is a mess, with Telstra
dominating both fixed and mobile sectors, no strong second-place competitor in
sight and a government unable to achieve its potential even with a promised
A$42bn spend on fibre.

If we look at the New Zealand market similar competition
alarm bells should be ringing. We have two companies that don’t just dominate
the market, they ARE the market. Telecom and Vodafone account for 90% market
share of the mobile revenue and a similar number in the fixed line space. At any
level of the market, whether it be local calling, toll calling, mobile data,
backhaul, international connectivity or TXT messaging, in terms of revenue we
see two names repeated over and again.

Yes, we have 2Degrees winning customers in the mobile space.
Yes, we have CallPlus and Orcon and others fighting the good fight in the fixed
line space. But when it comes to revenue we’re in single digits for market
share for everyone other than Telecom and Vodafone.

This isn’t a situation the market can sustain or which the
government can ignore. The question is, how will the government handle the
responsibility of getting us out of this situation? Sidelining the regulator is
not a good start.

Next week the Commerce Commission will hold its conference
to discuss the issue of Chorus’s wholesale pricing. TUANZ will be attending and
I’ll report back in next week’s newsletter.

 

Cost based modelling

/2 Comments/in /by

The Commerce Commission has made the only decision it could
regarding the UBA wholesale price determination process – it will continue to
work towards a final determination due before the end of the year.

Sadly the government has already said the Commission’s work
is irrelevant because it will introduce a review and a new Telco Bill that will
supersede the determination before it comes into effect in 2014. The
Commission’s work, vital as it is, will be completely sidelined in the process.

Chorus has also indicated that it’s likely to ask for a
“final pricing principle” on the UBA price alongside the UCLL (that’s the
unbundled service) FPP it’s already asked for. An FPP is a major piece of work
whereby the Commission works out how much the service actually costs (I know, I
agree it’s a bit odd that it doesn’t do that as standard but when you’ve sat
through as many economists’ presentations on cost models as I have you realise
that the Commission’s true role is to keep economic lecturers employed) and is
likely to take quite some time. The Commission has indicated that it may miss
the December 2014 timeframe and slip into 2015 because of that.

Actually I don’t mind the Commission doing the FPP work. I
think it makes sense to know exactly what we’re dealing with. The problem is,
the government doesn’t want to know what it actually costs to deliver broadband
over copper lines, it wants to make sure Chorus can continue to build the UFB
and as Chorus has said it won’t be able to if the price of copper drops (for
reasons I’ll get to in a minute) the government won’t have a bar of an actual
price point.

This is a shame because the review of the telco act could do
with a dose of facts, to put it mildly.

Currently the government is being led by Chorus’s world view.
Any reduction in wholesale rates will reduce Chorus’s income stream and
therefore jeopardise its ability to pay for the UFB deployment. On top of the
losses to copper line revenue, Chorus also faces a huge blow-out in terms of UFB
deployment costs to the tune of $300m in the first year alone, and so
logically, obviously, you can’t possibly inflict even more of a loss on the
company or it might go out of business/not deploy UFB/all end in tears (delete
where applicable).

There’s only one word for this and as we’re a
family-friendly website I can’t use it, so let me just go for “hornswoggle”
instead.

I know this to be true because Chorus is still talking about
paying out 25 cents per share as a dividend, possibly the largest dividend payout
in New Zealand this year and a rate (given the current share price of $280)
that I haven’t seen since the early years of Telecom’s privatisation where the
US parent consortium took out more money than it paid year after year till the
coffers ran dry.

If Chorus can afford that level of dividend it can cope with
a Commerce Commission determination in the $8-$12/month mark and can spend a
bit of effort on sorting out its installation process so it doesn’t cost $3500
per install.

Several things need to happen and a review of the Telco Act
isn’t one of them.

Firstly, the government needs to step back and let the
market figure out what’s going on. This random intervention model doesn’t work
and just scares the investors (let’s remember, Chorus’s investors aren’t the
only ones in this game).

Secondly, Chorus needs to figure out how to install UFB
without it costing the earth. The other LFCs can do it – so can Chorus.

Thirdly, the Commerce Commission needs to get on and deliver
us a wholesale price that uses actual cost and not retail-minus as it is
supposed to.

Fourth, those government departments that are pushing Chorus
not to do anything useful with VDSL should butt out and let the company offer
the services its customers want – in the interim while we gear up for UFB, that’s
fast fibre. It’s going to be at least another three years before most of us
start to get UFB – that’s three years of training us up to demand UFB speeds
and the best way to do that is with faster copper products.

And if the government insists on pushing ahead with its
review (of an Act it introduced, let’s not forget) then it should use the
Commerce Commission’s work as a benchmark. After all, if we know what it
actually costs Chorus to deliver these services, isn’t that going to be just a
little bit important?

'>

TUANZ submission on wholesale pricing

/in /by

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.

'>

The Prime Minister versus the Commerce Commission

/in /by

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.

'>

Initial Pricing Principle

/3 Comments/in /by

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.

Your [0800] call is [not] important to us

/6 Comments/in /by

I’m a bit of a Woody Allen fan. His later films are a bit tedious (although I liked “Vicki Cristina Barcelona”) but in the early works his genius shines through.

I remember one character (although I have no idea which film it was in) who would arrive in a scene and immediately ring his office to tell his secretary (no PAs back then) what number he’d be at and when he’d be leaving, and what number to call him on at his next location.

It neatly summed up a world where business leaders are required to be in touch but where technology simply hadn’t caught up with that need.

Thank the gods for mobile phones, I say. They’ve helped cut that tie, freed us to work from wherever we need to, whenever we need to.

I’m typing this on my iPad from Auckland’s water front looking at Team Prada take their catamaran out past the Harbour Bridge because I wanted to get out of the office for a bit. This is a good thing.

Mobility is one the key drivers of revenue growth for the mobile phone companies, it’s one of the great drivers of the overall telecommunications era in which we live and it’s a critical component of most of our lives these days.

All of which makes me wonder just why it is so many 0800 numbers tell me to hang up and call again from a landline.

Why is it that free phone 0800 numbers are off-limits to the very devices most callers use?

The answer, sadly, lies with termination rates. Or rather, in this case, origination rates.

The Commerce Commission decision on the price of calling a mobile was to regulate the termination rate down to a more reasonable number. Unfortunately, 0800 calls were left out of this determination, because they don’t attract a “termination” rate, but rather an “origination” rate. Users don’t pay to make the call, the recipient pays to receive that call and so the decision on termination rates doesn’t apply.

Which means there’s no incentive or requirement for 0800 providers to lower their prices at all, and so they haven’t.

If you have an 0800 number for your business a mobile call lasting one minute will cost you four times as much as a call from a landline and so many 0800 users simply block incoming calls from mobile phones. They can’t afford that level of cost in their business and so they deny their customers that ease of access.

Customers, as they always do, bear the cost of this. Instead of being able to call from their chosen device, they have to resort to other channels to communicate with these organisations. I resort to Twitter for the most part, but not all communications with corporates or other entities can be conducted by tweet.

In this day and age, is it appropriate that 0800 number providers can force different pricing on buyers of the service who in turn must decide whether to wear the costs or restrict their customers’ ability to make contact? Is it all about being customer friendly and obsessed as we’re told, or is it about money grubbing?

Have you had any experiences you’d like to share with regard to 0800 numbers? Please share below.

'>

The Big Hairy Audacious Goal

/in /by

The Commerce Commission has cleared Vodafone’s bid to buy
TelstraClear, paving the way for the merger.

However, there doesn’t appear to be any form of ongoing
monitoring or caveats on the deal. Vodafone had already indicated it would not
be buying all of TelstraClear’s spectrum assets as that would exceed the limits
on 2100MHz spectrum and would also potentially be a barrier to approval. That
aside, we had expected to see some kind of monitoring regime put in place
specifically for this merger. Market dominance is now effectively in the hands
of two players – Telecom and Vodafone – and TUANZ would have liked to see some
kind of additional monitoring put in place to assure customers that no cosy
duopoly could emerge. Presumably the Commission felt either it couldn’t impose
such a regime or that existing market monitoring was enough.

From the Commission’s press release:

“In reaching its decision, the Commission considered that
the merged entity would continue to face competition from Telecom, as well as
Orcon, Slingshot and other smaller businesses in providing fixed line voice and
broadband services to residential and small business customers”.

The Commission says there was no significant business
overlap between Vodafone and TelstraClear – something that has been painfully
obvious for many years now. Hopefully the two combined together will have the
ability to shake up the market and to challenge Telecom for the number one spot
– a long-held goal of Vodafone CEO Russell Stanners.

Time will tell – and TUANZ will be keen to see the results
of any competitive tension in the market.

'>

Whither VDSL?

/2 Comments/in /by

The UFB rollout is slated to take until the end of the
decade and arguments about whether that’s 2019 or 2020 aside, for most of us
it’ll be years before we see the fibre van roll up outside our homes.

For the foreseeable future, we’re locked in to a copper
world here in suburban New Zealand. While I fully support schools, hospitals
and businesses getting access to fibre as a priority (SME businesses stand to
gain the most from the UFB rollout and New Zealand will benefit from the
increased efficiencies that will bring) it does mean there’s a balancing act to
be maintained and unfortunately home users are on the wrong side of it.

But that’s OK because the advances in technology in the
copper world mean we should be able to see better services on our copper networks
in the meantime.

Over on Computerworld, a comment from Malcolm Dick (he of
CallPlus/Slingshot fame) caught my eye. Malcolm points to a recent announcement
regarding VDSL 2+ with vectoring:

“which gives download speeds of
100[Mbit/s] and upload speeds of 40[Mbit/s] on copper runs of 400metres long –
I would guess that covers around 800,000 households in New Zealand.”

Even standard VDSL as it exists today would be great – not
so much for the download speed but for the upload.

Currently, as you know, I’m running TUANZ from home – I have
a very good ADSL2+ connection and regularly get in excess of 15Mbit/s down.
This is fine for my uses for the most part, but the upload speed of at best
1Mbit/s is a killer. I’d be much better off with a 50Mbit/s down, 30Mbit/s up
speed which, given my location (less than 600m to the Mt Roskill exchange),
should be readily attainable.

Except there are very few VDSL sellers out there and worse,
the data caps are so incredibly low. It would cost hundreds of dollars a month more
to connect to a VDSL port, for no apparent reason.

Today, each VDSL port costs a premium of about $20 over and
above an ADSL port. Why? Because that’s the price the Commerce Commission has
set.  It’s a premium service, so it needs
a premium connection price, goes the theory.

Given the difference isn’t in the card in the slot but in
the backhaul and in the contention rates and so on , this is an artificial
price which keeps the retail price too high to be of interest to either
retailers or consumers.

Retail ISPs keen on selling VDSL will need to increase both
backhaul capacity and make sure the service delivers a higher level of quality
than ADSL2 does in order to attract customers. I get that, but an artificially
high price point that simply delivers extra cash to Chorus doesn’t really cut
it.

And then there’s the “copper versus fibre” model. The
argument goes like this – ISPs should not be wasting their time and money
investing in copper because fibre is coming and copper is a competitor. We
should artificially inflate prices on copper to ensure customers are
“encouraged” to take up fibre instead.

That’s all well and good if we all have access to fibre
(which we don’t) and if there is absolutely no other incentive in making the
leap to fibre (there will be plenty of incentives) but that’s not the case.

Instead I would suggest faster copper speeds serve as an
enticement to fibre – that a customer who has already moved up to 30Mbit/s is
more likely to want 50Mbit/s or even 100Mbit/s when that becomes available.
They’ll have discovered the apps they need to make such speeds worth their
while and their service providers will also have figured out which services
customers want. All of that is good for the fibre rollout because when it
finally arrives at my doorstep I’ll have an incentive to move – an incentive
other than “copper’s so expensive now I might as well”.

The telcos I’ve spoken to are all keen to rollout VDSL
services. They see the upside to it as they’ve seen the upside to unbundling
the copper lines today. They get increased margin, customers get better
service, they win more custom as word gets around and everyone’s happy. There’s
investment, there’s competition and there’s a dynamism in the fixed line market
that we simply wouldn’t have believed only three or four years ago. We were
late to unbundling, yet it’s still delivering results.

If we are to hike the price of copper lines to encourage
migration to fibre, we run the risk of snuffing out the nascent competitive
market in our fixed line world – that at a time when two of the three largest
players are about to join forces. That would be a tremendous leap backwards for
the industry and we, the customers who can’t get on to the UFB fibre, would pay
in terms of service and price.

Copper isn’t a competitor to fibre today. It might be once
the UFB is built but for the next seven years or more, it’s simply the only
choice we have for bulk broadband services. It’s important we get the regulated
price settings right.

Vodafone and TelstraClear

/in /by

The Commerce
Commission is due to report back on Tuesday with its decision regarding the Vodafone
purchase of TelstraClear.

Should it go
ahead the takeover will redefine an industry that’s already undergone dramatic
upheaval over the past dozen years.

We started in
2000 with the Fletcher Inquiry into the telecommunications sector, which
recommended the creation of a stand-alone regulator to oversee the industry.
This came at the end of a decade’s worth of nonsense that came about as a
result of the government’s sale of Telecom lock stock and barrel as a monopoly.
Funny that – monopolies operate in their own best interests and expecting
Telecom to do any different would be like dropping a hungry timber wolf in a
cattery.

By the mid-2000s
it became apparent that the light handed regulatory approach was not going to
deliver anywhere near the kinds of results we needed. The decision to unbundle
the local loop – something most other countries had done many years before –
was delayed until it was all but irrelevant. Finally, the bicycle courier
debacle saw the government break cover and demand Telecom operationally
separate.

By the end
of the 2000s, that was also deemed to be a slow-moving train wreck. Telecom had
continued to act in its own best interests and the industry had suffered as a
result – although the Commerce Commission had actually used its powers to take
on issues like Telecom’s “loyalty” scheme and the sub-loop extension service
(SLES) problems which were designed to block competition from getting a leg up.
So we embarked on the biggest project of them all – roll out a fibre to the
home network that would either overbuild Telecom’s copper network or require
Telecom to structurally split in two to take part in the venture.

Telecom
chose the latter path – Chorus was born and we are starting to see the fibre
network deployment take shape, albeit very slowly at first.

Telecom has
a lot to do in the coming year. It has to compete while figuring out how to
finish off splitting away from Chorus. It has a new CEO and has to compete in
the nearest thing we’ve ever had to a level playing field.

On top of
that, we now have Vodafone making the leap from a mobile provider, with an ISP,
into a fully-fledged telco hopefully with a keenness for shaking up the market.

Here at
TUANZ we thought long and hard about the ramifications. On the one hand we have
a reduction in competition as our top three telcos become two. We have a
consolidation at that end of the market where all the power lies and we see 80%
of the market dominated by two telcos, telcos who have had a history of sitting
pretty alongside each other in the mobile space.

On the other
hand, Telstra was never going to allow TelstraClear to compete vigorously in
the New Zealand market. Quite why Telstra bought Clear Communication off BT is
something of a mystery – I put it down to Telecom’s purchase of AAPT and a
desire to keep Telecom on a short leash. Mess with us in Australia and we’ll
mess with you in New Zealand, was the warning.

AAPT turned
out to be something of a mutt with fleas and so Telstra did the bare minimum for
its fledgling Kiwi company. After the Auckland City Council refused to allow
the expansion of TelstraClear’s cable TV business in Auckland (looking at you, New
Zealand Herald for that particular nonsense) and the staggering Commerce Commission
decision not to unbundle in 2003, TelstraClear really had no business plan for
growth. Sure, it had a tremendous asset in the form of its fibre backhaul
network, but its decision not to peer locally, its shambolic cellphone network
deployment in Tauranga and multitude of brand names did nothing to build its
business locally.

Rumour has
it that TelstraClear approached Telstra about buying Vodafone New Zealand’s
business in order to grow swiftly. Telstra baulked at the asking price
(rumoured to be $3bn) and instead entertained a reverse deal that includes a
clause to keep Telstra out of the New Zealand market for some time to come.

The upside
to the deal, however, means we finally have a competitor that can take on
Telecom in the fixed line market in ways Telstra simply wouldn’t entertain.
Vodafone has very little business in the fixed line market. Sure, it bought iHug
and has a consumer presence, but in the all-important business market, it’s a
minnow. In order to really take on Telecom in its heartland, only Vodafone has
the scale and with TelstraClear’s assets (both network and people) it would
have the ability.

I’d expect
the Commerce Commission to come back with an agreement to allow the deal to
proceed, albeit with a variety of caveats regarding market monitoring. If there’s
any sign of a cosy duopoly forming, I’d expect the Commission to act swiftly,
but I have high hopes that won’t be needed. It’s up to Vodafone now to deliver
on the promise of the Clear network. If it does that, we should have a more
dynamic and interesting market. If not, the Commissioner will have to wield the
scalpel once again.