10 March 2006

Local loop unbundling and subsidies for telecommunications

I said a week or so ago that I would read InternetNZ’s submission on telecommunications reform. I know Colin Jackson (President of InternetNZ) and David Farrar are smart men, having read their work before, and I also know they aren’t just bleeting for the own self-interest, there is a genuine interest in producing the best policy for NZ telecommunications. I also know that neither have a specific anti-Telecom agenda - so this is not about politics, but about outcomes. The Greens on the other hand, are simply anti-big business, Telstra Clear is conversely out to screw its competitor - Telecom.
InternetNZ is a private organisation which has evolved over the years to be an excellent example of the government NOT needing to be involved to ensure an industry can co-ordinate co-operatively and effectively when it is appropriate. For that alone, when InternetNZ speaks it should be listened to and carefully considered. Note that Grant Forsyth, Manager of Industry and Regulatory Affairs Telstra Clear is a councillor of InternetNZ and Deputy Chair of its Public Policy Committee- that interest is declared, and I don’t believe David Farrar (as Chair) would let that interest dictate policy (although if Telecom was in such a role and InternetNZ opposed local loop unbundling, there would no doubt be howls of indignation).

So I thought I’d go through the media release, which summarises the submission, and consider all of the points. If I was being truly libertarian I would reject competition law and this would be easier, and I wouldn't care about outcomes - but I accept that Telecom's privatisation was done with the owners (and subsequent owners) agreeing to it being regulated under the Commerce Act in order that Telecom provide cost oriented, fair interconnection with its competitors. This is a bare minimum for telecommunications, so I will take that as read. So here are the points from the press release in italics and my response in bold:

Our key message is that there is no 'silver bullet' in telecommunications reform - a multi-pronged strategy is required to deliver a more competitive market in telecommunications. The debate is not just about whether to unbundle the local loop or not. That will not be enough by itself. It will be a very useful step forward but needs to be followed by separating Telecom's wholesale business from its retail business.

Hmm not convinced, and some of its wholesale business faces enormous competition from the likes of BCL and Vodafone. Nowhere in the world has this been done. It is an enormous intervention in the business of a major company, and the last time it was done in New Zealand (electricity) it was against officials’ advice and didn’t deliver.

"Our submission contains proposals in two areas. The first series of proposals deals with increasing competition on the key economic bottleneck in the telecommunications market - the local loop. The second series of proposals deals with the development of other areas of Internet infrastructure.

"On local loop matters, InternetNZ proposes three inter-related steps:

Development of stronger wholesale service options for resellers of Telecom's services, starting with an unconstrained UBS (unbundled bitstream service). Such a service would allow bitstream provision at the maximum feasible line speed, with adequate network provisioning to make such services useful.

Talk to Telecom about it - ask why it wont do it, or whether it will do it if you pay. If Telecom wont do it, it may be because it wouldn’t be profitable, in which case why should it be forced to do so? I'd like a straight answer from Telecom.

Local loop unbundling, allowing service providers to install their own equipment in or near Telecom's local exchanges and cabinets. Growing international experience indicates this allows the development of very high-speed Internet services due to the stronger competitive environment resulting.

How about at the very least, amending the RMA so that telecommunications network operators have the right to lay cables along public corridors wherever other operators have cables, including power companies. This will end the abuse of the RMA by local authorities banning overhead cables where Telecom and power companies already have them. How about explaining why Telecom’s competitors wont pay a price to install equipment near its exchanges? Given the Commerce Act exists and was substantially strengthened by Labour, why have no competitors taken legal action claiming Telecom is acting anti-competitively? Is it possible that infrastructure based competition is not occurring also because competitors would much prefer a free ride with Telecom's infrastructure?

A split of Telecom's wholesale business from its retail business - the only way to ensure fair treatment for all competitors on Telecom's local loop network is to ensure the company faces incentives to deliver this. Only by including Telecom's wholesale business in a separate firewalled division - or a separate company - can one be certain that it will treat all access seekers on an equivalent basis to Telecom's retail division.

Hold on, the entire wholesale business? Including in Wellington and Christchurch and Kapiti where there IS infrastructure based competition? Including the CBDs? Including the toll bypass and international networks? There is no “natural monopoly” outside the provincial and rural local loops, and no justification for splitting the lot - competition on national and international calls is vigorous. Local competition now exists nationwide on Telecom’s network, and cellular is increasingly an option for people who do not want a fixed line. However, using information disclosure regulations along with the Commerce Act should be enough protection against “anti competitive behaviour”. It requires a case to be proven, but when you are talking about interfering with property rights the proof required should be high.
"InternetNZ has also proposed several other reforms that do not focus on the local loop. While we regard the local loop as the key site where competition is lacking today, there are other interventions the government can make to roll out better Internet for New Zealanders.
"In these other areas our proposals include the following:

An additional $60m for the Broadband Challenge, to ensure it can deliver meaningful fibre infrastructure to local communities. We understand that the fund, established under the Digital Strategy with a $24m limit, is fully subscribed. Expanding the fund is a simple way to show government commitment to the development of open alternative network infrastructure.

Nice try, but bugger off and look for your subsidies elsewhere! You have no more right to taxpayer’s money to subsidise your industry than farmers, tyre manufacturers, travel agents, shoe repairers or architects. Give that one a rest. If telecommunications companies don’t find it economic to expand infrastructure to certain communities (though I thought you wanted to piggy back off Telecom), then why should businesses, workers, pensioners and others pay for it? What is this about a government funded alternative network infrastructure? Why can’t Telstra Clear or an alliance of Telecom’s competitors do this? Why can’t you? This is no different to asking for Kiwibank, petrol stations or anything else that socialists ask for. Rural roads are paid for by road users and local landowners paying rates - why should telecommunications be different?

Review of state network building - a large number of Crown organisations have network capacity installed around the country, including the developing GSN, Advanced Research Network, SOEs like BCL Ltd and Transpower, and others. It is important their networks are well-coordinated, and that any potential gains they can bring to making the national Internet backbone network more robust and more competitive are fully realised.

Why not require state owned entities to onsell excess capacity, before privatising it?

Review of spectrum allocation policies, to allow better development of community wireless broadband. Current spectrum allocation policies allow the hoarding of spectrum by market participants. These should be reviewed to ensure that communities can easily roll out non-profit wireless broadband services.

Spectrum should be sold, those “hoarding it” value it more than the so called “communities”. Communities are either bunches of people with ideas (which they should pay for) or councils who want to force people to pay for their ideas. If someone buys spectrum and doesn’t use it, it is just like buying land and letting it go fallow - it isn’t your business, as long as the government has sold all of the available spectrum.

Develop a national strategy to roll out fibre-to-the-home services. Most of the best-placed OECD countries are already moving towards very high-speed Internet service rollouts. Copper technology imposes speed limits that don't exist with fibre. A national strategy to get fibre to the home - sooner rather than later - is a vital element in bringing New Zealand up to speed for the digital future.

Hold on, I thought competing infrastructure to Telecom’s network was uneconomic, which is why you want to attack its property rights. NOW you are saying copper is essentially becoming obsolete and the government needs to develop a strategy to replace it. Why? The government did not develop a strategy to roll out the internet in the first place, or a strategy for cellular phone networks, or a strategy for pay television, or a strategy for rollout of PCs in business and homes. Get councils out of the way in planning terms, and get taxes down and let network providers hold their property rights. Very high speed internet service rollouts are not being undertaken as government central planning, outside China and one or two others. Why are you choosing technology? HFC was the technology of the future in 1995, then it became xDSL, now you are claiming fibre to the home - the costs of getting this wrong are potentially enormous. Let Telecom, Telstra Clear, Vodafone and any other entrants invest, without feeling like they need to pull government strings for funding, or for access to each others property - beyond what was agreed at Telecom’s privatisation.

Taken together, this second series of proposals would push the boundaries around Internet service provision, leading to alternative options for those not well served by incumbent providers, far faster Internet access for communities with fibre infrastructure, and concrete plans to bring New Zealand to world class standing for very high speed Internet services over fibre," said Colin Jackson.

You either rely on the incumbent or rely on new entrants to roll out competing networks, you can’t have incentives for both.

"In Australia, it is possible for businesses and householders to buy packages that deliver ADSL2 services with 24mbps downlink speed and 6mbps uplink speed, without data caps, for AUD39.95. Such services are close to 40 times faster than the majority of 'broadband' services available under the current regime.

Not in most of Australia. This has a limited rollout. Why not ask why no one else is providing it, including Telecom.

"The current policy framework and resulting market structure cannot deliver outcomes to match Australia's, because they do not provide competition on the local loop. By far the best way to deliver higher quality, more innovative services is to create a level playing field where competition forces better services at lower prices.

Telecom’s owners bought a network, its competitors didn’t and haven’t offered to buy it from Telecom - it’s a level playing field when you each own the property you bought. What is stopping Telstra Clear from building an alternative network? Its owner is many times the size of Telecom.

"No matter what promises are made by incumbent providers, the fact is that progress in New Zealand will continue to lag behind the OECD, behind Australia - behind any country we might compare ourselves with - until competition is a fact of life, rather than allowed now and then by grace and favour of incumbents.

It’s not grace and favour, it is the right you have through ownership - a right you can get by building your own network or buying it from Telecom.

I’m not convinced - InternetNZ has shown it is either in favour of forcing Telecom to be split, so that its competitors (which in some cases are bigger than Telecom) can use its property, and ALSO it wants subsidies and central planning for competing networks, wireless and fibre, that will bypass Telecom’s network. This is fundamentally inconsistent, unless you simply believe in competition at any cost - including the cost of property rights, and the cost of taxpayers who may or may not ever use high speed internet services.

Telecom’s competitors have two avenues open to them to compete:

1. Build their own networks - lobby to remove restrictions on doing so, but build. If there is going to be demand for fibre to the home, then someone has to build it, and Telecom hasn’t. If it isn’t economic to do so, then don’t ask the government to pay for it.

2. Negotiate with Telecom. I mean seriously, not just to buy access but to buy the entire local loop business into a company owned jointly by Telecom and its competitors. Make Telecom’s shareholders an offer, assuming you believe you can grow this business better than Telecom alone - if you think there should be structural separation, make a serious proposal with money. It may cost a lot of money, it may be cheaper to build your own network in places, but if it costs a lot of money you will only buy it if the benefits are worth it. If not, then Telecom's shareholders have something of more value than what you want. I think all of the Telecom's competitors could form a company to buy 50% of the local loop from Telecom and agree on a way forward for the local copper loop - (although Telecom might want similar access to Telstra Clear's local networks in Wellington and Christchurch). It is too easy to ask the government to give you access to something someone else owns - it is more creative and entrepreneurial to make the owner an offer it can't refuse!
3. Make a takeover offer. That means buy shares. Either you get to influence Telecom's business decisions (but you aren't allowed, nor would you want to make it go under) or you gain a return on its dividends. If it isn't a good investment, then presumably Telecom isn't ripping you or New Zealand consumers off (otherwise you would want to share in the profits). If it is a good investment, you wouldn't be averse to enjoying a share in it. Yes, you need to watch the Commerce Act. Vodafone couldn't do it, but then again Vodafone is silent on all of this. Why? Because it took option 1 - it bought a network built from scratch, expanded it and it is now nationwide. Done in the early to mid 1990s, when councils were still finding their trigger fingers for using the RMA.
and don't even START thinking councils should spend ratepayers money on telecommunications infrastructure, if councils are doing it, it either is a very stupid idea or something that telcos would be doing anyway if councils weren't making it difficult to do!


Michael said...

A little company called Saturn built it's own network in the Hutt Valley, Kapiti Coast and Christchurch. But then it was taken over by Clear (and Clear was taken over by Telstra) who found it cheaper to lobby Government to open up Telecom's network than build it's own.

Anonymous said...

I think you have dealt with this issue extremely well and reached logical well though out conclusions.Your commentary is better than I have read anywhere else.
(I have to sign in as Anonymous because although my sign in details come up I get incorrect password when I try to publish

Anonymous said...

Communities are either bunches of people with ideas (which they should pay for)....

Yes if you want to make an idea reality. But a single service provider should not dictate the costs of all of that. Communities should have access to the tools that they need. Telecom's end2end services philosopy doesn't allow that.

Besides, the SOEs do sell excess capacity.

And you have this insane idea that Telecom's costs are not bloated, therefore their decision on whether something new will be profitable is valid.

It's not.

Libertyscott said...

Telecom's costs MAY be bloated, but that is a problem for Telecom's shareholders as much as it is an opportunity for infrastructure based competitors.

What I would like is some transparency here - there are aggrieved consumers who feel they are getting a raw deal, competitors who will (frankly) never get what they want (unlimited free access to Telecom's network unconditionally), and a company that is on the defensive.

It is far from satisfactory to tinker endlessly with the regulatory environment - as has happened the last five years.

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