Sky TV and the telcos: How will copyright notices, datacaps and peering affect content delivery?

Part two of Q and A with TelstraClear CEO Allan Freeth

In part two of our Q and A with TelstraClear CEO Allan Freeth he discusses the affects of copyright, datacaps, peering and whether the company might buy 2degrees.

What affect has the Copyright Amendment Act had for TelstraClear, has it been difficult as an ISP to administer?

We wanted $41 to do every notice, which is the true cost; I think we get $25. So that’s the government that made that decision, that’s OK we’ll carry that. I don’t think we’ve sent a notice three times to any one person yet, but it’s a lot of work and it will continue because we have to track people, we have to send them out. I think at the moment the movie industry hasn’t sent any notices to us at least, it’s all been the music industry, I think they’re trying to boycott us over that.

Datacaps – we’re going to watch movies on these channels, what’s going to happen with datacaps?

I’m not at all defensive about this but I think that speed isn’t the issue, datacaps is. And we saw it when we released the trial of 100Mbps – for a trial period with some customers with Christchurch and Wellington. The problem with datacaps is the choke point in the supply chain which is the international bandwidth, and managing that cost against what people are paying as a residential customer.

One of the things we saw when we did that [no limit] weekend was 300 percent [increase] straight up and I have to say I was wrong. I said that there will be a few people that will change their behaviour but I can’t see people really staying home... well we were wrong.

You were wrong and you got a lot of flack for it too.

We got different kinds of feedback from customers. From the gamers a lot of flack because we shut down their weekend for them. But the downloaders were really happy customers; they want us to do it again, which will be a long time away. But it really demonstrated was the insatiable demand for content and for product.

The argument is that if Pacific Fibre and/or Optikor (Kordia’s trans-Tasman cable) get up and running, the cost of international connectivity will come down. So which one is TelstraClear going to go with?

We’ll just wait until they build and then we’ll use them. We don’t see why we should be an underwriter for someone’s business case necessarily. Capacity is not a problem; it’s the price that’s the problem.

If you upgrade and lower the cost of the international connectivity, you’ve still got the upgrade of the domestic networks to deal with and that’s the problem.

For telcos to invest millions of dollars to keep augmenting their networks they’re going to have to find ways to make some money when that traffic passes through. And one of the obvious ways is content, games or applications. And the market will work, it will rationalise itself in some way, but it’s not going to rationalise itself in a way that broadband is going to be priced below it’s cost, which is where a lot of people feel it should be when they talk about affordable broadband and content.

What about peering, TelstraClear stopped peering.

And Telecom

It was your idea. You stopped peering with all the other ISPs.

We’re happy to peer if they pay for it.

You would rather they sent their traffic up to America and back again.

I don’t want them to do that. But they can’t expect to run over a network without paying for it. We’re peered with Telecom and we’re both big enough that our traffic matches each other, if we were much smaller we would have to pay Telecom for the use of their network. These guys want to access our network and use it to get to customers without paying for it.

People build this up as some type of freedom of the internet... but we’re not altruistic, we’re a commercial organisation. Whenever I hear an argument about the national good and building these things I know it’s going to cost my shareholders.

So is anybody paying to use it?

I think a couple of smaller ISPs have, I’m not sure.

At what point did we become a social service?

Sky TV might say the same thing.

It’s not the same issue, I’m not asking John Fellet to allow me to use his content without paying for it.

But you are asking to use some of it, not all of it, and he’s saying…

But I’ll pay for the some I use.

But he’s saying the only reason I can give it to you at that price is because you’re paying for everything and it evens itself out.

I don’t think it’s quite the same. Anyone can use whatever part of our network they like, but again it’s just if you want to use it and you don’t have traffic that warrants us doing a commercial deal with you, then you have to pay to run across. Why would they expect us to provide them with free access to a network say they can make bigger profits?

Peering isn’t about the consumer. If it was about the consumer they’d pay. It’s about them and their business model, which is fine, that’s OK. If they don’t like it they can build their own network.

John Fellet is sort of right in the same way. As I say, when the pain points get big enough we will go off and start buying content.

How many staff at TelstraClear these days?

We have 1300 FTEs and about 600-700 people who work for us but not directly for us.

You haven’t got a mobile network, you MVNO, you’ve got a national network and LLU, Cable. And Telecom Retails has got 7000 people. Do you think something will have to change there?

I don’t want to insult Telecom by talking for them. What’s happened to Telecom has happened nowhere else in the world. This is a grand experiment of breaking up a business model that has effectively worked and it’s not clear to me how the dynamics around the share price and the market of Chorus and Telecom will work. As I say, I think it’s a big experiment.

Remember Telecom still has a fair amount of network and remember Telecom could always vertically integrate itself again. Chorus can’t, but there’s nothing stopping Telecom building fibre. And they’re building it anyway for their Gen-i business. They’ve still got the backbone and they’ve still got the mobile network.

I think they’re going to be a very aggressive competitor. They’re an impressive company, they always have been. I think they are now free of a lot of regulation and a lot of the headaches that vertically integrated companies have. And I just think they’re going to be a very impressive and aggressive competitor on the network.

If they’ve got 53 percent of the broadband market, how much have you got?

Telecom are about 600,000+ broadband customers roughly, we have about 200,000. Then Vodafone is pretty close behind us.

Your MVNO offering – 50,000 customers?

It’s getting there. It’s more than it ever was under the agency agreement. It’s been growing very fast.

No regrets about going back to Vodafone?

Not really. I regret the dance we went through with everybody. Again, that was a reflection of the market and not having much power in the market because we didn’t have good MVNO maturity and regulation. And remember what we did with the agency agreement with Vodafone is effectively what we’d have to do with Sky.

We had to reach a pain point where we said we can’t live with this any more and we had to go backwards for a long time and then come out of it. That has hurt our business. We lost business and business customers because of it. But you make a long term strategic decision and you put up with the short term pain. I regret that we were never able to form a type of understanding that we thought we would have with Telecom going forward. But in those cases you had to make quick decisions and cut your losses.

They made you stay on CDMA and you didn’t want to do that.

They weren’t prepared to provide us access to the XT Network in the time frames that we had expected. Paul Reynolds made a call and that was fine and I have no bitterness about that.

Would we much prefer to have had our own network? Yeah we would. Would we want one now? Not sure actually.

MVNO is working very well; we haven’t had to spend all that capital. It does constrain us in some ways but in other ways it provides flexibility.

There’s one mobile network sitting there called 2degrees.

We’ve seen that actually, occasionally.

Have you done the sums sometimes?

We look at everybody on and off around the market and consider every option. But nothing at the moment, nothing we’d even remotely consider. But it will be interesting to see their long term game and just where they go. It’s a tough market, and they’ve been impressive.

You’ve been CEO for how long?

Seven years.

How long do you think you’ll stay in the role?

We’re having fun at moment. This year you’ll see a lot of stuff. We were a little quiet last year because we really had to assess what the government’s intervention was going to do and where it would go.

You weren’t quiet over the (proposed UFB) regulatory holiday if I recall?

We changed that, that was good, and we did it for consumers and we came under a lot of criticism for that both inside and outside the industry for taking such a public stance. It was a big call but it was a really big issue. And again, once the pain point got to a certain point and government said ‘we hear you but we’re not going to change’, we decided yet again to stand on our principle and do something about that.

*This is the final article in a series about Sky TV and its relationship to telecommunications in New Zealand that Computerworld has run this week.

See also: TelstraClear boss tackles content issues, What is in the contracts betweens ISPs and Sky TV?, Is Video on Demand a telco service? and Is there a case for content becoming a telco service?

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