Telecom to face unbundling, accounting separation, naked DSL and increased Commerce Commission monitoring

Telecommunications Minister David Cunliffe stunned the nation yesterday when he announced a comprehensive regulatory package which includes local loop unbundling for the incumbent, Telecom New Zealand. Although the announcement was to have been part of the new budget on May 18, a parliamentary leak to Telecom forced Cunliffe to reveal it early.

The package includes full unbundling of the local loop as well the sub-loop copper betwen exchanges and customers, and accounting separation between Telecom's business operations, a move which may ultimately lead to structural separation of the telco.

So-called naked DSL, whereby providers can deliver broadband only without the $42/month voice component, is also mandated.

Cunliffe has also enhanced the Commerce Commission's monitoring role to ensure improved competition, and removed the current limits on the Unbundled Bitstream Service, including the 128kbit/s upstream limit and the prohbition on supporting real-time services such as voice over IP and gaming.

The government intends to review public sector investment telecommunications infrastructure so as to encourage alternative networks such as fibre, wireless and satellite. Telecom won't be allowed to engage in predatory pricing to squeeze out new entrants from the market, as happened with cable provider Saturn in the 1990s.

A separate package for rural broadband will also be developed, and the Digital Strategy Broadband Challenge Fund will be expanded.

The key driver for the government's decision to hit Telecom with a regulatory sledgehammer were indicators that the incumbent was dragging it heels when it came to investment, delivering its promised next generation IP network, and expanding the wholesale broadband market.

In the cabinet paper and minutes, Cunliffe says that the 2003 decision not to unbundle has failed to deliver on its objectives, despite providing Telecom with "first mover" advantages over competitors that would be constrained with lower network speeds. Under the status quo, Cunliffe writes, Telecom would have an incentive to defer investment as this would postpone cannibalisation of existing revenues; the cost of investment would also decline under such a scenario, as equipment prices fall in the future.

Telecom promised to deliver at least one-third of all broadband connections through wholesale, but its Commercial UBS product was slow and problematic in implementation. While Telecom surpassed its total broadband customers target, it missed the wholesale one by some 20,000, another factor that weighed heavily in the government's decision.

Due to Telecom's delays in delivering on the government's targets, Cunliffe has been forced to lower the goal that New Zealand will be in the top quarter by 2010, to the top half only.

While Telecom describes the unbundling decision as a "lost opportunity for New Zealand", its competitors welcome the move. Ihug says the "handbrake comes off New Zealand broadband" and says the decision is more than the provider had hoped for.

Second-string telco TelstraClear says Cunliffe's announcement will allow true competition for the first time.

InternetNZ's David Farrar says his organisation is very pleased with the decision which shows that the government has listened to all the submitters on the issue. He warns that the "devil's in the the details" though but expects the lifting of the UBS constraints to show the first benefit to customers. Implementing the decision will take a while too, Farrar says, and warns not to expect too much in the first 12 months.

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