Telco sector undergoes revamp

By the end of the year, the telecommunications sector in New Zealand will have changed almost entirely from what we saw 12 months ago.

By the end of the year, the telecommunications sector in New Zealand will have changed almost entirely from what we saw 12 months ago.

The year began with a new government, a gravely ill telecommunications minister and a telecommunications inquiry, headed by Hugh Fletcher.

The inquiry team began the mammoth task of accepting submissions on the future of New Zealand’s entire telco industry. Keeping the Kiwi Share Obligation (KSO) was only the tip of the iceberg. The KSO requires Telecom to offer free local calls as well as ensuring rural users are not charged more than urban folk and that line rental costs do not increase beyond the rate of inflation. The final inquiry report would not be handed to government until October, and government’s response is due within days, but the report itself has been both lauded and abused from all quarters.

Telco big guns have challenged the report’s findings, claiming them to be both unnecessary and ill-conceived, in particular the section of the report’s findings that suggests the cost of telecommunications in New Zealand is high compared with the rest of the developed world and that a regulatory body would save users hundreds of millions of dollars. This was shown by opposing analysts to have been miscalculated in some areas and the savings involved overestimated.

The report’s recommendations include the creation of an electronic communications commissioner as well as the industry forum; and the creation of a two-tier system for looking at industry issues — specified, the lesser of the two, and designated, which is reserved for those issues that have to be dealt with immediately.

“The large majority of the services recommended for regulation are at the lower level. The higher level would involve price regulation (in the form of pricing principles) to inform negotiations, but only apply in the event of disputes,” says the report. This light-handed approach still requires the industry members to try to reach a solution before the commissioner is involved.

“The only services to be designated immediately would be services provided by Telecom on its fixed wire network, specifically interconnection, data tail (leased line) access, and wholesaling of retail services.”

The inquiry team effectively avoided one of the major issues raised by Telecom’s competitors — Telecom’s absolute control of the last mile between exchange and home or business. By requiring wholesaling of the services rather than complete unbundling, allowing competitors to have full access to Telecom’s exchanges and lines, the inquiry team effectively has let Telecom off the hook. In countries where the local loop has been unbundled completely, the incumbent has not been able to control the speed with which new services are brought online by its competitors. Wholesaling is likely to allow Telecom to control the pace of development as well as the direction it takes. Telecom will be able to protect its higher-priced services, such as leased lines or ISDN, from competing technologies, such as symmetrical forms of DSL (its JetStream service is asymmetrical in that downloading is faster than uploading) .

“In the case of unbundling, in all cases it has been very recent, or legal disputes have delayed its take-up. In the inquiry's view, it is therefore too early to judge its effectiveness,” says the report. However, it goes on to say, “These different forms of access are not ‘either/or’ strategies and could, in fact, be complementary. Depending on its business model and what was best for its particular customers, an access seeker could choose different forms of access for different customers.” Quite what government makes of the report is yet to be seen, however some rumblings from with the coalition government would suggest the minister of finance is less than thrilled to see a regulatory body being established at all.

After mulling it over for the better part of a year, the Commerce Commission decided Telecom did have a case to answer with its 0867 numbering scheme. In June 1999 Telecom launched the new numbering scheme which served two purposes: the stated purpose at the time was to move all internet traffic onto a new set of prefixes — 0867 — to better allow Telecom to control the ebb and flow of internet traffic. As an “incentive” any user caught not using an 0867 number would be charged two cents per minute for any surfing they did after the first 10 hours per month.

A large number of telcos cried foul, not the least of which was Clear. The number-two ISP claimed the only reason Telecom introduced its new scheme was because of the interconnect agreement Telecom and Clear had signed which saw Clear pay Telecom each year for calls terminating in Telecom’s network but which, for the first time, would see Telecom paying Clear around $14 million. By introducing a new numbering scheme, one not covered by the agreement, Telecom would escape paying the fee. Telecom eventually agreed that this was the reason for the move to 0867 and agreed to waive the two cents per minute charges after legal challenges from a number of individual users and the signing of a new agreement with Clear. The Commerce Commission is still concerned that Telecom was using its position as a natural monopoly to its advantage and will be taking Telecom through the courts to prove it. If it loses, Telecom faces a fine of up to $5 million.

To round out a busy year, watching the 2GHz spectrum auction has proved an enduring pastime. For over 370 rounds the auction has seen bidders push the price of management rights over different chunks of spectrum up to around the $140 million mark. Bidders include Telecom, Telstra-Saturn, Vodafone and late entrant Clear, which joined the fun after new chief executive Peter Kaliaropoulos decreed Clear would have a cellular future after all. Problems with the pace of the auction, initially very slow, encouraged auction managers to introduce new rules; however, the discovery that a withdrawn bid could force the price of any particular slice of spectrum down saw the price slashed as players withdrew bids then bid again at a lower level.

The two main bands of spectrum up for auction fall into the so-called 2G and 3G categories — 2G (second generation) is equivalent to today’s cellular networks, while 3G (third generation) will allow much faster data transmission speeds (up to 2Mbit/s) and should transform the cellular world from voice-only into voice, data and possibly even video. The latest round of changes to the auction rules should see an end to the auction, and a start to the implementation, in the very near future.

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