Free calls may cost telcos nothing

The telecommunications service obligation - which could cost nothing at all - may in any event be made unnecessary by a levy on telco profits or removing the line rental cap, says network economics specialist John Small.

The telecommunications service obligation — which could cost nothing at all — may in any event be made unnecessary by a levy on telco profits or removing the line rental cap, says network economics specialist John Small.

The TSO is a successor to the kiwi share obligation, which requires Telecom to provide free local calling services to all residential users at a capped line rental throughout the area serviced by Telecom’s fixed line network.

Small thinks it is likely that the income from profitable customers outweighs the expenditure on the costly ones. If a telco could provide a service to the more costly customers and still make a profit, TSO costs would be reduced to zero, he says. If that is not the case, he suggests the restraint on line rental be adjusted or removed so as to reach that point. TSO compensation, and the task of deciding how to distribute the costs equitably among providers, would then become unnecessary.

Such a radical rethinking would require major amendments to the Telecommunications Act, he acknowledges. But even under existing legislation, TSO funding could “come from tax on revenue earned from profitable connections”, he suggests.

Much effort is being expended and is still to be expended on quantifying the cost to Telecom of the TSO. This is a highly complex exercise involving risk profiling and predictions of technology and its take-up. The exercise would be better avoided, Small suggests, if it could be demonstrated that the profit being made from the line rental to customers more than compensates for serving uneconomical customers.

Small, director of the Centre for Research in Network Economics at the University of Auckland, made his controversial proposals at the Itanz-sponsored Telecommunications summit in Wellington last week.

In what may seem a counter-intuitive approach to a non-economist, he suggests taxing the essential elements of telecommunications rather than the “luxury” areas, because the former are the most “inelastic”. Taxing luxuries means discouraging people from consuming them and so erodes the revenue.

“Unpriced” long-term data calls — it would be misleading to call them “free” but the price does not increase with their duration — are a distortion in the system, he says, and should be removed by imposing a small charge which would discourage long dial-up internet calls. At present, unmetered dial-up data connections compete unfairly with broadband. Imposition of a small charge would encourage a move to broadband, which is apparently what government wants, he says.

Another significant point in favour of ditching complex TSO calculation and debate, he says, is that it would allow the Telecommunications Commissioner and Commerce Commission to concentrate on their core task of resolving disputes between telecomms companies.

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