The New Zealand telecommunications industry grew only 1% in the past year - compared to 10% in Australia. We also dropped on all international revenue benchmarks set by the International Telecommunications Union. The reason? An "outdated" regulatory regime that allows Telecom to abuse its local loop monopoly and stifle innovation. Outspoken Australian telecommunications analyst Paul Budde discusses this and other conclusions from his third annual report on the New Zealand telecommunications industry with Russell Brown. Your report seems to indicate that there's not necessarily much advantage in being first to deregulate telecommunications. We were first in the region - and yet it appears we have the worst performance. How so? Australia is isolated from the rest of the world and New Zealand is even more so. So countries like ours have to put a little bit more effort into being part of the global economy than, say Germany and Belgium. Because of that it is very important for countries like Australia and New Zealand to keep an eye on OECD figures or ITU figures - because that's your only benchmark. It's important not to ignore these figures, to embrace them and do something with it. It's obvious that New Zealand after being a leader for many years has failed to adjust to changes going on in the market - and I think now is the time to say the changes have been such that they warrant a new approach. What should that new approach be? You've criticised the Labour Party proposals for not being immediate enough. When you look back to 1985-87 when New Zealand started being deregulated, it was a totally different market. The Berlin Wall was still standing! The Asian Crisis hadn't happened. Things have changed and you cannot just say, let's go back to 1987 and put up a regulator. That's passed. If you look at the Labour enquiry, they're talking about six months. We know politicians, so that's 12 months. Then they come back with the plan and that will be discussed for another six months. It could take four years. And if you think back four years, the Internet didn't exist. Things are changing so rapidly that you can't do that. The government here has interfered in ways that are so far proactive for Telecom. If you look at the problems Saturn has had in Wellington, with Telecom bringing prices down street by street - I think that's disgusting. That's misuse of a monopoly. Would that be permitted in any other jurisdictions? No. In any comparable country, that would not be permitted. In Europe, the regulator would look at an issue for a month or six weeks and then on the Monday following the decision, it's implemented. In Germany [the incumbent] had to cut its prices by 60% on July 1 - no discussions, no court cases, no delays. In New Zealand or Australia - well, first of all in New Zealand there's no regulator who can say that - you'd see the court cases begin. The world is moving too rapidly for that. Is that important? Yes. We are in a global economy. It's no longer New Zealand or Australia or whatever. And to profit from the future will require intellectual products- our knowledge. The Internet, e-commerce and e-services in general are of course critical in that opening up of the world towards us. If we have to compete with countries where there is a government or regulatory regime that is stimulating e-commerce … E-commerce is driven by competition. It's not like somebody suddenly says "e-commerce" - it's companies who say, we can do things more efficiently and effectively in an electronic way. Telecommunications is the conduit in the whole thing. If your conduit isn't right and companies cannot implement electronic services, then you will run behind the rest of the world. In other words, if New Zealand companies do not very quickly evolve into the e-commerce world, then even what they think is their local market won't be any more. People will start buying things overseas. So it's even more critical that e-commerce is developed in Australia and New Zealand than in other countries, because of the isolation. If you don't have a pro-competitive environment in your country, you will develop e-commerce more slowly than other countries. It's coming, whatever happens - but it will happen slower. That's a disadvantage for New Zealand companies that want to participate. They have less innovation, less price competition, less choice. If we had an ideal world we wouldn't need any regulation. But for so long Telecom has been a monopoly - that's a historic fact. So you need some extra regulation, some stimulant, some support from the government to get competition off the ground. What's happening now is that all new telcos around the world are growing at between 50 and 60% per annum. That's what I predicted last year for New Zealand. In November last year I predicted that the new telcos here would grow 65%. They only grew 7%. In Australia, it was 57%, in Europe it's around 120%, in America it's around 40 or 50%. So New Zealand is the odd one out. It's not only Telecom that only has 1% growth - it's the whole industry that's suffering from the lack of competition. That would appear to be backed up by the e-commerce readiness document presented to Apec leaders by the CEO Summit here recently. The attitude of the CEOs was, basically, curb telecommunications market dominance by any means necessary. That's what I can't understand - if you'd got the OECD, the ITU figures, Apec - look at all the evidence around you and then make up your mind. Then say, hey, are we in step with the rest of the world? And if you are the only telecommunications market in the Western world that its only growing 1% - then you're doing something wrong! If there were five or 10 other countries in a similar position, you could say what Telecom is saying - that competition is biting. That's rubbish! Competition is biting in Germany, in Australia, in America - and none of these countries have New Zealand's low-level approach. I don't know of any country in the world, apart from war-torn places where the whole system has collapsed, that has such low growth in the telecommunications industry. At what point would you sat the New Zealand model went wrong? Was there a year when it went off the rails? I think it became clear very early in the game. Certain court cases went on for four, five or six years. You cannot run a business, any business, where it's necessary to have court cases that go on for such a long time. There's clearly something going on in the market that is forcing this to happen - and that's not a natural thing. That is a clear indication, of course, that the regime doesn't work. In a normal economic model, then at an early stage in the process, you'll find a solution. But it's in Telecom's total interest to delay as much as possible. Let's be honest - if they spend $100 million on legal costs in delaying competition, they can make a couple of billion dollars out of that. It's a great investment. What's the remedy? Are you talking about opening up the copper? That seems pretty difficult given the road we've gone down. Let's be honest - that's hard everywhere in the world. There's not one single country with the formula for success. It's trial and error. But the principles are firstly that telecommunications, as an infrastructure device, is critical for our social and economic fabric. Education needs the Internet. It's not just business. You first have to establish that telecommunications is critical for your country. Unlike a chocolate factory or whatever. Then having made the decision as a government, you have to say, alright, what's the best way of managing that infrastructure in a way that everybody profits? We don't have an ideal world. If we had an ideal world it would happen automatically, but it doesn't. Where there's one dominant player, you have a very tilted market and one that will try to protect high prices and hamper innovation. I'm no oracle here. These things have been known to economic science for hundreds of years. So knowing that, you have to say, what's the best way of opening it up? There are numerous way. The easiest way is to force the incumbent operator to provide wholesale service. Other players can use the network at wholesale prices - and those wholesale prices have to be realistic. The incumbent will typically price access so that no one else can make a business out of it. In Britain, what Oftel did was this: British Telecom was basically saying that the integrity of the network would be risked, and some of it was not up to scratch - then Oftel said, okay, BT, if you are not providing a network that is not up to scratch, we will allow competitors to actually upgrade your network. We've had Telecom pleading network capacity problems as the reason for introducing the 0867 system. They can get away with murder. No other country in the world would allow that. The Crown advised against it - and I can't understand why the government would then say, rubbish, all the experts are wrong and only Telecom is right. I'm not saying I'm always right. But you should be able to adjust your view based on good arguments. And if you look around the world, you'll find that Telecom's argument about the Internet has been used everywhere - Australia, America, the US - and after some thought and examination of the issues those governments have decided that it is rubbish. It is not a valid argument. I would have thought that New Zealand would have said, we're getting fooled by Telecom here. Let's wait for another year and monitor it. Would you keep the Kiwi Share as a part of our environment? I think it's absolutely critical to keep the Kiwi Share - but unfortunately so far it hasn't been worth anything, because the government has not used it to its advantage to get a better system going. On the other hand, Telecom has always cited its alleged Kiwi Share compliance costs to support its own case. Yes. But the scenario is that Telecom does have powers beyond telecommunications. They are the largest taxpayer in New Zealand, and the largest in the stock market. Telecom rules the government. And Telecom is so powerful that it can operate beyond the law and wherever necessary it can change the law to get its way. I can't interpret it any other way - if you look at the Saturn case in Wellington, if you look at the Internet case, if you look at the Maori case with the spectrum - the government is constantly bypassing expert advice and bureaucrats and doing their own thing. I know it sounds like a conspiracy theory, but what other explanation can you give? It's my opinion that Telecom uses its strong position in the New Zealand economy as a lever in its discussions with the government. Telecom's other argument is that if the environment is really that bad for competition, why have Vodafone and British telecom committed so much to this market? What are those companies seeing? The telecommunications market is an absolutely booming market. Over the last couple of years it has become the second or third largest industry in the world. And we're only seeing the start of it. So obviously if you are a company in that field, you know that there is long-term money to be made. Therefore you see BT, Vodafone and others get involved. Of course these companies want more out of deregulation. So the government always has to do a balancing act. I'm not just saying "listen to Clear and implement everything they say". So those companies are there in the market, they want to make some money, they see the opportunities. They hope they'll eventually get a government that is actively involved in creating a pro-competition environment. If that happens, they can quickly establish themselves and become involved in the process. If you look at Clear in the early days, they were a duopolist. They were happy to not rock the boat, reap the revenues and get away with it. It was the same with Optus in Australia and Mercury in the UK. A duopoly does that. Telecommunications is not something that will go away in two or three years' time. But Telecom could. If you look at the total telecommunications market worldwide, what you see is that prices are falling everywhere. You can make a three minute call between London and New York for 10 cents. It's becoming a commodity. New Zealand is one of the first countries in the world where a further drop in price is not resulting in more telephone calls. What that means is that people at a certain stage stop just making calls because they're so cheap. It's becoming a commodity market - one of high volumes, low margins. New Zealand alone is not generating that sort of volume. So if you are a telecommunications carrier whose income depends on telephone calls and you know that is becoming a commodity, then you know you have a problem. Only when you have a hell of a lot more minutes to bill will you be able to make money. The only way to survive for Telecom - and every incumbent around the world - is to actually work together, to merge. We've seen it in Europe, with Deutchsche Telekom and Telecom Italia. Once they've battled it out in Europe and America, they'll start looking at Asia-Pacific. Countries like New Zealand are very easy targets because there's no regulatory protection. In my view, none of the players in the Asia-Pacific area, except NTT in Japan, are big enough on the incumbent level to survive on their own. What you're seeing is the BT-Clear merger, the Telecom New Zealand-AAPT merger, which is what it will be over time. They're still not big enough to survive on their own - but they become a more interesting target. So despite the fact that the regulatory environment isn't all that fantastic, Vodafone and BT know that in a year or three, things will have changed. They'll be well positioned to either take over or be someone who's established a niche market, and buy from the carriers what they need.