Regulator hedges bets in broadband battle

Shoeshine

Friday 23rd January 2004

Telecommunications commissioner Douglas Webb is this week taking a well-earned rest.

Shoeshine's guess is that his cellphone will be switched off. He probably needn't bother; the horde of lobbyists clamouring to change his mind or strengthen his resolve will now have turned their attention to Communications Minister Paul Swain, who will decide by May whether to rubber stamp his decision not to order Telecom to open up access to the local loop, the "last mile" piece of copper connecting our homes and businesses to the rest of the world.

The mass of jargon, spin, hypothesis and big-company economics that surrounds the issue makes it fiendishly difficult for Joe Blow telecommunications users to figure out what all this means for them in terms of their monthly bills and the quality of services they get and might get in the future.

But a first taste seemed to come, just six days after Webb's decision, when Telecom announced an average 50c a month lift in line rental charges.

Given Telecom's customers have no choice but to pay up, the timing seemed unbelievably cheeky. But the howl of protest from competitor TelstraClear was a little overdone. Another $6 a year of revenue on 1.7 million access lines is scarcely going to have Telecom shareholders breaking open the bubbly.

It's also almost totally irrelevant to the question of how competitors should be given access to Telecom's network.

The debate Webb has been refereeing has taken as basic premises two of the economic facts of life.

Firstly, Telecom, with a last mile network monopoly, will minimise its costs and charges and offer news services only to the extent that is consistent with maximising returns to its shareholders.

Secondly, it is simply not worth anyone's while to dig up every street in the land to replicate Telecom's network. Saturn Communications started down that track in Wellington and Christchurch but its parent ran out of cash and it ended up in TelstraClear's ownership.

TelstraClear in turn announced plans for a $1 billion national last mile network of its own but its parent, Telstra, dumped the idea when it became clear the returns were unlikely ever to justify the cost.

Given those two, the issue for the regulator is not how much Telecom charges end consumers to have access to the network but the extent to which it should allow competitors to use Telecom's infrastructure to deliver competing services and how much the carrier should charge them for the privilege.

Webb basically faced two choices.

The first, local loop unbundling or LLU, involved allowing competitors to install their equipment at Telecom's local exchanges, the first stop between end users and the local, national and international networks.

Telecom's first line of defence has been that this is "unfair" as it's an intrusion on its right to earn a return on the infrastructure its shareholders have paid for.

That allowed chairman Roderick Deane to paint colourful analogies with milking sheds but that was never going to wash with the regulator; of all OECD countries, only New Zealand and Mexico have yet to implement LLU.

A far more telling argument, and one that appears to have won the day for now, is that LLU overseas simply hasn't produced enough consumer benefit to outweigh the damage to the monopolist.

For one thing, not all exchanges are equal in economic terms. It wouldn't be worthwhile for a competitor to install equipment in every exchange in New Zealand.

For another, the capital investment involved is significant. LLU competitors would still have to buy equipment, hire contractors, etc.

Webb has plumped instead for bitstream access. This amounts essentially to a broadband service that Telecom would run but make available to competitors at a wholesale rate, allowing them to charge their own consumer margin, and at wholesale technical levels.

Because of the vastly lower level of capital required, this seems far more likely to produce a wide range of competition.

According to telco analyst Paul Budde, in Australia broadband service providers, including Telecom subsidiary AAPT, have a 75% share of the retail DSL broadband market based on the good wholesale services incumbent Telstra offers them.

In New Zealand that market scarcely exists. Its starting point, the ISP (internet service provider) market, is dominated by Telecom's Xtra, which, Budde says, has 75%.

Webb's job is to make sure any regulatory action he takes benefits consumers more than it hurts Telecom.

That Telecom has come through the decision relatively unscathed is evidenced by the share price, which has since rallied by about 6%.

It will be some time before it becomes clear whether wholesale access alone will produce more and better services for consumers.

Budde's guess is that it won't. Internet, he argues, is a mature market and it's unlikely wholesaling will allow other ISPs to take significant market share from Telecom during the period in which it will be churning narrowband connections into broadband.

If so, the regulator can always go back to the drawing board. In the meantime he has hedged his bets while he waits to see what impact the wireless technology being deployed by the well-funded Woosh will have.

Webb's cautious decision surely beats imposing on Telecom a costly and complicated regime that hardly anyone, TelstraClear excepted, is likely to be able to afford to exploit.

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