By Keith Newman

The government, pressured from all sides to open up faster and more affordable internet access, has administered the first of a series of enemas to Telecom in the hope of relieving New Zealand’s communications constipation.

No-one could say Telecom wasn’t warned. Its endless tactics to keep broadband internet prices high and access speeds low, and its rapid response to defend its patch by placing obstacles in the way of competitors, are legend.

It has been a long held belief in the industry that New Zealand’s $5.3 billion telecommunications market, up from $3.6 billion in 1997, should be experiencing more robust growth. The main obstruction is Telecom’s failure to take its foot off the broadband hose.

As it is Telecom makes about $2.4 billion from local service and calling revenue and only a few entrepreneurial players, including service and equipment providers, get to share the rest of the pie. Even its competitors, TelstraClear being the largest of these, end up as its customers.

New Zealand squandered the enormous advantage it once had as the first nation in the world to fully deregulate its telephone industry. In 1987, a year ahead of deregulation, the government restructured and modernized the old Post Office monopoly which it promptly renamed Telecom and sold it to the highest bidder.

North American carriers Ameritech and Bell Atlantic snapped up the carrier in 1990 for a mere $4.25 billion and soon the media were full of their hype about on-line shopping, hundreds of movie channels, interactive services and the important edge we would gain in the knowledge economy.

Take the money and run

Investment soon slowed to a trickle, as thousands of staff were sacked, our largest company was trimmed down to the bones. Some very broad assumptions were also made by the new owners; from the outset there was no clarity about who owned the copper in the ground, the telephone lines or the phone numbers. That debate still goes on.

In 1997, after Ameritech and Bell Atlantic had siphoned the bulk of profits offshore and learned enough about deregulation to gain the edge in their soon to be deregulated home patch, they exited stage left.

Under new ownership and management the litigious environment, created around protecting the incumbent’s hold in the now allegedly free market, continued with true competition, particularly in data services, further stalled.

The persistence of Clear Communications (later TelstraClear), saw over time a highly competitive voice market evolve and through Vodafone, dominance in the cellular market was wrested from the giant carrier. By the late 1990s the focus turned to the high cost of internet-based services which had become critical for business and increasingly attractive to domestic users.

Again we had an opportunity to lead the world but because of ‘light handed’ regulation Telecom continued to monopolise the ‘last mile’ of copper connections into businesses and homes, keeping competition at arm’s length.

Reinvestment in Telecom remained at a low ebb, in fact the focus seemed to turn offshore with the 1999 loss-making acquisition of AAPT which remains to this day the oddest of all investments when its home turf was in desperate need of attention.

Until recently Telecom, dictated connection speeds and imposed data caps, preventing anyone other than itself from delivering internet performance greater than 2Mbit/sec for downloading and 128kbit/sec for sending. It stated on many occasions it would only increase speeds when the market demanded, but even under a deafening roar of protest, it continued to drip feed services as saw sees fit.

Still waiting after all these years Keith Newman has been writing about technology for 20-years, with a particular focus on telecommunications, the internet and the shift toward interactive multimedia. He has been an ardent internet user since the bulletin board days of the late 1980s. A decade of painfully slow dial-up modem speeds forced him to subscribe, first to an ihug satellite-based service, then in the late-90s to Telecom’s Jetstream ‘full speed’ service. He was promised at least 2Mbit/sec - 5Mbit/sec download speeds with a 600Mb data cap for $59 a month. It was expensive but he could be on the Internet and use his phone at the same time. Working in the publishing industry however meant he often went over his data cap dealing with large files, graphics and photographs. One month he and his son experimented with international radio stations and song downloads resulting in a $500 excess charge. Seeking a higher data cap he was informed his ‘full speed’ account had been grandfathered’ after Telecom divided its Jetstream offerings into lower speed 128Mbit/sec, 256Mbit/sec and 2Mbit/sec accounts. Even recently could go for a 3.5Mbit/sec account with a 10Gb cap, and pay .95 cents more but for a slower account than he had. He stubbornly resists, waiting for true competition to deliver a saner option. Footnote: The author finally conceded the lesser of two evils after maxing out his 600Mb cap too many times and in July 2006 settled on a 3.5Mbit/sec account with 128kbit/sec upload through Xtra. This noticeably curbed the download speed and markedly slowed the upload speed for larger emails. The concession at least he has 10Gb of data to work with now and can view video and audio streams without too much fear of breaking the bank.

Gamekeeper and poacher

Successive governments, either intimidated by our biggest company or blinkered by the contradiction of ‘hands-off’ regulation, in effect protected Telecom’s right to maintain the bandwidth bottleneck. Telecom continued to play gamekeeper and poacher, all but ignoring ministerial threats to play fair or face legislative changes.

Most recently Telecom CEO Theresa Gattung called communications minister David Cunliffe’s bluff when he threatened regulation. Addressing analysts in Sydney in March, she said the government was far too smart to "do anything dumb" like unbundling; suggesting the broadband issue was just a "manufactured grievance" created by competitors.

It was during that unfortunate outburst that she also implied telecommunications companies regularly used confusion as a marketing tool to keep prices up, and that customers knew at some level they were not being straight up.

When you fail to take your foot off a high pressure hose its inevitable there will be a leak. That leak, delivered by rogue Parliamentary messenger Michael Ryan into the hands of a senior Telecom employee on May 3^rd proved the government was indeed serious. A budget announcement was planned to bring New Zealand in line with 26 other OECD nations by legislating for local loop unbundling (LLU).

Once the news got out, it shaved an instant billion dollars off Telecom’s share index and while those shares are slowly bouncing back, Telecom now has to rethink what it means to operate in the unconstrained market promised to the country for nearly 20-years. Strong intervention in the telecommunications market would, for first the first time, literally kick start a new era of competition.

Telecom would be required by law to allow its rivals to install their equipment at its exchanges. Their latest generation DSL2+ DSLAMs are capable of delivering download speeds up to 24Mbit/sec. The government says the existing 128kbit/sec cap on upload speeds will have to go. Telecom will have to open up its books and technology roadmap, and separate out its wholesale and retail divisions so the Commerce Commission can monitor its compliance.

The government would renegotiate the Kiwi share (Telecommunications Service Obligation), put in place when it sold Telecom, as an incentive to improve broadband access in rural areas. There may also be action to prevent Telecom starting price wars to keep its customers.

As several players have pointed out, the ‘devil is in the details’ and it is imperative for the industry and broadband customers that the technical and commercial framework of the legislation is rock solid and unambiguous.

At least 26 OECD countries have been there and done that, and have frameworks and legislation in place. How difficult would it be to cut and paste, then refine that framework based on local requirements, rather than attempting an entire rewrite of the law?

Unbundling has been spoken about for many years but was first raised as a serious option in late 2003. Despite industry pressure the Commerce Commission, and newly appointed Telecommunications Commissioner Douglas Webb, favoured giving Telecom another chance.

However, Telecom though continued ‘marketing deceptions’, inflating its broadband figures by including 128kbit/sec speeds when the global consensus was a minimum of 256kbit/sec and in some cases 2Mbit/sec or 10Mbit/sec. It took until mid-2004 for Telecom to revise its minimum to 256kbit/sec after an ultimatum from the Commerce Commission to connect 250,000 new broadband customers by the end of 2005. A third of those customers (83,333) had to be connected by wholesaling to other internet service providers (ISPs).

Telecom failed to deliver, lamely arguing it believed its target was 50,000 wholesale connections, or a third of its total growth over the period. Telecom had not only made it uneconomical for competitors to wholesale services from its network, it had kept such tight data caps on accounts that ISPs and their customers they had to pay a huge premium if they were to stream or download any significant music, film or rich data.

Less than a year ago most ISPs couldn’t get 2Mbit/sec download speeds from Telecom and were restricted to upload speeds of 128kbit/sec. By May 2006 New Zealand had an estimated 300,000 broadband subscribers, or around 8 percent of the population, including 100,000 customers outside of Telecom’s Xtra network.

All of this made a mockery of the ambitious talk that New Zealand could gain a top place in the OECD broadband figures by 2007, and in its Digital Strategy goals or most residential homes to have 5Mbit/s broadband that year. The further suggestion that this might reach 50Mbit/sec by 2010 seemed impossibly optimistic.

Ahead of the LLU announcement, government pressure forced reluctant concessions from Telecom after TelstraClear won a Commerce Commission ruling. In December 2005 it was determined it should be allowed unconstrained access to the full speed of Telecom’s network at average retail prices less a suitable margin. That should have given Telecom’s largest competitor access to 7.6 Mbit/sec speed services at $20.47 per customer. However Telecom contested this, and rather than prolong the debate TelstraClear caved in to a 3.5Mbit/sec compromise.

The new deal was immediately passed on to Telecom high end account holders who were recently upgraded from 2Mbit/sec to 3.5Mbit/sec download speeds. The controversial upload speed remained at 128kbit/sec unless you were a premium account holder paying $80-$100 a month, in which case you would get 512kbit/sec upload speeds.

The new tougher regulatory environment will be outlined in the Telecommunications Amendment Bill, expected to be introduced into the House possibly before August, with the legislative process continuing through into 2007. The Commerce Commission would then need to be given new powers and rules to enforce the Act, which in itself could take time. Full consumer benefits may not be evident until election year 2008.

Hopeful competitors are promising internet surfing will power up to between 10-24Mbit/sec, finally bringing the country in line with the streamlined services enjoyed in many other countries. Meanwhile the pressure is now on to revisit the TelstraClear determination, forcing Telecom to lift its boot even further off the broadband hose ahead of local loop legislation.

At the end of May, CallPlus and ihug were leading the charge for unconstrained bitstream (UBS) access believing the Commerce Commission would now deliver on its original promise of 7.5Mbit/sec. This they believed could happen as early as October opening the way for faster sub-$30 broadband accounts.

Telecom in top shape

Despite market set backs; its market value was $12 billion last year down to $8.8 billion at one valuation in May 2006, Telecom is in the perfect position for a quick recovery.

It made $806 million tax paid profit for 2005-2006 year and invested $585 million back into its network and systems in the 2004-2005 year, and expects to spend $610 in the current year. This is part of an ongoing $1.4 billion investment in its next generation (NGN) network platform designed for more efficient delivery of voice, data and all forms of multimedia content, which further confirms it is highly geared for long term profitability.

Now Telecom is clearly trying to reinvent itself, or at least its public persona, as the nice, friendly, helpful telephone company. In a recent address to the Telecommunications Users Association (TUANZ) Theresa Gattung insisted Telecom was committed to a fair game, and not going to be obstructive, attempt to turn back time, mount rear guard action or hide behind legalistic actions.

It would act swiftly, she said, to come up with invigorating wholesale arrangements, and true to Telecom’s glossy charter would provide a consistent service delivery experience for everyone concerned, launch new intermediate products and offer greater transparency and communication.

A team of Telecom executives is evaluating a faster roll-out of interactive ‘next generation’ broadband services based on ADSL2+ and simpler, easy-to-use services reflecting the convergence of fixed and mobile services. This would include voice over Internet (VoIP) technology to deliver more affordable phone services to business and residential customers.

New networks in wings

So who’s going to benefit from unbundling? Certainly TelstraClear, ihug, Slingshot and CallPlus, Orcon, Maxnet, Quicksilver, Iconz and the dozens of smaller Internet service providers who are eager to deliver new speeds and services to their customers. Because of the high cost of creating national coverage there are widespread plans to co-operate by ‘port sharing’ or ‘credit swapping’ on each others equipment.

One consortium of investors, which wants to remain under the radar for the moment, is planning to create an independent wholesale network by installing its equipment at Telecom’s exchanges. Other bandwidth wholesalers with independent city and regional networks; Broadcast Communications (BCL), TelstraClear, CityNet, Vector, Inspire and FXnet and others, will also look at alliances so their customers also get direct nationwide access to the loop.

Also expect a new round of acquisitions and partnerships as the bigger players seek to consolidate their position, their customer base and their skill sets anticipating this new era of completion. You need deep pockets to create a national overlay network.

TelstraClear has to date spent $1.5 billion in furthering the network and business it acquired from Clear Communications and Saturn Communications in Christchurch and Wellington. It has 1400 staff, and been battling for a decade to get equitable access to New Zealand homes and businesses.

After the false hope of 2001 when it promised a major expansion of its cable network to reach 65 per cent of New Zealand homes and 80 per cent of businesses within five years, it can now finish the job by co-locating its DSLAMS on Telecom’s network.

TelstraClear spokesman Matthew Bolland admits it’s been a ‘pretty ugly’ environment for investment, and many other players, he’s waiting for the rules of the new game to firm up before announcing any financial commitment. "When you’ve been fighting every inch of the way as we have, you are very aware the only reason these things are happening is because the government has intervened."

Caution over three d’s

One of the options available to consumers is to cut the wires altogether. Vodafone and Telecom are both pushing 3G mobile phone services which deliver higher speeds for data and even videoconferencing. While mobile is a major global trend the local cost is still outrageously high for internet surfing. Wireless access however remains an attractive local loop alternative. Woosh, which has been in the game since 2001 when it was a fixed wire replacement, now has mobility as well through plug-in cards and is offering voice. Its speeds are about to ramp up from 1.6Mbit/sec to 3Mbit/sec and another technology upgrade promises 14Mbit/sec speeds by the end of 2007.

Woosh CEO Bob Smith admits unbundling is a challenge to his business but while they’re sorting out local loop legislation over the next couple of years he’ll be aggressively expanding coverage beyond the major cities. When the details are sorted out he’s keen to put in copper access equipment at Telecom exchanges to compliment the Woosh wireless network or partner with others to get broader coverage.

Unbundling has also come a little late for CallPlus Director Malcolm Dick who’s chosen high speed WiMax wireless technology as a direct challenge to Telecom’s copper. Ideally though he’d like a mix and match, so he’s tagged some of his initial $200 million investment to access the Telecom ‘last mile’.

He remains cautious, recalling his experience trying to interconnect a competing telco in Australia where Telstra publicly described his operation as "a germ invading the nooks and crannies of their tariff". He says incumbents typically use the three ds, ‘defer, deny, delay’.

Meanwhile Orcon has announced it plans to spend over $30 million over the next five years building a new wholesale ADSL2+ network, to deliver voice services and IPTV with over 50 channels which it claims it’ll be able to launch in late 2007. Ihug CEO Mark Rushworth is prepared to spend $200 million over the next two years on rolling out an alternative network which he could wholesale to other smaller ISPs. Like Orcon, he’s keen on ‘port sharing’ to quickly get the widest coverage.

Rushworth however believes only two or three players who can afford to createg their own networks. He says the ‘credit swapping’ model became the defacto way of doing things in Australia when Telstra refused to allow more than one provider into its exchanges at a time. "Optus would go into one exchange and someone else would put five cabinets in another and sell on that capacity. It certainly forced the industry to work together."

Rushworth is hopeful CallPlus, TelstraClear and ihug for example can operate similarly. "It makes a the roll out a lot quicker - we’re certainly keen to work that way so we don’t end up jumping on each others toes."

Internet service provider Iconz was forced to back off a plan to get into the digital video-on-demand business by Telecom’s ‘absurdly expensive’ access charges. If the market had opted for unbundling back then it would probably be delivering a service by now.

While the technology and the business case were there, John Russell who was research and development manager at the time, said no-one would develop "interesting, new and innovative content when they can’t push it out to the customers or let the customers interact with it at a reasonable speed".

Accelerating change

Now that LLU is looming Telecommunications Commissioner Douglas Webb is urging Telecom to work openly and accelerate the change process rather than waiting for the fine print. He believes we’re at an important ‘tipping point’ in moving from a hands-off system to much firmer "hand on the shoulder" regulation.

The Internet Society of New Zealand (InternetNZ), like other industry groups, has become more outspoken this year about the broadband bottleneck. Executive director Keith Davidson remains concerned Telecom may still take a defensive approach, complying with the letter of the law but not the "spirit of open access and equivalent wholesale treatment".

He says New Zealand needs to have a serious commitment to reform that goes way beyond local loop unbundling if it is to address the deficit. "If New Zealand does not resolve this broadband uptake problem, our economy will slide leaving us down the bottom of the developed world with Mexico, Turkey and Eastern Europe. That will be a loss for business, a loss for consumers and a loss for New Zealand."

Those who are long enough in the tooth to recall even half the promises made about telecommunications since 1987 will be forgiven for greeting Telecom’s alleged attitude adjustment with some skepticism.

Will there suddenly be a claim that there’s no room in Telecom cabinets for co-location of DSLAMs and related equipment? If alternative cabinets are required will Telecom oppose this through the Resource Management Act? Will local authorities allow the RMA to become an obstacle anyway?

Will competitors need a separate door to Telecom exchanges? Can they have access without a Telecom person being present? Does the exchange need a partition between competing cabinets? Do ISPs need to provide their own power and air conditioning? If the latest DSLAMs only cost $45 per port would it be fair for Telecom to charge $150 installation fees?

Will Telecom avoid doing anything to help its competitors until legislation forces its hand or will it begin offering more attractive deals in the interim to prevent customer churn before LLU ground zero, sometime in 2008?

There’s also the connection ratio – in other words how many users can share a single broadband link. British Telecom has a ratio of 50:1 for home users and 20:1 for business lines. It is alleged Telecom’s ratio may be as high as 140:1 which may mean the speed and quality of service competitors are hoping may not be possible. If wholesale prices are set too close to LLU costs new investors may also be deterred.

No-one can know for sure until the real turf wars begin, access is opened to the last mile and full disclosure is provided to Telecom’s new wholesale customer-competitors.

Another obstacle facing new players is a significant shortage of technicians, engineers and customer service people who have skills in installation and maintenance and network repairs. Telecom has exclusive contracts with Downer and Transfield and TelstraClear has a deal with Cabletalk to look after their networks. The other major player GDC recently went belly up. In the meantime, there’s not been a lot of industry training and many of our best engineers and technicians have been lured overseas by lucrative contracts, further reducing the skills pool.

Telecom has been ‘squeezing the sponge’ as one commentator so aptly put it, but the sponge and the patience of competitors and customers with its anti-competitive attitude have run dry. Internet Service Providers Association (ISPANZ) vice president Scott Bartlett is warning ISPs to sort out all their issues, complaints, questions and technology requirements, before the new legislation is drafted and implemented or the process could take two to three years.