Chapter 24 - Leaping the Loop - Cloud Cover Continues

From NetHistory

Society was clearly changing and the Commission for the Future in its 1981 report Network New Zealand recommended a totally revised telephone network that would be able to carry pictures and electronic data as well as voice at acceptable speeds; satellite communications would include not only New Zealand but also the South Pacific; and mobile communications terminals in cars, trains, boats or wherever they were needed. The Commission also pointed out the need for new legislation in areas such as individual privacy, copyright and the flow of data across national borders. Computer Culture, the information revolution in New Zealand, Colin Beardon, 1985.1

It remains my fervent hope that the day will come when the economic benefit of broadband is so well understood that the case does not have to be made.2 Ernie Newman, chief executive, TUANZ, June 2007.

Previous politicians essentially privatised a public monopoly and gave it the benefit of a pretty weak regulatory framework that has not served the country well … I hope Telecom, and other market players, are coming to realise that a series of short-term profit-maximising decisions must, in the end, be squared away with the long-term national interest. Communications Minister David Cunliffe, 2006.3

The Internet in New Zealand was at a watershed, with the government laying down a regulatory roadmap that opened up Telecom’s network to competitors and split the giant carrier into separate wholesale, retail, and network companies.

There was a certain irony in the fact that 20 years previously the old Post Office, which had a monopoly on everything from phone and data calls to snail mail – having failed to sufficiently future-proof – faced an identical challenge. In 1986 the Mason-Morris Post Office Review recommended splitting the state-owned behemoth into three separately managed businesses, a decision that was implemented the following year.4

In June 2006, the same month Telecom chief executive Theresa Gattung handed in her resignation, the policies set out in the Telecommunications Stocktake Review, including unbundling the local loop, were introduced to parliament. The Telecommunications Amendment Bill passed into law in December with a massive 119 votes to two, taking the original plan further by mandating the operational separation of Telecom.

In 21st century New Zealand the newly re-regulated environment would be framed by strong competition guidelines and new leadership at Telecom’s helm. Serious investment was necessary – some said several billion dollars – to get the country back on the developed world broadband map. There would be a major review of the Kiwi Share obligations, a big push to get equitable access to broadband in rural areas; the cellular networks were in for a shake-up to promote greater competition and lower prices, and number portability would come into operation, enabling customers to keep the same phone number if they changed cellular or fixed-line networks.

While Telecom had opened up the throttle on wholesale broadband deals, everyone was waiting for the next step, which would free up access to Telecom exchanges for competitors to install their own equipment and introduce wholly independent services. The big concern would be how much life the copper network had left in it before fibre and other options superceded its capabilities.

Financial adviser Citigroup seemed to think structural separation of Telecom wasn’t such a bad thing. The crucial factor was the price the government would set for competitors to access its copper network. Some analysts predicted $15–$25 per month while Citigroup estimated $31. Telecom had been weighing the numbers against the investment needed to meet the government’s broadband penetration requirements. One suggestion had the figure at $8 billion above current investment plans to achieve speeds of 20Mbit/sec to 100 percent of customers.

Telecom claimed it was on track to deliver 20Mbit/sec to about 30 percent of customers by 2011. “Numbers like $100 million are doable, $3 billion less so. If the government wants to target higher levels of penetration or performance there’s a gap that needs filling,” said Telecom CFO Marko Bogoievski.5 Telecom had stated clearly in its 2006 annual report that it was committed to driving increased broadband penetration with a new target of 500,000 retail broadband customers by the end of 2007.

“We must at the same time remain commercial in our approach to investment; the economics of delivering higher speed broadband to non-metropolitan areas are very challenging. To counter this, Telecom will be pursuing a technology-of-best-fit approach to investment, recognising technologies other than DSL, such as 3G mobile, WiMax, and satellite, as more efficient means of delivering broadband to some regions.”6

ISPS BURNING CASH Telecommunications analyst Phil Harpur of Paul Budde Communications said regulatory changes had seen the pendulum swing back slightly towards second-tier ISPs in the retail broadband market. However Telecom’s stranglehold on network access had meant the move to open up its networks to competition had come far too late for ISPs struggling to survive on slim margins. Successful operational separation of Telecom would be the key to creating a more level playing field for the rest of the market. The period through to early 2009 would be crucial. “A lot rides on the government in making sure that Telecom fully co-operates in the regulatory process.”7

Orcon founder and chief executive Seeby Woodhouse was pleased at the prospect of the new environment opening up but frustrated at the time it was taking for the local loop to be unbundled. “The original dates proposed are starting to slip. Telecom’s had nearly two years where they’ve known this has to happen … I think everyone’s doing the best they can; it just needs to happen faster.”

ISPs saw the new regime, including an operationally separated Telecom, as a chance to return to decent margins and profitability. “The issue is we’re not really making any money on broadband, and in some cases we’re paying more to purchase the wholesale product at cost, than Telecom retail customers … We have a certain amount of cash burn we can sustain and if LLU doesn’t happen in a reasonable timeframe then a number of ISPs will be out of business,” said Woodhouse.8

While restating its commitment to reducing the price of phone calls, Telecom announced in mid-January that monthly phone line rentals would increase by $1–$1.85. While it claimed the cost of national toll calls was on average 16 percent cheaper than in 2004, and international calling was 28 percent cheaper,9 it said rising business costs and inflation had driven the move. However telecommunications researcher Paul Budde said the argument was flawed. “Prices in technology are dropping and dropping and dropping, and so it’s very difficult to argue that these prices should go up.” Line rental charges in Christchurch and Wellington would be $7.60 cheaper than in other areas, but only because that was where Telecom faced competition from TelstraClear.10

The Commerce Commission had asked the Telecommunications Carriers’ Forum (TCF) to help prioritise tasks around LLU and naked DSL (NDSL) which gave competitors unconstrained access to Telecom’s network. The industry had reached a stalemate on priorities, with those planning to build their own infrastructure favouring LLU and resellers preferring NDSL which appeared to be the easier of the two to implement.

TUANZ chief executive Ernie Newman said public expectations of improved telecommunications services had been raised and there was a growing impatience to get on with it. “We would like to see NDSL as a separate workstream so some of those new services can be brought to market now, and tangible benefits realised sooner. The more substantial long-term benefits of LLU will follow.” WorldxChange and CallPlus wanted NDSL to be given priority but Ihug and Orcon favoured LLU.11

Within weeks submissions were being received by the TCF. Then Ernie Newman dropped a wildcard, asking for greater clarity around suitable back-haul capacity for carriers who wanted to use Telecom’s network to get into smaller towns and rural areas. “Suppose CallPlus decided they were going to do a foray into Eketahuna and they got 100 broadband customers on the unbundled local loop and all of a sudden there was no exchange back-haul capacity to get that traffic to and from Masterton. Suppose CallPlus didn’t want to invest in that and Telecom said, ‘They are not our customers, why should we invest?.’ What then is the process?” In a submission to the TCF, the lobby group said unbundling would be ‘fatally flawed’ if a way wasn’t found to deal with such situations.

In 2006 Telecom had offered to increase investment in its back-haul network by spending ‘hundreds of millions of dollars’ rolling out fibre-optic cable to almost all towns, but that offer was withdrawn when the government decided to regulate. TUANZ said without considering how back haul would be provided in regional centres and towns, unbundling would have little or no benefit anywhere other than the main CBDs. “Regional broadband will receive no benefit from the decision to unbundle the local loop and the digital divide will continue.”12

Freeman Media commentator Matt Freeman echoed industry frustrations with the delays. “It is believed by many that a finite window of opportunity exists for LLU services, a technology we’re already playing catch-up with the rest of the world on. Telecom’s multi-billion-dollar Alcatel-Lucent Next Generation Network is scheduled for completion by 2012 and the roll-out is already well under way. Some predict the carrier will begin rolling out converged consumer IP services by early in 2008 which could render LLU redundant.”

NUMBERS REMAIN FLAT Another major shift in the wind was the arrival of number portability. The Commerce Commission ruled on its introduction in August 2006, removing one of the last barriers for customers to switch phone companies. From April 2007 consumers would be able to keep their fixed-line and mobile numbers when changing phone companies. It was understood the industry as a whole had spent about $100 million to prepare networks for the change. Telecom alone had invested $48 million.

At stake were total fixed-line revenues worth $8 billion a year and cellphone revenues of $2 billion. Vodafone’s Tom Chignell said number portability was a key part of its attack on Telecom’s voice market. It would allow Telecom customers to keep their fixed-lined home and business numbers if they moved to Vodafone’s new home phone service, where cellphones could be used in place of landlines.

Vodafone was also launching free local calls between its cellular network and Telecom’s fixed lines and increasing network capacity backed up by its ownership of Ihug. Ihug regulatory manager David Diprose said it had been testing portability equipment with TelstraClear and Telecom. “When we get local loop unbundling near the end of the year, it will make a huge difference; we will be able to take all those customers without changing their home number.”13

Commenting on broadband penetration figures had become something of an industry art form, particularly since 2004 when the government set the impossibly tough challenge of attaining a position in the top quarter of the OECD top 30. The numbers and benchmark conditions were confusing at best. The goalposts shifted; it was 10Mbit/sec pre-Digital Strategy, then 5Mbit/sec, and now it seemed safer but nonetheless distant to aim for the top half of the OECD.

In the meantime all those OECD surveys didn’t really add anything to the mix other than to tell us, apart from the occasional blip on the heart monitor, that we had been virtually flatlining for almost a decade compared to most of the other developed nations. The March 2006 numbers showed relief for the first time in four years. We had clawed back three places to come 19th. Should we be excited? Despite all the activity going on to try to provide better-quality, higher-speed broadband in a more competitive market, there was no evidence of a major surge.

Statistics New Zealand reported 26.6 percent growth in broadband subscribers in its ISP survey to 30 September 2006, taking the number to 611,600. The survey for the following six months to 31 March, 2007 showed a further increase in broadband number, up 18.5 percent to 724,600. But uptake had generally slowed for the two periods and was still way short of the 980,000 subscribers needed to get even close to the original 2007 mid-point goal. It was also a long way from the two million needed to hit the government’s 2010 broadband target. Dial-up still dominated, with 739,700 subscribers, representing 50.5 percent of all Internet users – a slight fall of 4.1 percent. The survey of New Zealand’s 57 ISPs showed there were 1.46 million Internet subscribers at 31 March 2007 – an overall increase of 5.9 percent.14 There appeared to be fractional overall growth, most of it new broadband business and a little churn from dial-up to fast Internet.

Clearly improvements in pricing and plans for broadband were helpful, and while InternetNZ executive director Keith Davidson predicted broadband could overtake dial-up by the end of 2007, he was disappointed that 97.6 percent of broadband subscribers had data caps and 68.6 percent had a cap of less than 5Gb per month. “With 60 percent of DSL subscribers having download speeds of less than 256kbit/sec and 90 percent having upload speeds of less than 256kbit/sec, we have a long way to go before New Zealanders are able to experience the full potential of broadband.”15

Another OECD report in March delivered more of the kind of news that had encouraged the government to step into regulation mode. It concluded, owning a landline in New Zealand was more expensive than in most other countries and cellphone users were also paying prices well above average. It said ‘a significant gap,’ remained between prices in New Zealand and countries in the top half of the 30 OECD countries.

Consumer groups weren’t surprised with the evidence New Zealand was still lagging. The report, which pre-dated the Telecommunications Amendment Act, used figures to June 2006 showing good broadband coverage but poor uptake. Broadband access was available to 95 percent of New Zealand homes, with uptake of 11.7 percent, up from 10.9 percent in 2005.

Telecommunications Minister David Cunliffe agreed the market had become stagnant. “We are in a competitive international race and our relative performance has not improved.” The figures, he said, showed the government was right to intervene. “We are working hard and fast to ensure Kiwis get the internationally competitive services we need for our economic transformation.” Consumers Institute chief executive David Russell described the results as ‘predictable’ saying the ‘poor old Kiwi consumer’ continued to pay a heavy price, especially for mobile phones.16

However the government’s telecommunications reforms did seem to be having some impact, even if it was largely to do with attitudes; certainly fewer competitors perceived regulation as a barrier to growth. A Statistics New Zealand survey showed just 42 percent of ISPs by March 2007 believed the regulatory environment was still an impediment compared to March 2005 data which showed 73 percent of ISPs bemoaning lack of regulation and competition as preventing business growth.

The second quarter 2007 OECD broadband numbers showed more of the same. It was positive, heading in the right direction but oh so glacial. So how do you make a glacier sound as though it’s careening ahead? How about this: New Zealand had doubled its broadband penetration rates from 8.07 connections per 100 people in the final quarter of 2005 to 16.5 percent penetration by the second quarter of 2007. Wow. Enough to make the blood rush to your head. By June 2007 New Zealand was back at 20th out of 30 OECD countries, with 683,500 broadband subscribers (16.5 percent). Even Statistics New Zealand had offered better numbers than that for the March quarter and it wouldn’t be releasing any new numbers for months.

What was left to say? InternetNZ public policy committee chairman David Farrar said the one point increment was ‘encouraging’ but New Zealand was still playing catch-up with most of the rest of the developed world. There must be a dramatic increase in uptake if we were to achieve the Digital Strategy goals.17 “New Zealand has made some gains; we are the ninth fastest growing OECD country in terms of broadband penetration, with a net increase of 4.94 subscribers per 100 inhabitants.” We also ranked 15th on pricing, with an average monthly subscription of $NZ63 for October 2007.18

Recent regulatory reforms would play an important role in driving up penetration rates. However moving up the OECD rankings would also require sustained investment in more sophisticated broadband technologies, including deployment of high-speed fibre. “Fibre represents 8 percent of all broadband connections in the OECD. This is the race of the future and we are yet to get to the starting gate, while others are already a third of the way around the course,” said Farrar.19

TRIAL SEPARATION DRAMAS In the first week of April, David Cunliffe began laying out the specifics for Telecom to comply with the new Telecommunications Amendment Act, stating the proposed three-way way split between wholesale, retail and network access divisions would be cleaner than the British Telecom model. BT had voluntarily split its wholesale and retail operations under pressure from Ofcom, the UK regulator.

An independent oversight group (IOG) would be appointed, and in conjunction with the Commerce Commission would keep an eye on progress. While the network group would have common ownership it would be institutionally separate with its own brand and location.24 However Telecom insisted the proposal was far too complicated, unworkable and failed to address questions surrounding future investment.

Telecom chairman Wayne Boyd complained it was more complex than the British Telecom model. “The emphasis on a strict form of separation is inconsistent with the desire of our wholesale customers to see new regulated services placed into the market as soon as possible. The complicated separation requirements add unnecessary cost, and propose governance arrangements that are unworkable within a single entity.”

Besides, there were no incentives for future investment.The separation issue dragged on, with Telecom proposing the option of selling off the network division into a partnership with industry players or the government, thereby divorcing it from the rest of its business. There were concerns this wasn’t a future-proof solution as it didn’t include the electronics that allowed the network to function.

Telecom CFO Mark Bogoievski said the proposal had the potential to simplify the regulatory framework if owned by a third party. It would free up Telecom’s retail model to compete and innovate. He said Telecom would not be able to invest adequately in fibre networks under the government’s proposal because of the costs of separation.26

Bogoievski told the Sunday Star Times he thought the government and the industry were staring at “quite a high profile policy failure if we don’t get this right.” The Telecom counter-proposal specifically committed to faster delivery of naked DSL and LLU, with the first generation of those services in the market during 2007, unless Telecom’s resources became tied up in a complex operational separation scheme. The government wanted 90 percent of New Zealanders to have access to broadband speeds of 5Mbit/sec by 2010, but Telecom insisted it was pie in the sky for David Cunliffe to plough ahead with the original scheme. Chairman Wayne Boyd said the company was only prepared to invest a third of the $1.5 billion required if the government’s plan for operational separation was adopted.27

InternetNZ’s executive director Keith Davidson wasn’t happy Telecom had ignored what it had been asked to submit on, but the society nonetheless were ‘secret admirers of the plan.’ The problem for Telecom was it had ‘continually sacrificed long-term investment in order to achieve its short-term profit goal,’ partly he said, a response to the sharemarket and senior management wanting to get their annual bonus. “They’ve horribly under-invested in New Zealand infrastructure so in separating out the network company, where the entire focus is on the infrastructural layer, they can’t help but look at the long-term view and I think they’ll get the drivers and incentives exactly right. You will never get that while Telecom has a single board and a single management structure that controls the wholesale, network and the retail divisions. The drivers are just completely wrong.”

SPLIT HITS THE FAN At the end of 1995 InternetNZ had been invited to participate in the government’s stock-take of the telecommunications sector, largely because the previous year it had taken a Commerce Commission case to try to establish the wholesale price of DSL broadband. Keith Davidson said at that point Telecom was charging $2400 month for a full-speed business DSL connection when the wholesale price was going to be just under $30. “This certainly gave an indication Telecom was using the market for more than just profiteering.” InternetNZ had worked closely with ISPs and others in recommending LLU, naked DSL and operational separation to try to ensure more reasonable competition.

Naked DSL – also known as unbundled bitstream access (UBA) – on an unencumbered broadband line would allow a true alternative to Telecom’s fixed-line telephone and Internet services. Over time Telecom would develop multi-tier systems allowing wholesale broadband at different speeds for different services. In conjunction with the TCF, Telecom eventually signed off on a proposal for its wholesale clients but the framework for wider access was taking too long so the Commerce Commission stepped in.31 Telecom was still looking for certainty on whether its pricing met the Commission’s requirements. Meanwhile phone and Internet companies, frustrated at the delays, were lobbying the Commission to get a move on with the rules for unbundling.

InternetNZ’s Davidson remained concerned but could understand the caution. “This is New Zealand’s largest company and you know it needs to be handled with some care so the sharemarket doesn’t go into panic.” However he believed the ISP industry was suffering and would continue to feel the pain until they got a more level playing field.

Then Telecom’s objections to the structural separation plan and its last minute proposals to do things its own way had sparked a backlash. Both InternetNZ and ISPANZ found Telecom’s approach unworkable and unacceptable. In its submission ISPANZ said Telecom’s proposal had the potential to stall other telecommunications reform, and that LLU and naked DSL were ‘top priorities.’ ISPANZ, representing the majority of Telecom’s ISP customers, believed the MED should ditch Telecom’s proposal and proceed ‘with some urgency’ on the operational separation process. It wondered, if Telecom thought its approach was such a good one, why it hadn’t put it forward at the time legislation was being formed? While Telecom had complained about complex government recommendations, InternetNZ pronounced ‘the complexity of changes’ required for legislation under Telecom’s proposal could take more than 12 months to enact. “On top of that, Telecom’s proposal would weaken the equivalence obligations at the core of the model, particularly for Telecom Wholesale. This would reduce the prospect of investment by newcomers, an outcome that nobody wants,” said InternetNZ deputy executive director Jordan Carter.32

InternetNZ lodged a further submission in mid-May, arguing that Telecom’s proposal didn’t provide a basis for further consideration. “Telecom’s submission didn’t provide evidence for why the government’s approach was wrong, and its proposals to change the regulatory framework would have been a step backwards, harming future competition in the access network.”

The issues were canvassed in some detail at the 2007 TUANZ Telecommunications Day on 31 May, which saw several announcements, including the naming the new Telecommunications Commissioner Dr Ross Patterson, a lawyer from Minter Ellison Lawyers in Sydney. Taking up his role from mid-July, he would play a pivotal role in implementing and monitoring the new telecommunications regime. The government also made it clear that operational separation would be proceeding. InternetNZ maintained a clean separation was vital to future telecommunications industry competition. International experience showed that more competition would drive more investment, regardless of statements to the contrary by incumbents.33

THE NAKED TRUTH A year after the government announced Telecom would have to open its network to competitors, there were was a general sense that an Internet revolution was finally on its way. The first ISPs were still trying to work out the specifics of LLU and naked DSL services but confident they would be testing their equipment on Telecom’s exchanges by mid-year, although the hype about major roll-outs had been tempered during the long wait for action.

Telecom’s wholesale manager Matt Crocket was credited with ensuring ISPs and carriers engaged in a smooth waltz across the slippery territory rather than acting like head bangers at a rock concert.43 TUANZ chief Ernie Newman conceded a change in attitude by Telecom, and according to CallPlus chief executive Martin Wylie there was every indication Telecom was trying to treat its competitors more like customers. However the really tough stuff was still ahead, and the crunch would come around the commercial terms Telecom would offer other operators.

Telecom’s threats to cut back proposed investment in infrastructure and focus less on unbundling progress if it was forced to separate left an undercurrent of concern. Telecommunications analyst Paul Budde said there was a fine line between feeling sympathy for Telecom and his gut feeling that it was continuing to use its old tactics to delay and frustrate. He cautioned against looking to the Australian model where Telstra had used the courts to hold up unbundling for seven years and still vigorously campaigned against alternative networks. While New Zealand was still debating the details of LLU, most countries had already been through that process and were now unbundling fibre-to-the-node networks, which would make LLU technology obsolete.

Smaller ISPs also had reservations about the emerging environment. Ihug CEO Mark Rushworth said delays would be felt acutely by those operating on thin margins. “If you don’t get big, you get bought because you need scale for LLU.” TelstraClear chief executive Dr Allan Freeth said if carriers were serious about providing an alternative service they needed to invest $200–$300 million. It was inevitable there would be rationalisation and consolidation over the next three years.44

Freeth sided with Telecom over the desire for more regulatory certainty before investing in broadband infrastructure. Telecom’s fibre-to-the-node proposal, seen as the most viable option to lift broadband performance, would help TelstraClear achieve better coverage and get fibre closer to customers.

TelstraClear wanted open and equivalent access. “This isn’t a debate about being an incumbent or a challenger. It’s about sensible investment and returns, with regulation that gives companies the confidence to commit to the huge sums needed to transform broadband in New Zealand,” said Freeth, a day before operational separation submissions closed.45

Outgoing Telecom chief Theresa Gattung put her spoke back in, recommending the government spend hundreds of millions of dollars in partnership with phone companies if it wanted more rapid and wider deployment of fast broadband. It would cost $1.5 billion to give most people a high-speed broadband Internet service, but Gattung said industry would cover only part of that, because of the high cost and uncertain revenues from the investment. It would be ‘reasonable’ for the government to lead investment in broadband to lift economic performance, in the same way the state spent money on roads.

Telecom planned to spend about $500 million on the Digital Strategy target to ensure 90 percent of New Zealand got access to least 5Mbit/sec by 2010. She said it was highly expensive to run fibre-optic cable from Telecom’s phone exchanges to about 7000 roadside cabinets, and there was a deficit of about $1 billion that needed to be covered by other companies or the government in some form of partnership. “It is reasonable for (the government) to lead investment on.” If it were left to the industry, getting high-speed broadband throughout the country “would take much, much longer,” said Gattung.46

EXCHANGE RATE Telecom planned an ‘aggressive’ implementation of LLU and co-location at 40 key Telecom exchanges within 14 months from the final determination, according to documents obtained by on-line telecomms publication The Line. The paper submitted to the Commerce Commission outlined a three-month soft launch to five exchanges, where access seekers would be able to install their equipment 65 days from the final determination.

Telecom would consult with the industry on which exchanges would pilot the scheme to monitor technical and operational details. Service level agreements (SLAs) would outline conditions for access seekers, and there would be financial penalties if Telecom’s own performance levels were not met. Telecom had provided access seekers – also be subject to SLAs – with technical audits for 43 exchanges as agreed with the Telecommunications Carriers’ Forum and begun discussions about co-location trials.47

The Commerce Commission would be consulted before the rules were set in cement, sometime before 9 November and the ‘soft launch’ of LLU. Full LLU could be expected between March and June 2008.48

At the June 2007 Telecommunications and ICT Summit, David Cunliffe again affirmed world-class broadband performance was essential for our economic transformation and a prosperous future. Sitting back up at 21st out of 30 OECD countries for broadband penetration and 22nd for ICT infrastructure investment per capita was simply not good enough. The government would not stand idle he said, if there was any “indication of prevarication.”

Cunliffe said it was essential to future proof the regulatory environment. “Previous politicians essentially privatised a public monopoly and gave it the benefit of a pretty weak regulatory framework that has not served the country well.” However, he said, the government was responsible for ensuring private interests aligned with the public good. “I hope Telecom and other market players are coming to realise that a series of short-term profit-maximising decisions must, in the end, be squared away with the long-term national interest.”

Within days the government relaxed its tough stance on operational separation, saying there was potential to go with the approach Telecom had been pushing. Was this a major about turn? Only a month previously Cunliffe had stated structural separation ‘must not divert us from implementing operational separation.’ Now it seemed the government was discussing whether Telecom’s approach had potential to better meet the aims and objectives of the Telecommunications Act.49

Then the announcements came free and fast. Cunliffe was in fact still debating the preferred mode of separation, Telecom’s wholesale customers were told to expect naked DSL, which would enable delivery of services such as VoIP by the end of September. Internet companies would be able to move their existing broadband customers to naked DSL from December. Enhancements to the service, which could open up opportunities for television and movies delivered over the Internet, would be likely ‘over the next few years.’50

INVESTMENT FAILURE FINGERED Plans for huge, multi-billion dollar investments to revolutionise ‘Australia’s Internet infrastructure’were made by both major parties ahead of the 2007 elections which ushered in a new government. John Howard’s Liberal-National coalition was ousted by Kevin Rudd’s Labour Party in November, which promised a 21st-century high-speed broadband infrastructure and even appointed a minister for broadband. New Zealand’s Opposition leader John Key said the National Party was unlikely to follow suit and spend taxpayers’ money on building broadband infrastructure. It would not want to be locked into any particular delivery mechanism for broadband and preferred subsidies rather than direct investment.

However Key conceded broadband access was a major issue, ranked only behind the cost of housing with the public. He referred to problems in his own constituency, in the Kumeu area north of Auckland, where quality of service issues were having an impact on business and the economy.62 Meanwhile Pt Chevalier residents felt they were being short-changed after a public meeting with Telecom failed to resolve their broadband problem. More than 100 residents signed an on-line petition complaining about poor Internet speeds and connections. Some parts of the suburb had not been able to get the technology at all. About 80 residents met with Auckland mayor Dick Hubbard63 and Telecom representatives at Pt Chevalier School.

Hubbard said broadband was an important utility in the modern world, not just an optional add-on. “People are working from home, more students are moving into the area, people are reading more news on-line instead of buying newspapers. People may think that three months out from an election there is a temptation for politicians to use bolder statements but it’s absolutely unacceptable. I can understand with rural areas it may not work but Pt Chev is six or seven minutes from the CBD. For a city such as Auckland not to have broadband … do accuse Telecom,” said Hubbard. Telecom admitted there were problems; possibly it was the length of copper loop from the Mt Albert exchange to Pt Chevalier and while it planned to install local loops through fibre-fed containers it had to wait for government consents. That $2 million job would probably start in December, said a Telecom spokesman. The noisy meeting wasn’t deterred by that explanation with comments such as “It’s unacceptable” and “Do it now,” echoing around the school hall.64

When the OECD Communications Outlook figures came out in July, the finger again pointed at New Zealand as having been greedy with profit and stingy with investment. According to the OECD, telecommunications revenue in New Zealand was 5.39 percent of GDP, the highest of any of the 30 OECD countries where the average was around 3 percent. “Telecom New Zealand is among the world’s most profitable telecommunications companies, with its dividend having traditionally been around four times the industry average.”

These facts showed that the industry in New Zealand was anything but struggling, said TUANZ chief Ernie Newman. He reiterated his earlier observations that New Zealand had continued to under-invest in critical infrastructure. “It is no wonder our telecommunications infrastructure is creaking at the seams and New Zealanders are being denied the basic services required to be full participants in a modern-day economy … Given that major investments have been made in mobile services over recent years, it is clear that the big difference is in the failure to maintain appropriate reinvestment levels for fixed-line services.”65

New Zealand’s telecommunications investment as a percentage of the industry’s revenue was 32 percent between 1988 and 1990 when Telecom was privatised, but had fallen to 17 percent by 2000 and was 8.7 percent in 2005. Only Greece and Austria invested less that year. The OECD average was 15.3 percent. However Telecom said the situation had improved. Spokesman Mark Watts said capital expenditure in the year to 30 June 2006 was $620 million or 9.3 percent of revenue. Capital expenditure was forecast at $683 million for the year to June 2007, including upgrading its copper-line network for faster broadband speeds. Telecom’s annual reports, however, showed capital expenditure had fallen from $1.5 billion in 2001.

TelstraClear’s head of corporate services Mathew Bolland said it had not had the opportunity to invest. “If you have to throw a serious amount of money at a market where you’ve got a competitor that can block you ... [when] we don’t have unbundling yet, is it any surprise?” TelstraClear spent $141 million in New Zealand in 2006 but pulled back from its major investment in establishing a third mobile network. Vodafone’s general manager of corporate affairs Tom Chignell said so far the company had spent $2 billion, which included the initial purchase of BellSouth, buying Internet company Ihug for $41 million and upgrading its mobile network. “We’ve always invested heavily in the mobile sector and now … we’ll be investing in the fixed-line sector as well.”

New Zealand had also been a laggard when it came to research and development in communications. Telecom, the 39th biggest telco in the OECD, spent just $9 million on research and development, or 0.2 percent of revenue, in 2005. Most of the big telcos spent well over 1 percent of revenue on R&D and some had to meet legislated minimum standards; British Telecom for example spent 3.7 percent. Telecom said it expected to spend slightly more than $9 million in the 2007–2008 year.66

Telecom’s NGN project, underway since 2001, when the original outsourcing deal was signed with Alcatel (now Alcatel-Lucent), had largely been a behind-closed-doors affair in terms of upgrades to the core and edge IPNetworks, major transport layers, and extension of fibre beyond the exchanges. Core NGN services had been available to corporate customers for some time, but the big daddy was the mass market move of voice services from the PSTN. Telecom chief operating officer for technology and enterprises Mark Ratcliffe said there was a $205 million budget to migrate the old PSTN network, and when it did Telecom would be one of the first incumbent service providers in the world to do so. The process was expected to begin towards the end of 2008, after consumer and voice service trials.

The transition was in fact rather more urgent than Telecom made out. The remaining ancient NEC NEAX exchanges – which Telecom admitted were tired and needed replacing in 1997 and again in 2000 – were operating at or above full capacity and were a weak link in the network. This became apparent during 2007 when several failures again pointed to lack of investment. Ongoing maintenance and access to spare parts was becoming an expensive exercise for the end-of-line technology.67

UNBUNDLING FIBRE LOOP? Telecom continued to roll out higher speed DSL2+ broadband over copper to customers in the main cities, and move its cabinets closer to the streets to shorten the copper loop in the more fortunate suburbs. Greg Patchell, Telecom group technology officer, said installing smaller, more flexible DSL2+ DSLAMs marked a shift in protocol from the older ATM-based technology to Ethernet, which was able to better handle multiple gigabits in the backhaul.

The Alcatel IASAM boxes more easily interfaced with Telecom’s Next Generation Network Multi-protocol label switching (MPLS) backbone and even used Ethernet cards, to deliver 100Mbit/sec dedicated lines into business premises. Meanwhile older DSLAMs were being redeployed to lower density areas to help bolster bandwidth there.

Outside of massive multimedia or business use, Patchell said the industry seemed to have a preoccupation with speed which, he said, would ‘come along by default’ over time. “With cabinetisation kicking in across older suburbs you’ll start to see uniformity of experience and that’ll make a difference. The headline speeds are not relevant to most consumers. North of 3Mbit/sec is ideal for MPEG2 level broadcast transmission or downloading TV programmes; any more than 4Mbit/sec won’t make any difference.” He expected the Digital Strategy benchmark of 5Mbit/sec to 90 percent of the population by 2010 would be increased in the 2008 review, possibly reflecting geography which was clearly being kept in mind with the different prices for urban versus non-urban pricing of DSL access fees. “It’s expensive to reach four customers 35 miles from anywhere.”

Patchell believed public-private and community partnerships were likely to be the only way many outlying areas would get the kind of coverage being talked about. “We’ve worked with partnerships along the west coast of the South Island and it has worked there. Auckland, Wellington, Hamilton, Christchurch will all be well serviced but you’re always going to see geographical distortion. LLU competitors are not going to put DSLAMs in Gore, they’ll put them in Auckland. The conversation is always going to be geographically bounded because of the nature of the country.”

Genuine progress was being made but the government, local authorities and the community needed to be involved in the broader roll-out. “It’s always going to be a challenge to write a business case for remote New Zealand when you’ve got shareholders. The role of public authorities is to work out how to deal with this social separation. Incentives will be needed and that may be as simple as absolute certainty about pricing and regulation.”

The next step up, and Patchell was cautious not to hype the capability, was very fast VDSL,79 technically all Ethernet up to and including the exchange, DSLAM and cards. The downside was that this ramped up the way voice and data packets were handled by another frequency notch, meaning it was only effective over distances of less than onekm. It was also highly sensitive to mismatched lengths, although with a uniform network in a new suburb performance would rocket ahead, possibly between 50Mbit/sec and 100Mbit/sec. However there were no local deployments and the business case was still being worked through.

Of course building fibre to the home or business presented not only technical and logistical issues but regulatory ones. While LLU arrangements remained regardless of whether the access network was copper, fibre or wireless, there were issues with ‘regulated broadband’ which only related to copper.

Whether fibre-to-the-home (FTTH) networks would be wholesaled in the same way as the copper network was being discussed as part of the LLU reforms. Regulation might ultimately be expanded to cover this area, although it was likely to become an industry issue. A case in point was Pegasus Town near Christchurch, where TelstraClear won a contract to put in fibre and was refusing interconnection with other carriers. While Telecom was required to share its local loop networks with competitors there was no requirement for its competitors to reciprocate.

TelstraClear had won the sole provider deal to service residents and businesses in the 340-hectare, greenfields township being built at North Canterbury’s Pegasus Bay in March. The billion-dollar project being constructed over seven years would be home to 2000 residential and commercial lots, housing around 5000 people. TelstraClear would provide Pegasus consumers with InHome triple play, including premises and boundary cabling, pay TV, and set top box, 10Mbit/sec broadband Internet, and a phone line package, including a dedicated contact centre service and a unique phone number range, for a one-off connection fee.80

While Telecom had been known to collaborate with TelstraClear, for example, sharing fibres over a conduit between Queenstown and Invercargill, there was a concern that when it came to accessing fibre-cabled suburbs there might be competitive lockout. “That’s the big unanswered question. It should be a whole-of-industry concern.” So how would Telecom handle it if TelstraClear asked for access to fibre-to-the-premises suburbs it had cabled? “While this is not a formal stance, I would be fairly confident we would offer a wholesale arrangement or at least be prepared to talk about it. If Telecom was to make a decision like TelstraClear has made in Pegasus Town, I don’t think we’d get away with it, we’d just get another hammering,” said Patchell.

An example of what might lie ahead came when WorldxChange struck a deal to run its services over a Telecom open access fibre pilot at ten new subdivisions. About 1000 residents in Wanaka, Queenstown, Papakura, Cromwell, and Orewa would have a choice of running with WorldxChange’s Xnet VFX digital voice over broadband service from February to September 2008. Telecom Wholesale CEO Matt Crockett said the company was “committed to providing open access” to its networks.81

PAYING FOR THE PRIVILEGE While there had been a lot of noise about what different providers would do once they had better wholesale prices or unbundled or naked DSL access, the missing piece to the equation was still the economics: how much would they have to pay Telecom? Everyone had been waiting for the Commerce Commission to announce that small but significant detail. The Commission had been taken to task previously for determinations that erred on the favourable side for Telecom. Ihug and CallPlus took it to the High Court in 2006, claiming the wholesale charge was too close to Xtra’s retail pricing. They withdrew their action in December after it agreed to review its methodology.

The Commerce Commission’s first attempt at establishing prices was $26 for a wholesale DSL connection versus $29.95 for the retail offering to Telecom end customers. ISPs were up in arms claiming this would rapidly see them bleeding their customers to Telecom. Despite pleas from the industry for a better deal it made only a minor adjustment to the monthly charge. Frustration deepened.

Another attempt saw the charge for a wholesale broadband connection fall from $27.55 a month to $26.35 a month (ex GST). Ihug and CallPlus had been seriously hoping for a figure closer to $20.74. Regardless, the ruling was backdated to October, so the ISPs would receive about $1 million in refunds. After more than nine months, the Commerce Commission’s pricing methodology, complained Ihug CEO Mark Rushworth, “does nothing to drive competition.” The announcement was way off the mark. “With a 27 cent margin, I see no profitability in broadband ... we are destined to be in the backblocks for sometime.”82 CallPlus chief executive Martin Wylie said, “It is a little disappointing, but any savings help when you are in a price squeeze.”83

Then draft determinations for LLU and co-location services were released, enabling ISPs and new carriers to begin finalising investment plans. “The LLU price of $16.49 per line in urban areas is competitive, and provides a good incentive to ISPs to invest in DSLAM infrastructure in the urban areas, however, the rural LLU price of $32.20 per line is high, and reinforces the need for the government to come to the table with its oft-mentioned rural broadband package,” said InternetNZ executive director Keith Davidson.84

As expected much of the initial focus was on getting into the cities and built-up areas as quickly as possible, with the occasional nod to possible wireless solutions for the rural heartland. IDC analyst Darian Bird said there were still a lot of details to look at, and plenty of hidden costs not covered in the $16.49 a month that Telecom would charge access seekers. Ihug’s Rushworth said the urban access price was at the right end of the scale and would help the company decide where it would build networks, instead of continuing to buy wholesale broadband from Telecom. “The key message the Commerce Commission is sending is that it wants network-based investment to be the driver of competition.” A final decision on pricing was to be ratified in December.

Orcon chief executive Scott Bartlett thought the price was at the higher end of the company’s expectations but he was cautiously optimistic. “It certainly enabled us to go out and invest heavily in the urban areas for broadband.” Orcon planned to invest well over $200 million and had spent $1.5 million on equipment for testing LLU. “I can go to our board and our shareholders and say, ‘This is an investment that makes sense.’ It’s enough certainty for us to move into the next phase.” Martin Wylie of CallPlus said differing prices for rural and urban access gave the company an investment case for offering WiMax wireless broadband to rural customers. TelstraClear saw the decision as the first step towards introducing the services it offered in Wellington and Christchurch to other parts of the country.85

In the second week of August 2007 the first tentative steps in the unbundling bonanza began. Telecom opened access to telephone exchanges in Ponsonby and Glenfield, allowing competitors to plug their equipment directly into its copper phone network. Orcon and Ihug were in like a rat up the proverbial drainpipe. Ihug’s Rushworth said it reminded him of getting the keys to his dad’s Cortina when he was 16. “That was a big occasion … It’s the same kind of situation here in a sense – a significant milestone. What we’re excited about is we can control the end-to-end service and that’s critical, particularly with broadband.” However he was concerned the Commission only required Telecom to unbundle 15 exchanges a quarter. “It needs to be double, triple that,” he said.

Orcon would be locating broadband equipment in every open exchange. “Orcon, with the backing of Kordia, has made a commitment on a nationwide launch, which means we intend being in most towns,” said Bartlett. “Anyone not covered will be covered by our wireless ‘Extend’ service.” Orcon planned to offer high-speed broadband – up to 100Mbit/sec – and even deliver high-definition video services. CallPlus was also testing equipment in two of the exchanges with a full commercial service expected to be launched by the end of the year.86

Kordia borrowed an extra $38 million in late 2007 to help finance its bid to take on Telecom and Vodafone and become a major telecommunications provider. It had agreed to pump a ‘substantial’ amount of fresh capital into Orcon, so that it could take advantage of LLU and install Internet access equipment in every Telecom exchange that it could access. Orcon expected to launch its own mobile service, using Vodafone’s network, in February. But some of the money would help finance the construction of Kordia’s digital terrestrial television network and an overdue upgrade of its management information systems.87

Among the rush of press releases, in the clamour to be first to LLU, was one from TelstraClear, smugly entitled ‘Please be careful – we’re already in there,’ reminding enthusiastic interlopers that it already had equipment in 17 Telecom exchanges. TelstraClear head of corporate services Mathew Bolland warned that “in the rush to do what TelstraClear has already done” there was a chance they might bump into the precision hardware the company already had up and running. “We can remember how exciting it was when we first interconnected with Telecom over a decade ago and when we installed unbundled partial circuits last year it was a moment to treasure.”88

NETWORK A NOTWORK Then at the end of August 2007 a ‘hardware fault’ with NEAX phone switches serving the North Shore and Papatoetoe exchanges caused major disruption, affecting tens of thousands of calls to cellphones, freephone numbers and overseas numbers. The fault lasted two hours and was compounded by network congestion.

The MED warned such outages could become increasingly common, as aging equipment in Telecom exchanges became harder to repair. It said Telecom might not be able to guarantee that 200 NEAX phone switches supplied by Japanese firm NEC could perform to ‘international norms’ before they were replaced. Some of the switching equipment was 40 years old and NEC was no longer making some spare parts. Telecom signed a $200 million contract with Alcatel in 2005 to completely replace its aging switched network with a next generation IP–based network, but that was unlikely to be completed until 2012 at the earliest and some switches might not be replaced until 2015, said the Ministry.

Telecom spokesman Mark Watts, however, insisted the switching equipment was performing satisfactorily, was robust, part of a stable network architecture, and maintained to a high standard. “We have the capacity to repair all of the NEAX equipment across our network.” It would continue ‘cannibalising’ equipment and reusing parts while the network was being replaced.89

While glad to have taken the first step, alternative carriers were urging Telecom to move quicker. Telecom had originally proposed to open up ten exchanges every three months but the Commerce Commission had boosted that to 15 and even that wasn’t quick enough for the eager new entrants. In submissions on the draft unbundling determination Ihug had asking for 25–30 exchanges and at least 100 urban exchanges in the first year of unbundling. TelstraClear wanted clarification that it could complete its own installations if Telecom didn’t have access ready within the required 20-day period, or if it failed to roll out the minimum 15 per quarter.90

Then within weeks Telecom admitted the deadlines imposed by the Commerce Commission for the opening-up of the first batch of exchanges were too ambitious, suggesting only five of the first 15 exchanges required would be ready in the specified period. It claimed the list of priority exchanges required complex and lengthy preparation work. Telecom project manager Alan Mitford-Taylor said the first exchanges to be opened – Ponsonby, Glenfield, Ellerslie, Mt Albert, and Browns Bay – were the easiest to prepare and the next ten would be more complicated. Technically Telecom didn’t have to comply until after the final determination was issued in November and was suggesting competitors target simpler exchanges to make life easier. A shortage of materials and technicians might also present a problem. For those exchanges needing extensions to fit competitors’ equipment, building consents could further complicate things.91

Then came more of the devilish details the industry had been warned about. After all the hoopla Orcon announced it wouldn’t be delivering its naked DSL as planned, citing the “crippling limitations” Telecom had placed on the wholesale product. Orcon retail general manager Larrie Moore refuted claimed that his company simply didn’t have its product ready for market, saying the “caveats” Telecom proposed had forced it to put its product on ice. He said, Telecom was only allowing it to deliver its voice over IP product to 50 customers per week, with a maximum of five to ten per provider.

Moore claimed he had to turn business away. “We’re not going to market with a handful of connections ... what’s the point of launching a product that we can only sign up one or two customers a day?” He claimed this was an attempt by Telecom to limit the impact of lost line rental and calling revenue as customers switched services.92 Slingshot and WorldxChange had released their VoIP product using naked DSL, however, Orcon would keep its customers on hold until it could work out a better deal.

The details of the government’s proposed three-way operational split of Telecom were finally announced at the end of September with few adjustments to the original April plan. The three business units included a stand-alone network access unit, and one or more arm’s-length wholesale units and business units that might include retail. After Telecom’s draft plan separation had been considered by the Commerce Commission, it would become legally enforceable no later than 31 March 2008.

InternetNZ executive director Keith Davidson said this was another important milestone in the levelling of the playing field for the telecommunications industry. “The government is to be congratulated for its bold move to proceed with the operational separation plan largely as originally envisaged which provides the correct incentives for the future.”93

The 70-odd page document outlining operational separation meant the three different units under the Telecom umbrella would be strictly physically separated, and communications between the departments would be closely watched by the newly formed IOG as a watch dog. Incentives for staff would not be based on Telecom’s overall performance, and remuneration within the wholesale unit, for example, must not compromise any direct or indirect incentives linked to Telecom’s overall performance. The network unit would have to have a different brand to Telecom and would not be allowed to appear with Telecom’s brand. If Telecom failed to comply with the government’s undertakings, the carrier could face penalties of up to $10 million for each breach and a $500,000 per day penalty if the breaches continue.94

WORKABLE CHALLENGE Outgoing chief financial officer Marko Bogoievski had campaigned hard for Telecom to be allowed to sell its network arm and for a less complex form of operational separation of its wholesale and retail arms, without duplicate administration. He had complained strict three-way operational separation would “suffocate” the company and stall investment in telecommunications infrastructure.95 Now, Mark Ratcliffe, Telecom’s chief operating officer for technology and enterprises, said work on operational separation was well advanced. “Our initial assessment of the determination indicates that it represents a demanding multi-year programme of significant change for Telecom and the industry … With respect to the demands they will place on our people, the requirements are challenging though workable.”

Everyone at Telecom was working to tight deadlines on a range of projects including unbundling broadband. “We will continue to make it clear to both the Commerce Commission and the government that Telecom’s delivery of new regulated broadband services, and our meeting of the required milestones for operational separation, present real physical challenges.” He reiterated96 that compliance with operational separation was likely to cost Telecom around $200 million in capital expenditure over the next four years, with operational costs of up to $40 million per annum over this same period. Telecom had already broken out a wholesale unit, run independently from the retail units for most of 2007.97 There were also widespread rumours the physical fixed line network under the Access Network Services (ANS) unit; valued by Citigroup at between $3.5 and $4.7 billion, was for sale.

Incoming Telecom CEO Dr Paul Reynolds received regular briefings from his colleagues on the operational separation process, and made his views known to the government.98 In announcing Telecom’s annual results, chairman Wayne Boyd told shareholders the company was entering a new era, symbolised by the new regulatory landscape and Reynolds’ arrival.

Telecom revenues for the year were just over $3 billion, after-tax profits were $955 million up 16.5 percent on the $820 million it posted in 2006. Revenues were boosted by the one-off gain of selling the Yellow Pages Group for $2.84 billion. Total DSL connections including residential, business, and wholesale were up 40.4 percent for the year to June at 653,000. Total DSL connections – including residential, business, and wholesale and mobile broadband – were 653,000, an increase of 40.4 percent.

Broadband and Internet wholesale revenue was $49 million, an increase of 44 percent. As at June 2007 Telecom had 165,000 broadband wholesale connections. Its capital expenditure was up 12.4 percent to $844 million and it forecast spending of $950 million to $975 million for the 2007-2008 year.99 According to IDC Research, Telecom had migrated 605,000 or 71 percent of its Xtra customers to broadband by the end of June, with 238,000 left on dial-up. Competitors, operating on slim margins reselling Telecom’s services, had shifted only 19 percent or 120,000 of their customers to fast Internet, with 502,000 still on dial-up. Everyone was waiting for full unbundling before the mass migration.

THE NETWORK STAYS Then Telecom’s new boss chipped in. His first public statement in October 2007 was to dispel rumours that Telecom was about to sell off its core network. Following Telecom’s annual meeting in Dunedin he affirmed that Telecom was ‘fundamentally a communications business’ founded on running a network and there were no plans to change that.

“I think the outcome in David Cunliffe’s determination was good … for customers, it’s good for New Zealanders and … for Telecom and that’s because for customers it paves the way for choice ... I think it sets a clear framework for firms to invest – that’s Telecom and other service providers in the market – and it’s good for Telecom because it enables us to have real certainty about our market, to focus and to get on with growing our business, whether that be in the retail, the wholesale or the access space.”

Broadband brought a wealth of opportunity and possibility that hadn’t yet been fully exploited. “There’s also some opportunities to grow in new markets and we see some real strengthening in our capability in Australia, for example.” The new environment was going to be time consuming and would result in changes right across the company, said Reynolds.100

He told the annual meeting that the separation would give the management of each division the ability to focus on a distinct set of customers. Evidence from his British Telecom experience was that the retail business could be more innovative with new products and services. Without an over-dependence on the network unit, the wholesale unit was able to build trust with its customers and increasingly operate networks on behalf of those customers. The access network operation had become the foundation for good customer service across the market by focusing on fast provisioning and repair. “There’s a lot of fears around the process … but what we found was that all three parts of the business began to grow,” said Reynolds.101

As Reynolds stepped up to his role the Consumers’ Institute said one of his more urgent tasks would be to try to rebuild consumer confidence in the Telecom brand. The institute had received an unprecedented flood of angry complaints claiming Telecom’s brand had received lasting and significant damage. President Suzanne Chetwin said the company’s public image had taken a battering in the past two years, reaching a new low during the troubled launch of Yahoo!Xtra Bubble in August, which was the last straw for many customers. She predicted Telecom would lose a significant number of customers, particularly as competitors got access to the Telecom local loop.102

A PricewaterhouseCoopers report103 released on 2 November revealed businesses were worried about the cost and continuity of broadband and telecommunications services and the impact this might have on their future viability. Continued supply of broadband was a ‘major worry’ for 15 percent of companies surveyed, while telecommunications supply greatly worried 13 percent; 14 percent were seriously worried about broadband costs and 16 percent about telecommunications costs. “Both are top-of-the-mind infrastructure-related issues with the impending separation of Telecom,” said PWC.104

Within two days of the report a scheduled weekly switch over from mains supply to back-up supply at Telecom’s central Auckland Mayoral Drive exchange failed. The routine Sunday test of the UPS system worked for half and hour then crashed. Telecom tried to get the mains power back-up but the IT systems were also down, along with its IVR and customer database, further complicating matters. Phone calls were unaffected.

Epitiro managing director Mike Cranna was stunned a shutdown should have occurred at such a critical data centre where there should be 100 percent redundancy. The failure caused a significant bottleneck for all the nation’s ISPs for about an hour.105 Auckland’s emergency services communications centres were affected and South Island police and fire communication centres had to switch to manual during the breakdown – in other words, pen, and paper. The outage that triggered a failure in a Telecom switch came only two days after emergency centre databases in Auckland, Wellington and Christchurch had been consolidated. A simulated outage to test cut-over procedures was planned but the real failure happened first, delaying the switch to a Wellington back-up site and the subsequent reboot at the Auckland exchange.106

The day after the crash the Consumers’ Institute released the results of its annual ISP satisfaction survey revealing Telecom’s Xtra was the least popular provider for the third year in a row. It found only 42 percent of Xtra subscribers rated its performance ‘good’ or ‘very good,’ trending further down on 55 percent in 2006 and 78 percent in 2005. Sue Chetwin said the ratings dropped further to 36 percent after Xtra’s merger with Yahoo! wreaked havoc with its new ‘Bubble’ email service. Overall Xtra’s performance revealed the greatest level of dissatisfaction with any ISP in New Zealand. “Broadband users have been promised so much in terms of faster speeds, larger data caps, and cheaper pricing, but our survey shows that most customers think they’re getting a rough deal. And compared with overseas, there’s no doubt they are.”

TUANZ chief executive Ernie Newman said many people were starting to question the basic technical competency of the Xtra platform. “I think it’s time that the public started hearing from the engineers and people who can give an explanation about what’s going wrong here, rather than just from the PR department … Telecom have got to get out of the mindset of treating New Zealanders as technologically impaired.” Newman said the power outage was another example of Telecom’s technical equipment falling over. “If a phone company in 2007 can’t run a reliable ISP that doesn’t go off the air with extreme regularity, then there’s something fundamentally wrong.”107

COMPETITORS CONFUSED Then the Commerce Commission signed off on the final fees competitors would have to pay to Telecom for accessing the local loop. There had been begrudging acceptance of the interim de-averaged figures for rural and urban areas announced in July and few expected a hike but that’s what they got. The prices were up 20 percent in urban areas to $19.84 per customer and up 14 percent in non-urban areas to $36.63 per customer. The determination covered a 15-month implementation with a soft launch at up to 15 exchanges between January to April 2008, and up to 15 further exchanges a quarter for the next year. This would result in up to 75 unbundled exchanges by April 2009.

InternetNZ public policy chairman David Farrar was disappointed, fearing tighter margins for competing LLU operators, which would inevitably be passed on to customers. An upward drift of such magnitude had caught the industry by surprise and was expected to have flow on effects.108 ISPs eager to deliver on the pervasive broadband challenge were not only encountering resistance from their old nemesis but the government’s Commerce Commission was also playing hardball.

Now in the embrace of state-owned giant Kordia, Orcon was expected to shine brightly in the new environment but was now warning of a big question mark over its plans for a world-class true broadband network. Its customers in the trial phase at five Telecom exchanges were getting speeds of up to 20Mbit/sec now Orcon chief executive Scott Bartlett, said the additional costs raised ‘serious questions’ about further investment. He believed the move by the Commerce Commission made achieving the government’s own goals of getting into the top half of the OECD broadband ratings by 2010 ‘seem unachievable.’ Bartlett was further concerned at the impact this might have on the business case for sub-loop unbundling particularly if Telecom announced aggressive cabinetisation plans, which could reduce the number of customers competitors could serve from Telecom’s cabinets.109

Within three weeks Telecom’s announced it would build an additional 2100 cabinets to shorten the copper loop and bring fibre closer to the customer by the end of 2009. CallPlus was taken by surprise, estimating around 50 percent of its customers would have to be serviced from those cabinets. While agreeing this was a step towards faster cheaper broadband, CEO Martin Wylie said the announcement made a ‘mockery’ of the Commerce Commission’s LLU determination. “Why have we all wasted 18 months when we should have focused on different issues?” He remained concerned about the design of the cabinets -whether there would be enough room for future access by competitors – and at the lack of clarity about sub-loop unbundling.

Orcon’s Bartlett believed Telecom had ‘deliberately pulled the wool over the government’s and access seekers’ eyes.’ His company had invested a lot of money into the local loop and the ramp-up of cabinetisation essentially made that redundant. Both competitors called on the government to regulate sub-loop unbundling to ensure equal access.110 The risk with the higher cost of access – and the rapid move to shorten the loop so each cabinet served less customers – was that competitors could find their business cases for independent roll-out no longer stacked up.

Industry commentator Paul Budde was disappointed at Telecom’s turnaround and wondered whether the show of good intentions in 2006 was little more than smoke and mirrors. “In good faith the industry has been pre-empting Telecom’s positive attitude and made tactical changes to their organisations, and substantially increased their customer base in anticipation of the new environment. They now see that the emperor is not wearing any clothes and they are left stranded and in a financially very dangerous position.”

Budde warned the competitive industry there was only a short life ahead for copper and DSLAM placement in Telecom exchanges, leaving them with wholesaling as the only viable option, which itself was likely to increase rather than fall in price. He believed the entry level of broadband in New Zealand would consequently increase to around $45 when in some comparable countries it had dropped as low as $9.95 but was on average between $19.95 and $29.95.

“These high broadband prices will be a major setback for economic progress and innovation in New Zealand, something the OECD has been mentioning for many years. The fact that Telecom didn’t come up with a wholesale strategy indicates to me they have abandoned their co-operative approach or perhaps their supportive behaviour has all been smoke and mirrors. If they do have a plan to take the rest of the industry with them, why didn’t they announce that at the same time? This is a very worrying development indeed. We have learned from the past that innovation will be stalled when there is no or little competition and the current uncertainty alone is enough to kill any future investments by the competition.”111

If it wasn’t bad enough that Telecom was showing reluctance to open up its exchanges as rapidly as it had initially promised, there would now be triple the number of cabinets within two years, each servicing fewer customers. Competing carriers planning to place their own equipment in these roadside cabinets were forced back to the board room to explain the long-term benefits of delivering broadband over a copper loop that was about to disappear as quickly as the business case for unbundling.

Meanwhile the Commerce Commission, in allowing access prices to be pushed up, rather than removing the obstacles that were in the way of a more competitive environment, had undermined its own mandate – to ‘enforce legislation that promotes competition in New Zealand markets’112 – and helped make a mockery of the government’s goal to streamline broadband roll-out. In tandem with Telecom’s obviously pre-meditated announcement on cabinet roll-outs it had inadvertently helped disempower the very people the new environment was supposed to be encouraging. We were getting mixed messages again.

Chapter 24 Sidebars

BACKWARDS IN GOING FORWARD With unbundling just over the horizon and open slather accounts on offering, subscribers were being bombarded with offers from ISPs eager to win their business before the next wave of competition. In some parts of the country there were long delays in getting broadband connections and those who had upgraded to the new ‘all-you-can-eat’ packages weren’t exactly getting what they paid for.

In fact up to 40,000 people – 10 percent of Telecom’s 395,000 retail broadband customers – who had paid for faster broadband, had seen performance slow markedly. The Commerce Commission was investigating ‘a stream of complaints’ from people claiming they had been misled by Telecom’s advertising, since broadband was ‘unleashed’ in 2006.

Auckland arts patron and millionaire Jenny Gibbs was frustrated at being unable to get broadband at her opulent Paritai Drive home in Auckland despite the advertising spin. New units needed to be installed in cabinets near her street to boost capacity. Auckland broadband user Ron Johnson upgraded to Telecom’s Go Large package in October 2006 but despite paying more, he got less. “I’ve got Go Large and I’ve gone backwards,” he said. His speed had dropped from 400kbit/sec to 60kbit/sec and he was told he couldn’t go back to his old plan. Telecom eventually admitted it was having problems with ‘this particular plan.’20

The failure to deliver on its broadband promises earned Telecom’s ISP Xtra the Consumer Institute’s Supreme Ass Award, in the inaugural Complete Ass Awards for bad products and services. Institute executive director David Russell said that since Telecom ‘unleashed’ its broadband speeds, the institute had been ‘inundated with complaints of slower speeds and frustrating cut-outs.’ To make matters worse, “you can’t switch on the telly or open the paper without being confronted by the leering geek band, the Xtraordinaries, proclaiming unlimited broadband speeds and no data caps.”21

Telecom agreed to credit its Go Large customers up to a total of $8.5 million after admitting they were not receiving the speeds originally promised. An internal technical review had identified an issue with how Internet traffic was being managed on the plan. Go Large was introduced in October 2006 with no cap on downloads. It had around 60,000 customers and no more were taken on until Telecom sorted things out.22

Then Telecom was voted runner-up in the worst transnational corporation operating in New Zealand at the annual Roger Awards in Wellington at the end of March.

Australian-owned Progressive Enterprises was named worst company because of the 28-day lockout of more than 500 supermarket distribution workers in August and September. The judges said in their report that runner-up Telecom “continued to disappoint customers, argue every point with regulators, and so totally mismanage the roll-out of ‘faster cheaper broadband’ while frustrating its competitors that it probably cost New Zealand a fortune in lost opportunities.”23

CABLE CAPACITY CHALLENGED As the regulatory environment became less of a barrier to ISP growth the need for international bandwidth again become a major issue as the bulk of data being viewed by Kiwi surfers originated offshore, most of it travelling across the now overloaded Southern Cross cable.

A surge in demand for bandwidth, largely from video-hungry users in Australia and eager broadband users in New Zealand, had accelerated the need for a major upgrade, at a cost of tens of millions of dollars.

The declining capacity available on the undersea communications lifeline that handled the bulk of Internet traffic between New Zealand, Australia, Hawaii and the United States became so serious an announcement was made in February that capacity would need to be doubled. Space on the Southern Cross cable was nearly sold out, so 50 percent owner Telecom contracted Alcatel to increase the capacity of each leg of the 28,900km cable from 240Gbit/sec to 330Gbit/sec by April 2007.

Another boost to 430Gbit/sec would occur by the end of 2008. Termination equipment would be upgraded in New Zealand and if necessary a further capacity increase could occur to take the light-speed lifeline to 1.2 terabits. Southern Cross, which is operationally based in New Zealand, recorded over US$320m in sales in the second half of 2006. The cable laid for US$1.3 billion in 1999 was last expanded in January 2003.

Southern Cross sales and marketing director Ross Pfeffer said users were increasingly moving to a “video-dominated on-line world requiring very high access speeds.” With exploding demand for bandwidth in Australia as a result of consumer take-up of superfast broadband technology ADSL2+, Southern Cross needed to act quickly.

Some relief could also be provided by the fact that Telstra, Southern Cross’ largest customer, was building its own cable from Sydney to Hawaii.28 It planned to withdraw from the Southern Cross cable once its new trans-Pacific undersea route was completed. In fact it looked as though Telecom had serious competition. Telstra’s project running through Hawaii and Guam, expected to cost hundreds of millions of dollars, would deliver 1.28 terabits capacity and was due for completion in 2008.

Telstra chief operating officer Greg Winn said the new cable would ‘significantly reduce’ Telstra’s reliance on ‘foreign-owned companies’ to provide its international bandwidth and compete globally. Meanwhile Perth-based Pipe Networks was planning to lay another fibre-optic cable from Australia to Guam, where it would link with other undersea cables. Project Runway was expected to cost NZ$227 million.29 New Caledonia carrier OPT was also building a cable between Sydney and Noumea with a potential 300Gbit/sec capacity, large enough that some have suggested it could be extended to further destinations.

A further boost to international capabilities would be delivered by the Optus D2 satellite, which was launched in October, providing direct TV broadcast, Internet, telephone and data transmission services for Australia and New Zealand. Weighing 2350kg at launch, Optus D2 was fitted with 24 Ku-band transponders and had a design life of 15 years.

In December winds reaching 130km an hour battered the Oregon and Washington coasts in the United States damaging the Southern Cross cable network and reducing Telecom’s international capacity by 50 percent until the cable could be repaired.30

UNDER NEW MANAGEMENT Telecom’s chairman, Roderick Deane, nicknamed ‘Doctor Death’ for his ability to wield the knife when it came to restructuring and making the hard decisions, had announced his resignation at the end of May 2006. He got a golden handshake of $661,000.34 Having joined Telecom as CEO in 1992 Deane had spent 14 years on the Telecom board. His departure was celebrated in an editorial in the Christchurch Press:

That change was essential at Telecom goes without saying, and the glee was widespread at the sight of its bloated arrogance being punctured by the network-unbundling announcement. The debate over the merits of using the regulatory approach to force its hand is now academic. It seems Telecom itself has grasped that point … But he (Deane) also represents a past that Telecom now needs to shake free of – one where confrontation, obfuscation, litigation and bullying have too readily been preferred to engaging with customers, regulators and, on the occasions when it might have been the best course, competitors … Theresa Gattung faces similar guilt by association with that tarnished past. It is little wonder that predictions of her departure are only mounting…35

Telecom CEO Theresa Gattung who had been elevated from the Telecom marketing department and groomed by Deane to step into his CEO shoes in 1999, handed in her resignation within weeks of her mentor. She resigned on 31 June 2006 after seven years at the helm of the country’s largest listed company. Gattung planned to stick around for at least another nine months to oversee changes in policy.

Telecom’s board of directors quickly scoped out the world market for a replacement. Chief financial officer Marko Bogoievski was considered an obvious choice by some but others blamed him for the dramatic fall in Telecom’s market share over the previous year.

Gattung, the first woman in New Zealand to hold the chief executive role in such a major company, admitted 2006 had been her worst year, after Telecom lost billions of dollars in market value through the changing regulatory environment. Share prices took a dive with the leaked news of the government’s unbundling plans and it had been forced to wipe $1.1 billion from AAPT, its loss-making subsidiary in Australia. John Goulter, her long-time communications adviser, was also exiting as was government regulatory affairs manager Bruce Parkes, another indication of a major change in the old guard.

TELECOM’S OBITUARY Long-time IT journalist and NZ Herald writer Chris Barton held nothing back in his swansong for the departing management team at Telecom.

So it’s goodbye at last to Roderick, Theresa, Bruce and John – the former Telecom quartet I’ve crossed swords with for more than 15 years of so-called telecommunications reform … Roderick Deane became Telecom chief executive in 1992 and is the architect of the regime that has deprived New Zealanders of a decent telecommunications service. His strategy was simple. Deane would build Fortress Telecom from which he and his cohorts would block, stall or mitigate every regulatory and competitive threat while they duped and ripped off a hapless public. For many years he had a free ride as successive governments agreed with the idea of light-handed regulation – none more so than National communications minister Maurice Williamson, who seemed like a puppet in Deane’s hands.

Gradually governments began to realise that when it comes to essential infrastructure, leaving its destiny to market forces is a really stupid idea. Laissez faire economics in the telecommunications market simply reinforces the power of the incumbent monopoly and competition is strangled as soon as it sprouts. Deane groomed Theresa Gattung and Bruce Parkes in his fortress mentality – and the pair, she as chief executive and he as head of government relations, were formidable. She was loud and gauche and he was goofy and affable, but both were ruthless in their battle against regulation. They were joined six years ago by spinmeister John Goulter, Telecom’s chief apologist for its anti-competitive ways, who, by the end of his tenure, had perfected the art of saying black was white to the point where I think he believed it…

All the while Deane was in the background as Telecom chairman, advising his protégés and laying down the law with government ministers. You could argue he was the most powerful person in New Zealand. He was like a smiling assassin calmly drawing his opponents close – so they could smell his aftershave – while he quietly said “no.” The ways Telecom has abused its monopoly power and engaged in anticompetitive practices are too many to mention. But the one that stands out for me was the infamous “0867” scheme – a 2c per minute tax Telecom unilaterally imposed on dial-up Internet users in 1999 if they didn’t dial that prefix.

It was the brainchild of Parkes, designed to stop competing Internet providers who were taking Telecom customers in droves. The plan was the subject of High Court cases and injunctions which Telecom lost. It is still before the court in action taken by the Commerce Commission for breach of the Commerce Act. But it didn’t bother Telecom. Despite having to make out-of-court settlements Telecom still won because once again it had obfuscated and delayed enough to cripple competitors.

Telecom’s influence knew no bounds. In 2004 when it was clear to all that Telecom’s monopoly on residential phone lines must be opened to competition, Telecommunications Commissioner Douglas Webb’s ordered against local loop unbundling – even though a detailed report by his own office advised in its favour. To this day no one has been able to explain why Webb performed his incomprehensible back flip.

But now as Roderick, Theresa, Bruce, and John depart, I feel compelled to question their ethics. Some would say they were just doing their job – in fact doing it very well. But thanks to their sterling work, their legacy is that while the rest of the world races ahead with faster, cheaper, and unlimited broadband, not to mention voice services that are almost free, New Zealand in 2007 has a telecommunications system that’s the equivalent of the party phone lines of the early 60s. Yes, I am angry.36

During her final year with Telecom the 45-year-old who had held one of New Zealand’s most powerful and high profile positions, with a pay packet of $2.9 million, was given a special bonus pay of $1.8 million. By the year ended 30 June 2007 she had received a total of $5.4 million including base salary, performance incentives, long-term incentives and $287,000 in unpaid annual leave. Months after her departure Gattung was reported to have sold Telecom shares worth $770,000.37

OUT WITH THE OLD Speaking in Sydney ahead of stepping into the new role in October, Paul Reynolds, Telecom’s new chief executive said he believed there was much scope for Telecom and the New Zealand communications business in general to grow, if the company got it right for its customers. Reynolds, who had been running the wholesale division of British Telecom, believed customers were better off after strong separation of the networks and retail divisions of his former employer. He had been a key player in the overhaul of BT’s networks and information technology systems, which the company called 21st century network (21CN).

He had beaten two internal candidates to the Telecom role, finance chief Marko Bogoievski and operations chief Simon Moutter. Bogoievski effectively ruled himself out after disagreeing on the path the board was taking with the company’s structure.38 He handed in his resignation at the end of August 2007, after more than seven years with Telecom.

It was believed Reynolds preferred to work with the government rather than pursue Telecom’s ‘aggressive’ resistance to giving competitors access to the local loop. Bogoievski was among those opposed to the plan to split Telecom into three businesses and was responsible for the press release describing the government’s proposal as ‘fundamentally unworkable’ and uneconomic.

According to the Dominion Post, Bogoievski and other senior managers wanted to continue fighting greater government intervention, which was at odds with the board and caused a great deal of tension. According to Telecom’s annual report for the year to June 2006, Bogoievski received $1.29 million cash and $849,000 in equity-based remuneration, making a total of $2.14 million.39

Weeks later Kevin Kenrick, chief operating officer of Telecom’s consumer arm, announced his departure following a ‘storm of criticism’ from consumers about the handling of its new Yahoo! Xtra Bubble service. In August Telecom’s loudly trumpeted upgrades and additions to its email service and web site turned into a disaster. The new customised bundle of services from Yahoo! announced in February, due for launch in June and finally offered in August, put Xtra customers through horrific inconvenience.

A couple of days after the outage Telecom claimed it had resolved the registration fault which had “affected some customers’ ability to access the service.” It had added more people at call centres to assist customers who still had problems.40 The downplaying of the impact incensed the NZ Herald’s editorial writer:

Telecom customers would be justified in believing that the company has taken its strategy of confusion in the marketplace to a new level. Now it sows anger as well as confusion. It was not just that it managed to make a hash of upgrading to Yahoo!Xtra Bubble, it was the attitude afterwards of not seeming to care that thousands had been seriously inconvenienced. At first it played down the problem, saying a fault had affected ‘some customers’ ability to access Webmail. What this piece of corporate doublespeak meant was that thousands had been cut off at the weekend. Five days later hundreds remained without the email service they rely on for their businesses. Making everything so much worse, was the insensitive way that Telecom glossed over the problem. It was well nigh impossible to get help or information. Telecom declared it would not compensate businesses. Worse it went on trumpeting the exciting new Bubble service that would supposedly change the way subscribers used the Internet. But disgruntled customers were not buying it and hundreds expressed their anger – and explained the enormous personal and business cost – in public forums such as Herald On-line. But mid-week Telecom was prepared to talk about compensation after all…41

After a period of denial and confusion Telecom made an overt apology, offering to provide all its Xtra customers one week’s free Internet access – around $5–$6 million – and donate $1 million to charitable organisations voted on by those customers. Kenrick was forced to admit the service had got off to ‘a miserable start.’ It was the second time Telecom had been forced to apologise, after it credited 60,000 customers between $130 and $160 each when its Go Large broadband service failed to perform as advertised.

Kenrick’s departure came just weeks ahead of Scotsman Paul Reynolds taking the helm. He had grown Xtra’s business and regained lost market share in the mobile business after joining the company in 1999 as a sales and marketing manager for Xtra.42 Within a week of his resignation, Kenrick was announced as the new chief executive of House of Travel, the country’s largest privately owned travel company.

TALENT QUEST CONTINUES New Zealand was not training and retaining the right kind of skills to achieve the economic and social gains envisaged by the government. Universities and technical institutions were losing skilled tutors and lecturers, students didn’t seem interested in training as engineers, programmers, or network and ICT specialists. And even if there was an influx of interest, it was doubtful we could cope.

Employers were being warned to hold on to skilled staff by offering more attractive packages or risk losing them in a tightening labour market where there were huge skill shortages. While the unemployment rate was at a record low at 3.6 percent the number of job vacancies in ICT continued to climb. According to a 2006 Department of Labour survey, 118 out of 134 specialist IT areas were experiencing acute skills shortages, but the number of students enrolled for IT degrees fell a dramatic 44 percent in four years.51

HiGrowth Project director Garth Biggs had told the MIS Careers Fair in Wellington in November 2005 that New Zealand needed to triple its ICT workforce by 2012 if it hoped to meet government targets for the sector. The government wanted to raise ICT’s contribution to the nation’s GDP from 4.3 percent to 10 percent by 2012. That meant employing 125,000 people in ICT, up from only about 41,000 in 2005.52

IPENZ chief executive Dr Andrew Cleland voiced his concern following the 2007 Budget that the government hadn’t taken into account the resources needed for its proposed investments in major infrastructure, which would require world-class engineers. Since 2000, he said, IPENZ had produced considerable evidence that the proportion of professional engineers in the tertiary-educated workforce was a critical success factor to resolving economic and environmental issues. New Zealand continued to have one of the lowest proportions of professional engineers in the OECD. The need to attract skilled migrants against strong global demand would continue to be critical for the nation.53

The skills issue was likely to be significantly heightened with projected growth in the industry over the next five years. More than 11,000 extra jobs and 300 new businesses would be created within New Zealand’s information technology industry over the next four years, taking employment within the industry to 66,000, according to a Microsoft-funded study carried out by research firm IDC. It said spending on IT would reach $5.4 billion in 2007, and would then rise 4.3 percent a year till 2011.54

DOES NOT COMPUTE Otago University computer science lecturer Simon McCallum, in his October 2006 paper ‘Computer Science Shortage,’ said there was likely to be a severe impact on the New Zealand economy unless the country addressed the ‘sudden and dramatic drop’ in the numbers of students enrolling in ICT degrees over the previous five years.

“This divergence in the supply and demand for programming staff raises a serious concern over the number of well-trained programmers that will be available for employment within New Zealand in the next five years. These trends are global and will impact on the New Zealand economy severely and limit growth,” said McCallum. In the month he published his report there were 4203 IT jobs advertised on the two main employment web sites. A review of ten professions by the Department of Labour summarised the IT profession as: ‘Genuine skill shortage.’ The numbers suggested that New Zealand would have to compete with all its Western trading partners for the shrinking pool of skilled IT staff. Even in developing economies such as India and China there were reports of IT skills shortages.

McCallum’s greater concern was the precipitous drop in enrolments for ICT degrees. In New Zealand, computer science and information science degrees had first-year enrolments less than 50 percent of those in 2001. The graduating class of 2004 was made up of first-year students mostly from the 2002–2001 year. The number of graduates in 2008 was expected to be fewer than half of the number in 2004.

The government did not appear to have taken this looming shortage into account with its plans to grow ICT revenues by 2012 to achieve 10 percent of GDP. To achieve those goals there needed to be 66,000 more staff in ICT companies, when the position at the end of 2006 was 22,000. By 2009 there would only be about 3500 ICT graduates. “Even if only one third of the employees have ICT qualifications this will only be an increase of 10,500 staff.” Even including migration (around 200 per year) this would still mean only 33,000 employees.

“Given current enrolment numbers it would take until 2018 before we have enough graduates to get anywhere near this target. These numbers should be a call to arms for the IT sector. Industry and academia to work together to increase the numbers of students so there are qualified people to employ and sustain growth.”55 A report commissioned by the Game Developers Association stated that by 2010, the number of ICT professionals needed to increase threefold to take up expected demand. McCallum said regardless of any action taken, the industry would feel the pain through until 2009. He said some game developers were reconsidering whether to bid on contracts, and this impact would be felt throughout the wider ICT employment market as well.

HiGrowth executive director Garth Biggs said the findings validated long-held industry concerns that the industry had no mana.56 “Kids are simply turned off. They don’t see a future in ICT and think it’s all about sitting in cubicles working on spreadsheets. Parents and teachers both seem uninterested and actively oppose children’s interests in it.”

The view was echoed by the associate head of industry and development at AUT, Tony Clear, who said even if there was an increase in the number of people wanting to take the courses the academic community most likely couldn’t cope. As student rolls shrank, universities and polytechnics were offering redundancy to lecturers and reducing the number of staff teaching ICT. ‘The ones who leave are, of course, the ones in greatest demand elsewhere, who can get a job in industry that typically pays very well.’57

ENGINEERING THE NET If you took a survey of the movers and shakers involved in Internet-related decision making, bandwidth expansion or the use of academic and research networks to keep pace with international trends, the same faces kept popping up. They were often the same people who were labouring away on number eight wire solutions to connect our universities to the world back in the 1980s.

Internet entrepreneur Simon Riley was concerned at the lack of skilled people being trained in universities to cope with the next stage of the Internet’s evolution, and the move to pervasive fibre-optic infrastructure. “The old grey beards back to Tuianet days are still driving things. Going forward, there is zero capacity of people with those kinds of networking skills in the university sector and very little funding for ICT at research level in this country. If you don’t have funding you don’t have courses or post graduate students or research activity. It’s a lose-lose situation.”

John Hine, head of the School of Mathematics and Computer Science at Victoria University, got involved in the Internet in the mid-1980s because he felt it could change things. “When TV and the Internet were new it wasn’t a problem getting people involved. Now there’s a tendency to take these things for granted. I guess that’s why the same group got behind the country’s research and education network. If you look at the roadmap for building capability for KAREN you’ll also see there are quite a few challenges in that. We just have to keep trying to get people interested.”

In August 2007 Hine took delivery of a substantial report from a working group of the US Government’s NSF, detailing research challenges in advanced networking. It contained important information that would help New Zealand develop its own roadmap for the research community. So how many people in the country did he think could understand and accurately interpret such a report? He reckoned about a dozen people at university level including a couple within Crown Research Institute, Industrial Research. While the research wasn’t necessarily where New Zealand should go, it was an indicator of how the country might follow behind United States developments. “We have to anticipate it and have a sense of the impact it might have on us.”

Dean Pemberton, senior technical specialist and long-serving member of the (NZNOG, was also hopeful that more people would take a serious interest in network engineering. “If you look at the people starting to turn up to ISPANZ and InternetNZ meetings, many are in their 30s and have a good handle on where the Internet is going. It’s taken us a while to get this generation of network engineers and computer science graduates involved. Now we need to make sure the new generation gets involved earlier.”

Part of the problem, suggested Pemberton, is that young graduates often don’t know about the opportunities. While a lot of new blood came up from the helpdesk environment at ISPs, many graduates were snapped up by large corporates before they had a chance to get exposed to the grass roots Internet. One of the attractive things about New Zealand was the size of the technical community. “It’s small enough to meet the people you are dealing with. Having worked in Australia and the US, I know it’s virtually impossible to get that kind of exposure because of the scale. However if you go to an InternetNZ or an NZNOG meeting you are going to find yourself face to face with the people who make the decisions.”

NZNOG is a hugely influential group within the New Zealand technical community, mainly focused around discussing core issues and problems facing Internet and network development. At last count it comprised a discussion list of around 900 members, typically the chief network engineers at places like Orcon, Ihug, Iconz, and Vodafone. “You certainly wouldn’t want to piss anyone off as your employment opportunities within New Zealand would go south rather quickly,” said Pemberton. “The list is certainly a place to get a bit of experience, learn who the players are and get exposed to the hot topics and the way people think about them.”

EXODUS ACCELERATES Across the Tasman similar pains were being felt, with the ICT sector hit hardest by the talent crisis and skill shortage. The Deloitte Technology Fast 500 CEO survey suggested the problem was complicated with the baby boomer generation reaching retirement age. Deloitte Technology media and telecommunications (TMT) industry group leader, Damien Tampling, said CEOs were citing chronic shortages of talent as one of their greatest concerns, with fears the problem could go on for decades.

Technology companies in particular would suffer from this global problem as they sought to innovate and expand. All companies surveyed agreed the biggest challenge was finding, hiring, and retaining qualified employees. CEOs had made talent their top personal challenge in a bid to develop the next generation of leaders.

Tampling said a large number expressed concern about the focus of national education systems failing to train people with skills for modern market requirements which had a drastic effect on ‘offshoring’ or importing required talent. The survey of the fastest-growing tech companies in the world found that 75 percent of CEOs in Australia and New Zealand listed talent shortages as one of the most serious items on their agenda, especially among those working in ICT where it was even more acute.

Deloitte’s head of IT infrastructure, Chris Mills-Vasas, believed the way managers saw people and their value to the organisation needed to change dramatically. “We encourage everyone to undertake development plans, regularly review and support people and offer variety in roles … As we give value to each role and make them more interesting we attract talented people and keep them longer.”58

Meanwhile the Department of Labour’s ‘Skills in the Labour Market’ report, covering the June 2007 quarter, showed the working-age population grew only 0.2 percent, the lowest quarterly result for nearly two years. Combined with falling net migration that meant employers had a smaller pool of talent available. “The labour market has been showing this trend for some time and employers know they need to think outside the square when it comes to recruiting … They need to consider retraining and upskilling existing staff before looking for new people, and offering attractive terms of employment,” said Labour Department deputy secretary for work directions, Monique Dawson.

Job vacancies had rocketed in Canterbury and other parts of the South Island, although there had been a decline in job opportunities in Auckland and Wellington, leaving the overall market flat. However the Labour Department report said overall there was an increase in openings for highly skilled occupations, with firms having difficulty attracting skilled staff – up to 42 percent from 41 percent in the March 2007 quarter.59

Figures on long-term and permanent departures gave further reason to consider the impact on the job market, with a steady exodus of some of our brightest people, who didn’t believe there were sufficient opportunities for growth or rewards for their skills within New Zealand.

For the first time, Kiwis were the largest immigrant group to Australia, with the numbers crossing the Tasman to settle permanently rising almost 5000 to 23,906, in the year till 30 June, a 26 percent increase. In other words there were more New Zealanders than British heading to Australia, the majority of them going to Queensland, followed by New South Wales. The Australian government’s immigration policy favoured skilled people with qualification ranging from nursing to medical specialists and welders.60 New Zealand’s high business and personal tax rates compared to Australia’s rapidly declining toll on incomes was seen as a major incentive for jumping the ditch.

National Party immigration spokesman Lockwood Smith said the biggest worry was that almost 80 percent of those leaving New Zealand were under 40 years of age. “We are losing too many of our best and brightest overseas. Simply covering our net loss to Australia takes all the immigrants New Zealand gets from the top ten sources of migrants combined, including the United Kingdom, the Philippines, and India. Kiwis are voting with their feet … and are making their homes and their futures elsewhere.”61

RELIEF FOR RURAL ROUTES - KIWI SHARE HOLDS FAST All New Zealanders, including those in rural and outlying areas and those termed ‘non-viable’ by Telecom under the Kiwi Share arrangement, were likely to be given a legal right to broadband under proposals put to Cabinet by the end of 2007.

All New Zealanders, including those in rural and outlying areas and those termed ‘non-viable’ by Telecom under the Kiwi Share arrangement, were likely to be given a legal right to broadband under proposals put to Cabinet by the end of 2007.

David Cunliffe said there was still a great deal of disquiet from the rural sector about the state of the network and it was essential farmers had access to the same high-speed, high-capacity broadband available to urban business and residential users.

“Quite clearly there has been a history of under-investment in rural telecommunications and we want to see that turned around. The more I learn, the very much more serious I am coming to believe the problem is.” The government was investigating rural phone and Internet services and a proposal to substantially revamp the TSO, otherwise known as the Kiwi Share, in parallel with its Rural Broadband Strategy aimed at ensuring acceptable access.68

“The cost to Telecom of providing this is cross-subsidised by other members of the industry to the tune of about $20 million net a year. We are going to have to take a very hard look at whether a non-contestable cross-subsidy of that nature fits with the emerging evidence on the level of investment, or lack of it, in rural networks.” Proper incentives were needed for market participants to lift their investment and service levels to rural New Zealand, said Cunliffe.69

BROADBAND KIWI SHARE? The Kiwi Share was first established when Telecom was privatised in 1990, guaranteeing free local calling to all regions at the same cost with no increases beyond normal inflation based on the consumer price index. It was later agreed the arrangement extended to the Internet, with rural customers promised a minimum of 14.4kbit/sec access. Now Cunliffe was looking to clarify whether the TSO should cover rural broadband access. If anything the rules would be tightened rather than relaxed to ensure New Zealanders had access to affordable basic telephone services, he said. “We have no intention of moving away from the basic principle in the Kiwi Share of preserving free local calling for residential telephone users.”70

In February Telecom began talking about recycling the first generation ADSL broadband hardware from exchanges around the country to supply regional areas. It was spending $50 million–$60 million upgrading 120 exchanges in 2007 to deliver faster DSL2+ technology. The old technology would be used to provide broadband to areas where the service was not currently available. However some were less than impressed with the idea. “You would wonder why you would put old gear in,” said Don Nicolson, Federated Farmers’ vice president and telecommunications spokesman. “If it is no longer useful in a built-up area, putting it into a rural area – when technology is changing so quickly – looks like a retrograde step.” He said it would be disappointing if rural New Zealand continued to get second best.71

The Commerce Commission decides annually the cost incurred by Telecom in delivering services to outlying and rural areas. Telecom’s compliance cost for the 2003–2004 year was $63.8 million,72 70 percent of which it had to cover itself. The balance was shared by Vodafone, TelstraClear and other carriers including WorldxChange, CallPlus, Compass Communications, Teamtalk, and Ihug in proportion to their ‘net liable revenues.’ When those bills go out there’s always a backlash, with the various players wondering why they should be subsidising Telecom’s loss-making customers.

For the amount they paid some carriers wanted an opportunity to reach those customers themselves, but that’s not how the TSO is structured, although the findings of the review could well change that. WorldxChange director Paul Clarkin was calling for an end to the TSO. “Its relevance is well past its use-by date, especially when we talk about naked DSL and LLU.” Looking ahead he said it was important the TSO recognised the range of new services, rather than a system where the more new customers a challenger signs up, the more they get penalised. Vodafone commercial development manager Tom Chignell was also ‘extremely concerned’ at the cost increase from the revised draft determination, calling it ‘a tax on competition.’73

Vodafone claimed the current system penalised Telecom’s competitors, took no account of alternative access networks and was potentially limiting investment. If another carrier were to win customers away from Telecom in these non-viable areas, they would be charged more through the TSO subsidy while Telecom’s costs would remain the same and it could claim back more through the TSO. Vodafone head of government relations Roger Ellis wanted to know where these non-viable customers were, so infrastructure providers could make commercial decisions around network build, to potentially accommodate them. This would reduce non-viable customers, which could then be more effectively tackled co-operatively between government and industry. “We’re saying the TSO would roll back to areas where there is no competition,” said Ellis.74

CARRIERS HIT TWICE The Commerce Commission announced its draft TSO determinations for the 2004 to 2006 period on 9 July, stating the net cost to Telecom was $71.4 million between 2004 and 2005, and $78.3 million from 2005 to 2006. Telecom would bear 69 percent while the bulk of the remainder would be carried out by Vodafone and TelstraClear. According to TUANZ’s calculations, Vodafone and TelstraClear would be asked to pay Telecom $66,501 every day to subsidise Telecom’s supply of services to customers that can not be served profitably over its fixed network. TUANZ chief Ernie Newman said carriers were being hit twice under the scheme. “They cannot compete to service these customers because Telecom gets a subsidy and they don’t. Then, to add insult to injury, they have to contribute to the subsidy.” This, he said, stifled innovation and investment in other technologies because fixed lines, and therefore only Telecom, qualified for the subsidy. This was a sign the government needed to speed up its TSO review, which was taking too long.75

Meanwhile Telecom had hinted in August that it would seek to charge higher line rentals outside the main centres if the Commerce Commission pressed ahead with its plan to “de-average” local loop pricing. However David Cunliffe said it wouldn’t be allowed to raise its phone line rentals to small towns and rural areas beyond the rate of inflation. The TSO agreement between Telecom and the Crown prevented this. “Telecom is allowed to charge less than the standard rate in any area if it wishes, but it cannot increase the rates in other areas to compensate.”

Commerce Commission telecommunications director Osmond Borthwick said variations in the LLU price might flow through to different line rental charges, which might leave some room for differences in charging for broadband-only lines or naked DSL in urban and rural areas. That might include the 335,464 homes or 27.2 percent of households that lived outside those areas. After deducting the cost of accessing the local loop from its current line charges, Telecom’s wholesale and retail businesses would be left with a margin of $11.40 that would need to more than cover the cost of providing rural backhaul, equipment to provide free local calls, a basic dial-up Internet service, and marketing and billing costs. There did appear to be some room for Telecom to raise its line rental charge by more than the rate of inflation if it could show the profitability of its fixed-line business “is being or will be unreasonably impaired” by its deal with the Crown, said Borthwick.76

When the government’s discussion document to canvas ways forward for the TSO was finally released in August, one of the recommendations was to make services in the difficult areas contestable. It said about half of the telephone lines in rural areas were broadband capable compared to 98 percent of urban lines. Ernie Newman said the existing system where telecommunications companies contributed to Telecom’s provision of services in those areas made little sense. “It’s bizarre that service providers other than Telecom, who actually have a service available ready to switch on for those same customers, are not only deprived of doing that on a commercially viable basis, but have to subsidise Telecom for its non-viable service.” He cited Vodafone, Kordia and Woosh as having potentially suitable networks.77

The government hoped to improve the chances of widespread broadband when it offered local radio spectrum licences at tender, which could be used for broadband coverage. It made available 75 area spectrum licences during the last quarter of 2007 for wireless access services in the 3.5GHz band. This followed the sale in 2006 of an initial 73 licences, targeted mainly at larger provincial centres and metropolitan areas.

Another issue that would inevitably impact on the rural community was the first ruling of newly appointed Telecommunications Commissioner Ross Patterson, in announcing what came to be known as de-averaged LLU pricing, setting a higher price for access to lines in the rural sector and lower-than-expected prices for urban areas. Telecom’s retail arm and other telcos could access Telecom’s copper phones lines at $16.49 a month in the main centres and $32.20 elsewhere, including rural areas. The question remained whether they would still have to pay Telecom for a share in the cost of extending its network to many of these so-called ‘loss-making’ customers through their Kiwi Share obligation.

Telecom warned, however, the ‘de-averaged’ LLU price mixed with ‘an averaged unbundled price’ would have dire consequences not only for itself but for end users. Telecom Wholesale general manager Matt Crockett said he understood the Commerce Commission’s reasons for doing what it did but it left him feeling “very exposed as a wholesaler.” Overall uncertainty about the TSO outcome and other regulatory decisions on the way could leave Telecom stuck with ‘a very challenging model.’

Price differentiation, Crockett suggested, could mean rural New Zealanders ended up staying with an averaged unbundled bitstream access (UBA or naked DSL) product with little incentive to change. There might also be difficulties and costs involved in marketing different packages to different groups based on location. There was a consensus that broadband in rural areas would stay with UBA, but with a de-averaged LLU price Telecom would ‘bleed money everywhere.’ There was also debate as to what exchanges would be classified as rural and which would come under the urban classification. Telecom hadn’t determined this. The Commerce Commission suggested that alternative technologies such as wireless technologies should increase in popularity and therefore create alternatives for rural access seekers or ISPs.78

Matt Freeman’s blog on the subject quipped, in relation to Telecom’s alleged difficulties about marketing different bundles to different regions, “They seem to have no problem doing this with their retail business in Christchurch and Wellington for residential line rentals, where there is competition from TelstraClear.” Submissions on the TSO were extended by a month with no announcement expected by the government until at least the end of 2008.

ICT REMAINS UNFOCUSED At the end of July 2007 the government announced it would help get ICT-NZ up and running – with a two-year grant from New Zealand Trade and Enterprise – as the body representing the broader interests of the sector.

Economic Development Minister Trevor Mallard said the government had identified ICT as an enabler, “an industry which enables other industries to achieve growth and is likely to have a strong positive impact on the New Zealand economy.”

The announcement had industry commentator Bruce Simpson comparing the group, allegedly representing a $15 billion industry sector, to Theresa Gattung applying for a WINZ113 benefit. “Apparently … ICT-NZ is to get a fistful of taxpayer dollars because it is unable to meet its own operating costs,” Simpson complained on his Aardvark blog. “This is despite levying its members up to $20,000 a year in fees. Something doesn’t quite seem right here.”

However acting chief executive Garth Biggs insisted ICT wasn’t a rich industry and the total turnover figure was misleading. “We’re an industry that consists of between six and 20 large companies and 8000 struggling small ventures – small either because they’re entrepreneurial or because they want to stay small. The ICT industry is “no different from the biotech or organics industries, which have already received funding.”114 While Biggs had no desire for the group to be government funded in the long term, he said, this was the only way to get the ball rolling. “We need to be big and mature enough to look after ourselves, but we need something to build on.”

CHANGING BUSINESS He believed Digital Strategy goals had been too government focused and the vision for the future needed to be opened up and owned by a broader base, to encourage industry to upskill and work smarter and ensure ICT success stories were being heard by the right people.

Many companies were using technology well, some were using it defensively or simply as a tool to run their business rather than for making their businesses smarter. “It’s not just about computerising and making things work faster but how you can change your business. ICT is the best solution we have to our productivity problems. It has been well applied by the banking and airline industries in changing the way they do business and that’s what all industries need to be looking at.”

The way forward was about connecting companies to customers and suppliers in effective ways and about productivity and efficiency gains. The tools were there but more examples were needed to show the business community how investment in ICT could not only transform business but have an impact on the whole country, and on productivity and per capital income.

Biggs, who had held senior IT roles at Air New Zealand and Gen-i, also headed the HiGrowth Project Trust, a government-funded group originally tasked with creating 100 ICT firms with $100 million in annual turnover by 2012. It later dropped this goal as unachievable. Biggs wanted to see greater flexibility and more realistic targets across the sector, for example $500 million or $10 million revenue.

Achieving 10 percent growth in GDP by 2012 remained a prime target as did increasing productivity in local government, particularly where similar solutions could solve common problems and increase overall productivity. HiGrowth had channelled $80,000 of public funds into ICT-NZ, which was roughly matched by the now-defunct ITANZ and the Software Association. Corporate members were asked to pay fees of up to $20,000 a year to join ICT-NZ, which hoped to employ six staff, in Wellington, Auckland, and Christchurch.

CHALLENGING TARGET According to Statistics New Zealand the IT industry, excluding communications, contributed about $7 billion to the New Zealand economy in 2004. However only one percent of companies had annual sales exceeding $15 million and generated approximately 80 percent of the IT industry’s contribution to GDP. The growth needed to reach the proposed 10 percent GDP target would have to come from an increase in the number of companies operating at above $20 million of annual sales, and if achieved would still only bring in $16 billion by 2012.

HiGrowth believed a sound information base was needed to help identify niche market opportunities and trends, and factors that may contribute to success in product development, commercialisation, and exporting. Resources were also needed to enable them to enter and develop offshore markets and build a global presence.115

The August 2007 Business Software Alliance (BSA) global study of IT competitiveness didn’t exactly deliver the kind of results the local ICT sector wanted to hear. New Zealand was ranked 17th out of 64 nations, well behind leaders, the United States and Japan. The BSA, which commissioned the study, identified Australia as being among the best in the world, ranking it fifth out of 64 countries when it came to IT infrastructure and global competitiveness. New Zealand ranked 17th, just behind Germany and Ireland, but ahead of France and Austria.

The scores were based on PC ownership, broadband adoption, government regulation, enrolment in higher education, IT employment, the business environment, research and development spending, and cyber crime laws. New Zealand ranked eighth in the overall business environment category and for human capital116, and ninth for labour productivity, with US$148,384 output per employee. Taiwan led the category with US$386,413 per employee. New Zealand was 13th for government support of the IT sector but fell to 17th place for its legal environment rating, and 19th for research and development and for IT infrastructure.

‘Given the national significance – and enormous cost – of deploying advanced communications networks, government vision and commitment is often required to encourage their spread,’ the report said. ‘National infrastructure initiatives benefit the IT industry, of course, by providing businesses of all sizes with the ability to network easily with suppliers, partners and customers.’117

Meanwhile long-time industry advocate John Blackham was concerned at the number of large ICT organisations who had normally invested in cross-industry initiatives now moving offshore, essentially making New Zealand a branch office of Australia. “There is no longer the cash to cobble together a formal ‘industry’ representation. InternetNZ recently tried to engage with ‘the industry’ to put on a show of all the achievements of our indigenous ICT people at the Beehive but no one wanted to collaborate,” he said.

Blackham said it was ironic that ICT was driving productivity forward all around the world with the exception of New Zealand, where our productivity was actually falling. “It was a national disgrace that not one dollar went into the ICT vote last year and the same will probably be true of the upcoming budget round.”

At the APEC summit he ran into Chinese representative Jack Ma, founder of Alibaba, the world’s largest B2B Internet company, with 16 million companies trading. “His vision for ICT in China is for the Internet to drive productivity, completely