Cloud cover continues

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 Telecoms 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 Telecoms 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 wasnt 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 governments 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 theres 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 Telecoms 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. Telecoms had nearly two years where theyve known this has to happen I think everyones 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 were not really making any money on broadband, and in some cases were 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 doesnt 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 its 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 Telecoms 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 Telecoms 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 didnt 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 wasnt 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 were already playing catch-up with the rest of the world on. Telecoms 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. Vodafones Tom Chignell said number portability was a key part of its attack on Telecoms voice market. It would allow Telecom customers to keep their fixed-lined home and business numbers if they moved to Vodafones 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 Telecoms 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 didnt 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 governments 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 Zealands 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 werent 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 governments 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 its 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 wouldnt 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.[20] 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 wasnt a future-proof solution as it didnt 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 Telecoms retail model to compete and innovate. He said Telecom would not be able to invest adequately in fibre networks under the governments proposal because of the costs of separation.[21]

Bogoievski told the Sunday Star Times he thought the government and the industry were staring at quite a high profile policy failure if we dont 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 Telecoms 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 governments plan for operational separation was adopted.[22]

InternetNZs executive director Keith Davidson wasnt 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. Theyve horribly under-invested in New Zealand infrastructure so in separating out the network company, where the entire focus is on the infrastructural layer, they cant help but look at the long-term view and I think theyll 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 governments 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 Telecoms 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.[23] Telecom was still looking for certainty on whether its pricing met the Commissions requirements. Meanwhile phone and Internet companies, frustrated at the delays, were lobbying the Commission to get a move on with the rules for unbundling.

InternetNZs Davidson remained concerned but could understand the caution. This is New Zealands largest company and you know it needs to be handled with some care so the sharemarket doesnt 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 Telecoms 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 Telecoms approach unworkable and unacceptable. In its submission ISPANZ said Telecoms proposal had the potential to stall other telecommunications reform, and that LLU and naked DSL were top priorities. ISPANZ, representing the majority of Telecoms ISP customers, believed the MED should ditch Telecoms 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 hadnt 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 Telecoms proposal could take more than 12 months to enact. On top of that, Telecoms 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.[24]

InternetNZ lodged a further submission in mid-May, arguing that Telecoms proposal didnt provide a basis for further consideration. Telecoms submission didnt provide evidence for why the governments 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.[25]

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 Telecoms exchanges by mid-year, although the hype about major roll-outs had been tempered during the long wait for action.

Telecoms 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.[26] 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.

Telecoms 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 dont 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.[27]

Freeth sided with Telecom over the desire for more regulatory certainty before investing in broadband infrastructure. Telecoms 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 isnt a debate about being an incumbent or a challenger. Its 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.[28]

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 Telecoms 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.[29]

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 Telecoms 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.[30]

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.[31]

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 Telecoms approach had potential to better meet the aims and objectives of the Telecommunications Act.[32]

Then the announcements came free and fast. Cunliffe was in fact still debating the preferred mode of separation, Telecoms 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.[33]

Investment failure fingered

Plans for huge, multi-billion dollar investments to revolutionise Australias Internet infrastructurewere made by both major parties ahead of the 2007 elections which ushered in a new government. John Howards Liberal-National coalition was ousted by Kevin Rudds Labour Party in November, which promised a 21st-century high-speed broadband infrastructure and even appointed a minister for broadband. New Zealands 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.[34] 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 Hubbard[35] 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 its 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 wasnt deterred by that explanation with comments such as Its unacceptable and Do it now, echoing around the school hall.[36]

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 worlds 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.[37]

New Zealands telecommunications investment as a percentage of the industrys 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. Telecoms annual reports, however, showed capital expenditure had fallen from $1.5 billion in 2001.

TelstraClears 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 youve got a competitor that can block you … [when] we dont 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. Vodafones 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. Weve always invested heavily in the mobile sector and now well 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 20072008 year.[38]

Telecoms 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.[39]

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 Telecoms 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 youll start to see uniformity of experience and thatll 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 wont 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. Its 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. Weve 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 youre always going to see geographical distortion. LLU competitors are not going to put DSLAMs in Gore, theyll 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. Its always going to be a challenge to write a business case for remote New Zealand when youve 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,[40] 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 Canterburys 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.[41]

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. Thats 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 dont think wed get away with it, wed 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 WorldxChanges 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.[42]

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 Xtras retail pricing. They withdrew their action in December after it agreed to review its methodology.

The Commerce Commissions 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 Commissions 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.[43] CallPlus chief executive Martin Wylie said, It is a little disappointing, but any savings help when you are in a price squeeze.[44]

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.[45]

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. Ihugs 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 companys 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. Its 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.[46]

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. Ihugs Rushworth said it reminded him of getting the keys to his dads Cortina when he was 16. That was a big occasion Its the same kind of situation here in a sense a significant milestone. What were excited about is we can control the end-to-end service and thats 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.[47]

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 Vodafones network, in February. But some of the money would help finance the construction of Kordias digital terrestrial television network and an overdue upgrade of its management information systems.[48]

Among the rush of press releases, in the clamour to be first to LLU, was one from TelstraClear, smugly entitled Please be careful were 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.[49]

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 IPbased 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.[50]

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 wasnt quick enough for the eager new entrants. In submissions on the draft unbundling determination Ihug had asking for 2530 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 didnt have access ready within the required 20-day period, or if it failed to roll out the minimum 15 per quarter.[51]

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 didnt 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.[52]

Then came more of the devilish details the industry had been warned about. After all the hoopla Orcon announced it wouldnt 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 didnt 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. Were not going to market with a handful of connections … whats 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.[53] 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 governments 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 arms-length wholesale units and business units that might include retail. After Telecoms 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.[54]

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 Telecoms overall performance, and remuneration within the wholesale unit, for example, must not compromise any direct or indirect incentives linked to Telecoms overall performance. The network unit would have to have a different brand to Telecom and would not be allowed to appear with Telecoms brand. If Telecom failed to comply with the governments 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.[55]

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.[56] Now, Mark Ratcliffe, Telecoms 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 Telecoms delivery of new regulated broadband services, and our meeting of the required milestones for operational separation, present real physical challenges. He reiterated[57] 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.[58] 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.[59] In announcing Telecoms 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.[60]

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 Telecoms 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 Telecoms 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 Telecoms 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 Cunliffes determination was good for customers, its good for New Zealanders and for Telecom and thats because for customers it paves the way for choice … I think it sets a clear framework for firms to invest thats Telecom and other service providers in the market and its 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 hadnt yet been fully exploited. Theres 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.[61]

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. Theres a lot of fears around the process but what we found was that all three parts of the business began to grow, said Reynolds.[62]

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 Telecoms brand had received lasting and significant damage. President Suzanne Chetwin said the companys 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.[63]

A PricewaterhouseCoopers report[64] 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.[65]

Within two days of the report a scheduled weekly switch over from mains supply to back-up supply at Telecoms 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 nations ISPs for about an hour.[66] Aucklands 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.[67]

The day after the crash the Consumers Institute released the results of its annual ISP satisfaction survey revealing Telecoms 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 Xtras merger with Yahoo! wreaked havoc with its new Bubble email service. Overall Xtras 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 theyre getting a rough deal. And compared with overseas, theres 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 its time that the public started hearing from the engineers and people who can give an explanation about whats 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 Telecoms technical equipment falling over. If a phone company in 2007 cant run a reliable ISP that doesnt go off the air with extreme regularity, then theres something fundamentally wrong.[68]

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 thats 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.[69] ISPs eager to deliver on the pervasive broadband challenge were not only encountering resistance from their old nemesis but the governments 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 governments 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 Telecoms cabinets.[70]

Within three weeks Telecoms 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 Commissions 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.

Orcons Bartlett believed Telecom had deliberately pulled the wool over the governments 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.[71] 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 Telecoms 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 Telecoms 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 didnt 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 didnt 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.[72]

If it wasnt 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[73] and helped make a mockery of the governments goal to streamline broadband roll-out. In tandem with Telecoms 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.


[1] Colin Beardon, Computer Culture, the information revolution in New Zealand, Reed Methuen, 1985 p25

[2] Ernie Newman, chief executive, TUANZ, address to Telecommunications Summit, Auckland, 25 June 2007

[3] David Cunliffe address to 8th Annual Telecommunications and ICT Summit: Fast-forward to the Broadband future, 25 June 2007

[4] Vivienne Smith, Reining in the Dinosaur - the remarkable turnaround of New Zealand Post, New Zealand Post, 1997 pp4546

[5] Tim Hunter, Split Telecom twice as nice for the market, Sunday Star Times, 18 March 2007

[6] Telecom 2006 annual report

[7] Helen Twose, Regulation now a smaller barrier, NZ Herald, 3 August 2007

[8] Matt Freeman, ISPs rot as time ticks, The Line, 26 February 2007

[9] Telecom press release: Adjustment to monthly phone charges, 15 January 2007

[10] Telecom rental raise condemned, Christchurch Press, 17 January 2007

[11] Matt Freeman, Industry split on NDSL and LLU, The Line, 21 February 2007

[12] Tom Pullar-Strecker, Unbundle, then invest Tuanz, Dominion Post, 5 February 2007

[13] Jenny Keown, Numbers game no fun for Telecom, NZ Herald, 19 February 2007

[14] Geoff Bascand, Government Statistician, August 2007

[15] InternetNZ, press release, 7 March 2007

[16] Paul Easton, Cost of NZ phones among worst in the world, Dominion Post, 19 March 2007

[17] InternetNZ media release: Room for improvement in OECD ranking, 6 November 2007

[18] Paul Clearwater, NZ moves up in OECD broadband stats, The Line, 6 November 2007

[19] InternetNZ media release: Room for improvement in OECD ranking, 6 November 2007

[20] Jenny Keown, Ministers plan spells it out on Telecom split, NZ Herald, 7 April 2007

[21] Jenny Keown, Telecom pleads for industry backing, NZ Herald, 14 April 2007

[22] Tim Hunter, Telecom strikes back, Sunday Star Times, 29 April 2007

[23] Sue Allen, Telecom looks at deal for network, Dominion Post, 26 March 2007

[24] Paul Clearwater, Telecom stranded by industry comments on structural separation, The Line, 16 May 2007

[25] InternetNZ addresses Telecom proposal, The Browser, InternetNZ, May 2007

[26] Creative licence with comments form Orcon general manager of operations Scott Bartlett

[27] Helen Twose, Its coming together nicely, NZ Herald, 5 May 2007

[28] Paul Clearwater, TelstraClear sides with Telecom on investment issue, The Line, 14 May 2007

[29] James Weir, Broadband needs state assistance Gattung, Dominion Post, 1 June 2007

[30] Paul Clearwater, Telecom reveals plans for LLU and co-location roll-out, The Line, 13 June 2007

[31] Simon Hendery, Unbundling at a snails pace, NZ Herald, 21 June 2007

[32] Paul Clearwater, Cunliffe softens stance on structural separation, The Line, 5 July 2007

[33] Helen Twose, Customers to get naked in September, NZ Herald, July 12 2007

[34] Rob ONeill, Broadband bidding war not on cards for NZ, says Key, Computerworld, 30 July 2007

[35] Three months later Hubbard lost the 2007 Auckland mayoralty election to John Banks

[36] Alanah May Eriksen, I accuse you: Mayor scolds Telecom over net blackspot, NZ Herald, 26 July 2007

[37] Rob ONeill, Telecom rejects TUANZ claim of gross lack of investment, Computerworld, 18 July 2007

[38] Peter Griffin and Helen Twose, NZs wealthy telcos stingy on investment, NZ Herald, 19 July 2007

[39] Matt Freeman, Telecom PSTN migration to next-gen to be one of first in the world, The Line, 2 July 2007

[40] Very high speed digital subscriber line

[41] Ken Lewis, TelstraClear wins exclusive rights to Pegasus Town, The Line, 27 March 2007

[42] Paul Clearwater, WorldxChange to run services over Telecom fibre network, The Line, 29 November 2007

[43] Paul Clearwater, New bitstream access price met by disappointment, The Line, 11 July 2007

[44] ISPs disappointed by access fee fall, Dominion Post, 12 July 2007

[45] InternetNZ, press release, 31 July 2007

[46] Helen Twose, Access price pleases Telecom rivals, NZ Herald, 1 August 2007

[47] Helen Twose, Telecoms great unbundling exercise finally gets under way, NZ Herald, 10 August 2007

[48] Tom Pullar-Strecker, Kordia to borrow an extra $38m for broadband push, Dominion Post, 15 October 2007

[49] Rob ONeill, Unseemly rush to claim unbundling firsts, Computerworld, 11 August 2007

[50] Tom Pullar-Strecker, Aging gear may cause more phone failures, Dominion Post, 4 September 2007

[51] Jon Hoyle, Telcos seeking faster access, Dominion Post, 4 September 2007

[52] Jon Hoyle, Telecom under pressure over timetable, Dominion Post, 24 September 2007

[53] Paul Clearwater, Orcons VoIP delay a mayday?, The Line, 28 September 2007

[54] Media release: InternetNZ welcomes Operational Separation Determination, 26 September 2007

[55] Paul Clearwater, Operational separation: the regulation ride nears its end, The Line, 26 September 2007

[56] Tom Pullar-Strecker, Telecom prepares to sell phone network, Dominion Post, 26 September 2007

[57] First stated on 3 August when Telecoms 2006/07 result was published

[58] Telecom press release: Response to determination on operational separation, 26 September 2007

[59] Helen Twose, Telecom okay with three-way division, NZ Herald, 27 September 2007

[60] Telecom financial results, 3 August 2007

[61] Helen Twose, We wont sell network, says Reynolds, NZ Herald, 5 October 2007

[62] Helen Twose, Been there, done that, its OK, NZ Herald, 6 October 2007

[63] Jon Hoyle, Telecom bosss first job is repairs, Dominion Post, 2 October 2007

[64] Behind the Walls & Inside the Minds of Kiwi Companies, compiled in collaboration with the EMA (formerly the Northern Employers and Manufacturers Association) and the University of Auckland

[65] Stephen Bell, Telecoms costs and continuity worry Kiwi companies, Computerworld, 2 November 2007

[66] Paul Clearwater, Telecom power shortage questioned, The Line, 5 November 2007

[67] Stephen Bell, Database changes behind emergency response failure, Computerworld, 21 November 2007

[68] John Hartevelt, Telecom customers unhappy, The Press, 6 November 2007

[69] InternetNZ press release: Local Loop Prices Disappoint, 7 November 2007

[70] Orcon media release: UCLL determination puts big question mark around investment, 7 November 2007

[71] Paul Clearwater, Competitors bowled over by Telecoms cabinetisaton plans, The Line, 21 November 2007

[72] BuddeCom press release: Progress at the expense of competition 22 November 2007