Broadband Warriors: Taming the beast

Grant Forsyth

Grant Forsyth
Ex-TelstraClear

Picture a mosquito - colossal head, immense thorax and bloated abdomen - so big it stretches from Bluff to Cape Reinga.

The mosquito is sucking blood - from millions of people who are resigned to giving up their blood because in return they get something everybody wants - a telephone.

There are signs, however, that the situation we take for granted - that Telecom is the telecommunications market - may be about to change. But bringing such a creation to heel is easier said than done. Which is why the Government is considering something more severe than simply unbundling the local loop (Telecom's residential wires) to competition. It's called operational separation - disconnecting the mosquito from its feeding tube and then reconnecting it along with competing mosquitoes, so they can all suck on an equal footing.

The separation surgery was recently performed on British Telecom and on Australia's telecommunications company Telstra. And it's one of the options for Communications Minister David Cunliffe's "stocktake" of telecommunications regulation .

Grant Forsyth has been on the frontline of telecommunications regulation for more than a decade. The former manager of industry and regulatory affairs for TelstraClear who before that seven-year stint headed telecommunications users' lobby group TUANZ for five years, is about to take up a new role at British Telecom (BT) Global Services.

Forsyth is at pains to point out that operational separation is not Telecom-bashing.

"Often people say to me, 'You must hate Telecom'. I don't hate Telecom and the issues which I've sought to address in my jobs are not 'anti-Telecom'. It is about enabling the market to operate in a competitive-like manner."

Forsyth has no doubt what New Zealand needs. "Basically, the Government has to draw up legislation. The running of the [telecommunications] network has to be put into either a division or into a separate company."

The separate entity would still be owned by the Telecom group, but would have its own board and transparent financial reporting requirements. More importantly, says Forsysth, the wholesale company or division would provide transparent transaction charges - so that whatever it charged Telecom's retail arm to use the network would be the same as what it charged other competitors.

Isn't this all a little extreme? "Why?" asks Forsyth pointing to a growing awareness about the need to uncork competition. "I think there is a much greater realisation that customer access to the copper [phone line] network is an enduring bottleneck."

In February Prime Minister Helen Clark told Parliament: "It's become very clear that new initiatives are needed to get faster internet access and at more competitive prices."

Then TV3's John Campbell tackled Telecom chief executive Theresa Gattung. "They say you guys are anti-competitive and you still enjoy the fruits of an antiquated monopoly, particularly in terms of your control of the local loop."

TVNZ's Sunday programme chimed in, showing just how bad our connection speeds are - 12 times slower than Australia's.

Clark complained that "upload speeds" were too slow. Campbell grilled Gattung on Telecom's appalling "contention rates" and "download caps". And Sunday's John Hudson discussed how a one-gigabyte file took just three minutes to download in Australia, compared with more than an hour here.

But although many are now clamouring for competition to deliver faster, cheaper broadband, Telecom's friends in high places are singing a different song. In February Phil O'Reilly, chief executive of Business New Zealand, said its survey (later shown to be using out-of-date data) showed Telecom's recently announced broadband packages were among the best priced in the world.

In March, Michael Barnett from the Auckland Chamber of Commerce told TV One's ASB Business that its latest confidence survey showed issues such as tax, skills, compliance costs, the resource management act, interest rates, and roading were much more important to businesses than broadband uptake. And transtasman sharebroker Macquarie Equities circulated a report titled "Lies and damn lies", disputing the widespread criticism of Telecom's broadband performance and pricing. Interestingly, Macquarie also noted that Telecom had "lost the media battle".

Forsyth sighs. He's well versed in Telecom's far-reaching influence. "They are very practised at shaping peoples' thinking." But he's also puzzled. "Why is Phil O'Reilly championing Telecom's cause? I would have thought his business members' interests would have been best met through improving the competitive environment and enabling his members to receive greater choice and greater values rather than seeming to wish to enshrine Telecom's market power."

Forsyth points to other examples of Telecom's sway - the now infamous letter written by Gattung to the then communications minister Paul Swain, in May 2004, warning that if the Government freed up residential phone wires to competition (unbundling - see box), Telecom's share price would fall by 30c - to the detriment of the health of the sharemarket. (Telecom's shares make up more than 20 per cent of the market.) Gattung pointed out that a fall in Telecom's share price would in turn affect the Government superannuation fund which is invested in Telecom. Shortly afterwards the Government decided not to unbundle.

Forsyth is mystified too by telecommunications commissioner Douglas Webb's 227-page report which recommended against unbundling despite presenting a cogent argument to do the opposite. "I have never been able to reconcile the conclusion with the analysis."

Then there's the support Telecom gets from the farming sector groups - despite providing a bare minimum service to rural areas as required by the Government and subsidised to the tune of about $12.5 million a year by Telecom's competitors.

"Somehow Telecom has managed to convince some people in the rural sector that they service those areas because they are somehow noble and do it out of some sort kindness. It's absolute rubbish. They only do it because the Government requires them to do it and now the industry funds them to do it."

But Forsyth also sees what Telecom does as thoroughly logical. "Telecom's core objective is shareholder value. It is not social welfare." In his view Telecom is a classic example of a monopolist at work - constraining investment, managing and constraining services and maximising value. "In the absence of competition they entirely dictate when the country gets a particular service, how that service is rolled out and what's charged for that service. They set all those things."

The way Telecom is able to do things in its own sweet time was vividly illustrated when Gattung told Sunday how Telecom was delaying the introduction of super cheap voice calls over the internet.

"Voice-over - internet protocol is a fact of life," said Gattung. "The way we're dealing with that, the voice trials that we've done for our next generation network, is to look at what sort of services might New Zealand buy that will allow us to deal with the fact that we are going to lose revenue in other areas." Which makes perfect business sense - protecting a monopoly is a far more cost-effective activity than giving it up and competing for customers.

"It's entirely rational for Telecom to fight long and hard to retain their market power," says Forsyth. As he points out the company has significantly better resources than any competitor and the Government.

While Telecom's relentless lobbying may be one reason the Government has been so wimpy about reining in Telecom's rampant monopolist behaviour, government ideology also plays a part. Forsyth says there has long been "an inherent reluctance" in government policy and among officials to intervene in the telecommunications market. He believes it stems from an economic view in Treasury that monopolies should be tolerated: if you leave monopolies be, they create a desirable target in the market that other competitors will alight upon. But in network industries the monopoly often casts such a large shadow that competitors have nowhere to alight.

A successful monopoly can't help but extract monopoly rents - above-normal profits, not from cost savings or innovation, but from the captive market. "There is an economic argument that Telecom needs to gather super profits in order to make investments for the future. I reject that. What drives companies to invest is competition. Left unchecked a monopoly will minimise its investments."

To some extent, Forsyth says, the "damaging" thinking can be laid at the doorstep of Rogernomics and the lighthanded regulatory approach it spawned. But there's also a natural abhorrence of regulation in the business community. "Most business people see regulation as an imposition - as a cost or compliance. Because most businesses are not monopolists, don't have market power and aren't required to comply with competition-enabling regulation, they don't make that jump. They just see all regulation as bad."

Forsyth rejects the argument that regulation forcing Telecom to provide competitors access to its raw copper wires is an unfair constraint on the company's property rights. "The only right being constrained," says Forsyth, "is Telecom's right to extract a monopoly rents" - an exploitation of New Zealanders he believes the Government has good reason to constrain.