Adam Gifford: Decision time in mobile market

Two-thirds of mobile customers pay some of the highest rates in the OECD. Photo / Supplied

It's crunch time for the mobile phone market.

Will the Government step in and create a competitive environment that benefits New Zealand customers and businesses, or will it continue to let giant foreign-owned companies set the rules that allow them to gouge the economy?

With the release this week of the Commerce Commission's report on mobile termination access services, Communications Minister Stephen Joyce has three options before him.

He can leave things as they are, which is pretty much a non-starter.

He can follow the recommendation of telecommunications commissioner Ross Patterson and accept the undertakings made by Vodafone and Telecom, which will lead to a gradual reduction in prices over the next five years.

Or he can take his lead from the minority view of commissioner Annette Mazzoleni, who argues regulation is necessary to promote competition.

At stake is not only new entrant 2Degrees, which has spent 10 years and more than $250 million trying to enter the market, but foreign investment in general.

Patterson spent much of last year trying to get Vodafone and Telecom to improve their voluntary undertakings on mobile termination rates, the amount they charge others to connect with their networks.

He has now concluded that even though the rates offered still exceed the companies' costs more than the commission would like, they are close enough to what they charge their own customers to allow new entrants to compete.

What has become the commission's main concern, and quite rightly so, is how on-net pricing has distorted the New Zealand market.

In some countries on-net pricing is illegal. Here it has become the incumbents' main marketing strategy. When users pay almost nothing to text someone on the same network, and far far more to text to a competing network, is it any wonder that more than 80 per cent of mobile to mobile voice traffic and more than 90 per cent of texts are on-net?

Mazzoleni doesn't believe the problem will be fixed by letting the two major telcos set the rules.

She says there will continue to be a barrier to competition in both the mobile to mobile and fixed landline to mobile markets as long as mobile termination rates stay too far above the total service long run incremental cost, which is the tool the commission uses to assess price gouging.

The result of this lack of competition is that two-thirds of mobile customers pay some of the highest rates in the OECD.

It's tough to compete when the wholesale rate you pay to connect your fixed or mobile customers to a network exceeds the retail price being paid by the majority of mobile traffic on that network.

The commission has recommended regulation before, and been overruled by the politicians preferring to take the reductions Vodafone and Telecom were offering.

That may have tempered Dr Patterson's approach this time, or he may have been caught out by the need for caution in making recommendations that can have a very real impact on revenues and share prices.

Mazzoleni is having none of it. She says if Patterson's assumptions about what the large network operators will do are wrong, especially when it comes to dropping their on-net pricing, then small operators still can't compete, and the commission will need to look at regulation all over again.

"Given the commission has been concerned about competition issues in this market since 2004, it is unacceptable to not now correct this issue once and for all," she says.

That means matching mobile termination rates to the total service long run incremental cost, which will allow network operators to get back their capital, while giving them close to a level playing field to compete for customers.

The release this month of information from Telecom and 2Degrees can serve to illustrate the extent of the problem, even if there are important figures they don't reveal.

Telecom's problems with XT stem in part from its failure to create a proper mobile phone business.

But since its real money comes from elsewhere in the business, it's not bothered as much as it should be.

2Degrees marked its six month anniversary of going live to tell us that it had 206,000 active customers.

While this might be cause for celebration, it's meaningless, given the privately held company isn't releasing financial data.

What we want to know is how those customers are helping pay off the $250 million the company spent building out its network to Auckland, Wellington and Christchurch.

If a 2Degrees customer in Auckland calls another 022 number in those cities, kaching. If they ring anyone else, another company clips the ticket. Travel outside Auckland and make the call, and Vodafone gets an extra clip for roaming access. Send a text and 2Degrees pays someone else to deliver it.

We will know competition has arrived when the competitors start worrying, and for now, they're not.

They haven't responded directly to a prepay phone rate half what they're offering. Why should they? Most of their customers aren't paying that billboard rate most of the time, because they're using various on-net deals.

Their main response has been to spend some of their war chests adding new phones and other goodies for customers to switch from prepay to post-pay deals on multi-year contracts. Expect to see the percentage of overall users on prepay dropping.

If this game continues, customers will continue paying more than they need, and other foreign investors will get the message: don't come to New Zealand, there is no competition.

adamgifford5@gmail.com