Mobile firms still face a hard cell

Tex Edwards

Tex Edwards could be described as a zealot.

In fact, the 42-year-old former banker dubs himself and his African employer, Econet, "freedom fighters for the New Zealand consumer". Econet sees becoming New Zealand's next mobile phone operator as a cause, not just a business plan.

Thirty per cent owned by the Maori Hautaki Trust and 70 per cent owned by Johannesburg-based Econet Wireless, the company has certainly styled its five-year battle to enter the $2 billion a year New Zealand mobile market as a crusade of David and Goliath proportions.

"We are a virus," the Auckland-born Edwards says. "There is a whole team of people behind the rough-and-ready Tex, all ready to behave like Kiwis once the competition rules are aligned with OECD best practice."

Econet is now waiting for what the evangelical Edwards calls the "road rules" before it proceeds with its 10-cellsite pilot project in Auckland, which was due to be up and running three months ago. The company has spent $32 million to date, has allocated another $45 million and has $80 million in reserve. It has 20 staff in New Zealand, including representatives of Chinese company Huawei Technologies, which is supplying equipment. Edwards says the Commerce Commission's decision in May to examine the reasons for the lack of new entrants into the local mobile phone market as a prelude to deciding whether regulation is needed has been a turning point. "Because obviously we've got hundreds of millions of dollars of investment at stake - what are the road rules, Mr Regulator?

"We've seen rational, logical policy that's encouraged investment on the broadband side of things. It's logical that the same conclusions will be arrived at in the mobile industry."

Edwards' mantra is that there are huge barriers to entry for a new mobile phone entrant, due to a serious lack of regulation. He says New Zealanders accept there are rules on the road and the rugby field, and yet they're prepared to tolerate abusive behaviour in network industries. "You don't have to be a brain surgeon or a telecommunications analyst to know that something went wrong in New Zealand when we didn't get number portability, unbundling, and three or four mobile operators 10 years ago."

Econet Wireless has networks in Zimbabwe, Morocco, Lesotho and Nigeria. Here, it's in partnership with a Maori Trust. Are these sound places and people to be doing business? Well, through a Treaty of Waitangi settlement, the iwi has the necessary piece of third-generation spectrum for setting up a mobile network. And as industrialised nations reach over 90 per cent penetration of mobile phones, the developing world is the place to be.

"If you really want to make money in mobile, you have to be in Africa and Latin America, because that's where the big growth is," says telecommunications analyst Paul Budde.

Edwards says the principal of Econet Wireless, Strive Masiyiwa, is "a highly ethical, spiritual man who's a great guy to work for". He says African telecommunications has boomed in the past five years because the cost of implementing networks has collapsed. "Arguably Africa is way ahead of New Zealand. Econet suggested that the Ministry of Economic Development visit the Congo, because there they have five networks operating in the same technology, which means the spectrum needs to be managed very definitely."

Edwards says it's this lack of same technology competition - "petrol engine competing against petrol engine" - which has held prices up in New Zealand. He points out that Ireland has four mobile phone operators and one on the way, and no other OECD city the size of Auckland has only one GSM network. Econet's platform will be W-CDMA - third generation GSM technology and the same as Vodafone's. Edwards says Econet's challenge is to build a network, not to be a retailer or reseller.

"Own-network competition is what creates the consumer outcome."

Budde says the trouble with Econet is how long it has taken to do anything in New Zealand. But he says the anti-competitive environment here has a lot to answer for. "When you get third and fourth players in a market, that's when you really see competition. Telecom and Vodafone will do anything to avoid that."

A recent Deutsche Bank report estimated a new entrant into the New Zealand mobile phone market could cost Telecom up to $590 million dollars a year in lost earnings.

Budde says the regulator now needs to "wield a big stick" and facilitate competiton. He says with the new wind blowing in New Zealand following the unbundling decision, the Government may be getting more serious about it.

"If the [Commerce Commission] review results in that stick, then we're on the right track."

The Commerce Commission says it plans to have the mobile review completed by the end of August.

Clearly, Econet is not the only player vying to be New Zealand's next mobile network operator. It's long been the aim of TelstraClear, and 10 days ago the company gave the government a strong message when it announced it's investing $50 million dollars in a third generation network in Tauranga to offer local customers a phone, mobile and broadband product from next July. Communications manager Matthew Bolland says the company has been putting business cases to its shareholder Australian Telstra for years, including one for a mobile network which was knocked back 18 months ago. He says Telstra liked the business ideas but not New Zealand's closed market. Bolland says the unbundling announcement has changed all that. "It's been a tipping point in terms of helping make good business cases get over the line."

But TelstraClear also wants certainty out of the Commerce Commission about how to proceed. One of the significant barriers to entry to the market cited by the would-be players and consumer groups is the ability to rent space on competitors' cell towers, or co-location, as it's known. New entrants say it would be prohibitively expensive and a visual pollutant to build an entirely new set of towers across the country.

Edwards says a hillside in Pokeno where Telecom, Vodafone and South Auckland broadband carrier Wired Country all have their own towers illustrates the point. Industry group the Telecommunications Carriers Forum has just taken three years to come up with a co-location code which still hasn't been implemented.

Ironically, Vodafone general manager of commercial development Tom Chignell identifies co-location as one of several key supports that tilt the playing field in favour of new entrants. He says while an established player such as Vodafone has had to expend a lot of resources in setting up 1400 cell sites, a new player can simply come along and request co-location. "It's a huge leg-up."

But at what price? This is the problem with the existing regulatory environment, says Edwards in rather strong terms and Bolland more politely - it doesn't specify the detail of how pricing and terms will work in such things as co-location and roaming agreements. "What we've found in the industry generally is a lot of the time you might be able to get something, but the price and terms are so prohibitive that you just don't bother," Bolland says.

"It means you can't get it to your customers, and therefore you have a competition problem."

Roaming agreements is one of the other planks that Chignell says gives new entrants a helping hand. Existing rules say if a new player builds a network covering 10 per cent of the country, it has the right to offer customers national roaming via a larger competitor's network. "National roaming says if you build a small bit of network you can sell a national service and see if it works, and if it works you can build more and roam less," Chignell says.

No one's ever applied to use the provision. Part of the problem is that what constitutes 10 per cent has never been defined - whether 10 per cent of the nation's geography as a whole, or 10 per cent of where people live and work. Would-be new entrants ask why they would go to the trouble of building a network covering 10 per cent of the country when they have no guarantee of an economic agreement.

Another sticking point is providers charging customers differently, depending on their situation. For example, Vodafone charges its customers less to call other Vodafone customers than it does to phone Telecom users. Would-be entrants want the practice prohibited.

It seems clear there isn't going to be a national rollout of a new mobile phone network until these and other issues are resolved, and it remains to be seen whether the Commerce Commission review will produce a result as radical as the unbundling decision.

"I'm absolutely convinced that the telecommunications saga in New Zealand will be written up in 10 years' time in economic theory like a big disaster," Edwards says.