Competition crumbles under call charges

By Richard Braddell

Between the lines

Shell-shocked by Telecom's latest assault, some 30 of the country's Internet service providers and telecommunications companies took solace in each others' company in Auckland on Tuesday.

The meeting, "facilitated" by Clear Communications, was called to consider Telecom's radical changes to its terms for connecting calls to Internet providers. Their mood was one of fear and anger.

While they are distracted by the effort of switching their customers to Telecom's new 0867 access code, Telecom is hitting the market with a flat rate charging plan. But that's the least of their worries.

With few exceptions, most are dependent on Telecom for the so-called "last mile" connection to their customers. Thus, Telecom's move to start charging for local Internet connections looks like the blunt end of Telecom's efforts to reshape the Internet market. In the process, Telecom will reinforce its position as the de facto regulator and arbiter of its competitors' fortunes.

By directing the market to the new 0867 access code, it will retain control of Internet traffic, giving it the final say on service standards and quality. And for how long will Telecom offer the 0867 service free of charge?

Once the ISPs and their customers have bowed to the "economic incentive" of switching to 0867 to avoid Telecom's new charge on local Internet connections, any pretence of the Kiwi share principle of free local calls will go because 0867 connections can be regarded as national calls.

By all accounts, Tuesday's meeting produced little in the way of a plan for fighting back despite the high stakes. If, for example, Telecom started time-based charges for the 0867 numbers, ISPs would be forced to foot a bill not faced by Telecom's own Internet service, Xtra.

Competitors could end up losing money if those per-minute connection charges start to exceed the flat rate subscriber plans which are now the vogue. At that point, flourishing competition could face a threat similar to that in the long distance call market where plunging profits margins are rapidly being soaked up by interconnection charges.

There may still be potential for competition if third parties sell Telecom's Internet services. But the outlook is far from encouraging, particularly since Telecom's willingness to price retail services below the wholesale rates it offers competing carriers is a key factor behind the re-billing dispute with Telstra currently being considered by the High Court.

All in all, Telecom's latest moves will give it undue influence over the Internet, thus impairing competition in the fastest-growing area in telecommunications.

Now is the time for robust examination of the issues by the Government. If ground rules are not set at this early stage of the market's life, draconian measures will be needed later to enforce competition. That is exactly the lesson the electricity industry is paying for now.