Net lesson: upset the big guys and hurt

By Richard Braddell

Between the lines


The biggest challenge to telephone companies can be summed up in one word: internet. Its wildfire growth is confronting telcos with critical decisions on how they invest, the services they provide, how they relate to other providers and how they are ever going to make any money out of it.

Such factors lie behind Telecom's surprise move last month to unilaterally impose a new internet pricing and interconnection regime between itself, other carriers and internet service providers.

Apart from howls of outrage at what has been interpreted as a monopolist flexing its market power, a coherent response has yet to emerge from a fragmented industry which is only too aware that litigation will be slow and expensive and support from regulatory quarters unlikely.

Whatever, the fact remains that Telecom is endeavouring to address issues troubling telcos around the world. They know that their future lies in the seamless integration of traditional voice with data using IP, or internet protocol, as the packet-switching technology that underpins the internet is known.

But doing that is not easy. Voice over internet is still very much an aspiration, as the technology that will do the job effectively is still a year or two away. And then telcos will be spending money when the return on investment is not that obvious.

The problem with the internet is exactly the same one that has made it so popular: for the most part it is free or near-free. Admittedly, internet users pay providers such as Ihug, Clearnet or Xtra (increasingly modest sums) to get connected. But under the system of free local calling prevailing in New Zealand and many other countries, there is no way for the telephone company to recover the cost of providing the connection.

As yet, Telecom's proposal will not bring in extra money from internet users as long as they behave "rationally" and migrate to its new 0867 national access number. But it lays the ground for charging and if the 2c a minute local charge was applied uniformly to all connections, carrier charges would be as costly to consumers as provider charges - unless of course, the user is with Telecom's own Xtra.

Such an outcome points to internet providers increasingly being owned by local access providers who service customers solely on their networks.

Indeed, the internet can do wonders for a new entrant telephone company in driving up customer numbers. A small local telephone company in Britain turned a flagging business into a runaway success by offering free internet as a bundled service - its customers multiplied 17-fold.

With trends like that, the independent providers have every reason to reflect that when the big guys get upset, it is they who will suffer.