Phone bills finally on the line

Photo / Dean Purcell

Ernie Newman found a way to (almost) halve his phone bill. He ditched his landline for naked DSL, an option which brings phone services via the internet.

For around $70 a month, Newman gets a digital voice phone line with voicemail, broadband internet, free local calling and 5c a minute toll calls in New Zealand, Australia, Britain and the United States.

This bundle, he says, is considerably cheaper than the monthly bill he used to get for his landline and broadband usage.

Mere mortals might argue that Newman, as the chief executive of the Telecommunications Users Association, is better placed than most to navigate the arcane world of telecommunications pricing to find a bargain.

But a growing number are exploring the expanding range of alternatives on offer ranging from mobile to VOIP (voice over internet protocol) services including Skype and naked DSL, which allows free phone calls without the monthly fixed line charge.

Hanging up your landline saves about $45 a month for more versatile communication options. Well, kind of. Even VOIP providers have to pay Telecom the wholesale price of access to Telecom's copper line between the exchange and the house, which is $19.84 a month in urban areas and $36.63 in rural. This, say service providers, makes it uneconomic to offer broadband only or voice only deals.

There are lingering concerns about voice quality and loss of phone communication if there's a power cut. And there's some one-off costs as well: you may need a special box to bypass Telecom's network and a compatible handset.

Vodafone has a deal where you can use your mobile as a landline at home; new entrant 2degrees wants to extend this beyond the home.

But most people discover they still need a landline for reliable high-speed broadband, which increasingly comes as a package - with local and toll calls in the monthly price. And using mobile is more expensive than it could be, partly because of the fees competing networks charge each time you call someone on a rival network - the so-called mobile termination rate (currently 15c a minute) which has seen Telecom and Vodafone under fire from the Commerce Commission.

This hasn't stopped a growing number of small businesses switching to mobile-only, despite loss of White Pages listing and potential loss of landline custom.

With the popularity of Skype and other technologies, and an estimated 80 per cent of the population using at least one mobile, is it time for the rest of us to cut the cord? Welcome to call pricing 101, an interconnected world of cross-subsidisation, patch protection, acronyms and obfuscation, where unbundling of local loops has ushered in bundled services which seem only to result in customers spending more.

Many argue we should be paying less. Take landline. For the privilege of "free" local calls, we pay a monthly charge of around $45. But with Telecom's copper landline network long ago paid for, the cost of making a local call has fallen to just a few cents, say analysts.

What would these calls cost on a per call basis? Say the rate was as high as 5c a minute - you'd need to talk for 30 minutes a day (or make 10 three-minute calls) every day for a month to spend $45. Few of us need to use our landlines that much.

The regulatory framework for landlines is under scrutiny from a government review of the Telecommunications Act, focusing on the original Kiwishare obligations of Telecom's 1990 privatisation and the subsequent Telecommunications Service Obligation (TSO).

Among other things these guarantee "free" local calling with a monthly fixed line charge which can increase by no more than the rate of inflation.

For some subscribers - mainly in rural areas - the cost of installing and maintaining the copper line is far more than can be recovered from users. Under the TSO, Telecom is the "provider of last resort" to these customers, known as CNVs (commercially non-viable customers). Telecom's costs in providing services, which cost more to install and maintain than it can recover from users, are subsidised by other providers.

New Zealand is one of the few privatised telecommunications regimes with free local calling. Overseas, landline bills are more commonly a mix of a fixed monthly charge (lower than New Zealand's) and a per call rate which can be as little as a few cents per minute. This includes national (toll) calls. Analysts say we pay $10 to $15 a month more for landline than Australian and British customers.

That's without factoring in the cost of fixed-to-mobile calls, for which Telecom still charges many subscribers 47c a minute for calling a non-Telecom mobile. What it means is we don't make that call, which is bad for business.

Overseas, consumers have come to use mobile as much, if not more, than landlines, with prices said to be cheaper. In Australia, usage is around 50:50, in western Europe, the reliance on mobile is even higher.

Here, around three-quarters of all calls are still made using landline. It's a combination of our arcane regulatory and pricing framework - which keeps the cost of mobile and other alternatives relatively high - and the belief many cling to that local calls are "free."

"It's economically costly," says Bill McCabe, chief commercial officer of mobile newcomer 2degrees. "How much are we losing as a nation because of the lack of competition in mobile?"

With static on both lines, most of us prefer to sit ... and wait. The alternatives are confusing and there's no such thing as a free bundle. Ernie Newman says psychology also plays a part.

"A lot of people paying $45 a month plus mobile would be a lot better off if they switched to mobile. But they are scared friends won't ring them. On landline you can talk for an hour but some of us talk more than others. There are a lot of social issues around it. There are lingering concerns that mobiles are less reliable and perceptions about quality ..."

Tackling high mobile charges has been left to the Commerce Commission, whose standard tactic is to brandish the stick of regulation to beat recalcitrant telcos down. It's a tortuous process of draft reports, consultation and ministerial recommendations - always, it seems, with the goal of avoiding regulation.

But whenever the prospect of deregulating landline is raised, it becomes the political equivalent of an obscene phone call. No government seems brave enough to put landline customers on user pays, fearing a voter backlash because bills for isolated rural customers would rise astronomically. This is where the market should be allowed to step in with alternatives, say Telecom's competitors.

As Newman says, the TSO was devised before mobile, before the internet and when Telecom had no competitors. Its purpose was not only to ease rural voter concerns about the cost of a privatised phone call but also to ensure everyone could dial 111 in an emergency.

Now, there's mobile broadband, wireless and satellite technology and the promise of fibre optic cable to offer rural and urban subscribers choices. And competition should ensure lowest prices, say those queuing to compete.

It's relevant that Telecom's monthly fixed line charge is about $6 cheaper in Wellington and Christchurch, where it faces competition from TelstraClear, than in Auckland and elsewhere.

"The present system is creating all sorts of perverse outcomes," says Newman. "It's slowing the introduction of mobile, slowing down penetration of mobile [in remote areas] and it's anti-competitive because newcomers pay Telecom a share of its losses."

The Government remains cautious. After Opposition spokeswoman Clare Curran flagged the end of free local calls, Communications Minister Stephen Joyce quickly guaranteed their off-limits status. This still leaves scope in the review for improvement, such as ending the Telecom "monopoly" over the estimated 60,000 "non-viable" customers and the requirement that competitors subsidise Telecom for its trouble.

Vodafone is the biggest complainant in this, handing $18.4 million to Telecom as its TSO levy in the last financial year. And 2degrees has been paying even before it launches.

"We would like the opportunity to figure out if we could provide them with services," says Vodafone spokesman Roger Ellis. But Telecom's rivals complain they need to know exactly where the non-viables live to weigh up whether they can provide a cost-effective service - but Telecom keeps those details secret. Another sore point is that Telecom doesn't have to reveal how, or where, it spends the money.

Vodafone believes it could cover about 70 per cent of rural non-viables with mobile if it didn't have to subsidise Telecom. Ellis says the TSO is a huge averaging exercise, effectively an urban-rural subsidy. "Some have suggested it's for social cohesion - so people stay connected. We say those in low income areas end up paying higher prices than they need to, to subsidise particular Telecom services.

"If there was no TSO levy in place, so prices reflected underlying costs, there would be scope to reduce prices to urban low income houses.

"The way it's calculated, we end up with a tax on competition."

The Government and Commerce Commission believe the TSO adds little to the price consumers pay for a call, either landline or mobile. The cost, about $70 million a year, pales in comparison to revenues of nearly $4 billion earned by telecommunications carriers in 2007/08.

The Commerce Commission says: "While the requirement to provide free local calls probably plays some part in the comparatively low use of mobile phones, the relatively high price of mobile calls, particularly off-net (cross network) calls, is also likely to be a cause." The real worry may be that if urban New Zealanders stopped subsidising rural, the cost of guaranteeing rural access to a "free" phone would rise exponentially.

But Joyce says one area where the review could make a difference is in allowing "technological neutrality" in rural areas - placing alternatives such as mobile, wireless and satellite on a level playing field with landline. The question for the review, he says, is: "Are we at a point where the local service could and should be supplied in a different way to copper wire?"

For Joyce, it's not a huge concern that New Zealanders cling to landline while other countries make much more use of mobile. "It's just the way our telecommunications system has developed - the way we do things around here."

Joyce figures our grip on landline will slip with time and technological advance. The much-trumpeted roll-out of fibre optic cable over the next decade will certainly ease rural reliance on copper wire, although he cautions: "It's not likely we'll end up with fibre up every valley to every farmhouse."

He sees more scope for improvement through falling mobile call prices as competition increases, with newcomer 2degrees investing heavily and encouraging further investment by Telecom and Vodafone.

HEALTHY COMPETITION

Anyone watching prime time television news cannot escape the advertising blitz of mobile companies offering deals like "free" broadband, mates' rates, home-away-from-home zones, bonus credit ...

It's no coincidence that this bombardment comes with the approaching launch of 2degrees, a fledgling third player in the mobile market. The offers tend to prove the case that there's room for improvement in the prices consumers pay - that we've been stung by the Telecom-Vodafone duopoly.

Our mobile call charges have long been talked up as among the most expensive in the western world but it seems to depend on who you talk to. OECD benchmark studies show some improvement since 2007 when both Telecom and Vodafone rates for high users were among the most expensive of the 30 countries measured.

The Commerce Commission is touting some progress with its efforts to bring retail prices down by setting wholesale rates to encourage competition. The commission's current focus is mobile termination rates (MTR), the charges mobile companies levy when you call a rival network. Telecom and Vodafone have gradually lowered the charges in recent years but the commission says at 15c a minute, they are still roughly twice what they should be. Critics say even at 7c a minute, that's out of line with Europe where the MTR is 3c and due to fall to 1c. New player 2degrees has said it would scrap the MTR completely - and not just between mobile networks. Chief commercial officer Bill McCabe says there's no reason why a fixed-to-mobile call should be so expensive when the mobile user benefits equally from the call.

But the regulatory regime moves slowly. Analysts say it will be early 2011 before MTR pricing comes down - unless the industry budges.

Meanwhile, frustrated mobile users continue to shout down the phone about the charges they cop. One anecdote doing the rounds is that an Australian 3 user on prepay using Talk International can call a New Zealand landline for an hour for A$3.00 ($3.80). A New Zealand user on Vodafone or Telecom prepay would pay $53.40.

Vodafone and Telecom perform poorly in comparision to a survey of voice and text charges in 19 European countries by the Finnish regulatory authority. The yardstick was for 300 minutes of calling and 100 texts.

The postpay price comparison put the New Zealand charges either last or second to last, while for prepay New Zealand was almost double the European average of $87.