Parties clash on telcom plans

David Cunliffe (left) and Maurice Williamson

Labour and National set out where they stand on telecommunications.


* LABOUR - DAVID CUNLIFFE, NEW LYNN CANDIDATE


NZ is near the bottom of virtually every international telecommunications measure, a situation that has not improved under National or Labour. On that basis, why should anyone vote for either party?

That presumption is not true. In some measures, New Zealand is near the top of the OECD league table. In terms of basic internet penetration, New Zealand is very high. In terms of PC usage, it's very high. But in terms of broadband usage, New Zealand is in the bottom third of the OECD even though broadband penetration has increased by 200 per cent in the last calendar year.

In terms of mobile pricing, I've made it very clear I think it is too high. We're near the top of the OECD league table and that's not where we want to be. We're in the process of getting that price down by one means or another. It's on its way down already - Telecom has already cut prices - but more importantly, there are going to be a lot more cuts coming.

I agree with part of the presumption that things are not where they should be, but I don't want to see an over-generalisation made. There are good bits and bad, but in that context what's important is that our active strategy, the Digital Strategy, and our regulatory toolbox, are driven even harder, not abandoned as National would do.

The general thinking holds that NZ's woeful rankings are a direct result of the Government refusing to get tough on Telecom. Do you think that's true? And if not, what is the cause?

We inherited from the end of the 1990s a very weak regulatory framework and a very strong incumbent. We've been through a process since then of the telecommunications inquiry bringing in the Telecommunications Act, solving some of the legacy problems, like interconnection pricing and now, number portability. We are in the process of upgrading the act.

There was no surprise to anybody that the Government made a line call in accepting the recommendations of the Telecommunications Commissioner to unbundle the bitstream rather than the whole local loop. I have signalled and repeat now that if Telecom does not make good on its commitments under that decision, then further action will follow.

How do you propose to improve NZ's standing in these measures?

There are two broad sets of tools. The first, demand stimulus tools, are contained in the Digital Strategy, which I laid out in May. It's been very well received by the industry and the community alike and there's a very rapid implementation program currently underway. We will be launching the application criteria for the Broadband Challenge and the community partnerships fund later this month.

We recognise that strong and appropriate regulatory tools are also required. That is why the Government has released its intended amendments to the Telecommunications Act, which will allow for multilateral determinations, faster resolution of problems, make it impossible for corporate gaming to contract out of regulated decisions where these are less advantageous to the consumer than the regulated outcome, and a raft of other far-reaching amendments. This will be a very important upgrade of our regulatory capability.

I have also signalled to the Telecommunications Commissioner that I expect full consideration of a wide range of options on mobile telephone termination rates and further action will follow in that space as well.

How does your plan take into account the fact that NZ is far behind, yet the rest of the world is also improving? What will you do to avoid having NZ constantly lagging?

I've already said that the requirement for us to get into the top quartile of the OECD in today's terms relative to our competitors would be over 600,000 broadband connections and by 2010, which is our target date, I think it will be around 800,000. Clearly this is a step change from where we are today and it will require the migration of a majority of narrow-band internet accounts to a broadband future. I understand that Telecom believes this is achievable, but I will judge them by their actions rather than their verbal commitments. That's roughly two-thirds of our internet connections we'd expect to be broadband by 2010 to get to the top quartile. I think that is very achievable.

You've said you are in favour of the market solving its own problems, but you aren't afraid to regulate where there is a market failure. How do you define market failure?

It's a failure of the market to reach outcomes equivalent to a perfectly competitive market. That can be for a range of reasons. In the jargon of economics, it can because of externalities like public goods. It can be because of lack of effective demand, it can be due to monopolistic practices.

We believe that a competitive telecommunications market provides the strongest incentives for investment and innovation to the benefit of consumers, and that's what our policy is designed to achieve.

There is a huge gap now between the active and firm policies of the Labour Party and the non-policy of the National Party in that respect.

Can you conclusively say one way or the other whether there is a market failure in broadband internet?

I think the absence of an effective wholesale market would be sufficient evidence of a degree of market failure, and that is an issue I'm following very closely. The jury is still out, but there is mounting evidence of an issue.

What is your position on local loop unbundling? Is the initial ruling of a few years ago flawed?

The initial ruling was considered in the circumstances of the time and it was a line call made on the basis of commitments by the incumbent to meet certain targets. As I've said before, if those targets aren't met action will follow.

How about mobiles? Is there a market failure there?

Yes, the commissioner is clear that there is insufficient competition in the market for mobile termination to provide competitive outcomes. His analysis, which I find convincing, is that the current termination rate of 27c should be at or around 15c. I think that analysis is robust and that simply reflects the lack of competition in the market. In other words, the two incumbents are making margins far greater than their cost of capital.

Why is it then that third or fourth providers are either reluctant or unable to enter the market?

I don't believe that they are unable, and your newspaper has speculated about the potential for entry ... I think it's clear, also, by the margins currently there for termination that there is a great deal of profit to be shared potentially among new entrants as well as incumbents.

Among the changes you've proposed to the Telecommunications Act is the provision that the Communications Minister can accept or reject parts of a Commerce Commission recommendation. You've criticised Maurice Williamson for proposing to limit the powers of the Telecommunications Commissioner, but wouldn't your proposal do the same thing?

No, this improves the regulatory process. Maurice Williamson's proposal is to give incumbent telcos the right to appeal commission decisions. In my view, it already takes too long to get a regulatory decision through. For example, had we moved to unbundle the local loop we would have expected potentially two years worth of litigation as it stood from incumbents. To give further appeal rights seems to me to be at odds with serving the needs of consumers. Instead, it serves the needs of incumbents, and I think they're already well served.

Aside from regulating existing technologies to spur competition, what sort of incentives can Labour offer to providers looking to deploy new technologies, such as wireless broadband and the like?

First, we're offering some direct incentives by way of subsidy through the MUSH networks broadband challenge for fibre or equivalent broadband technologies. We've incentivised the early rollout of fibre and wireless broadband through Project Probe. We are directly providing advanced high-bandwidth connectivity through the Advanced Research Network and the Government Services Network. And the primary focus of our regulatory work in the near future will be on driving the rollout and availability of residential and small business broadband.

There are a raft of tools in use, both direct stimulus through the Digital Strategy and regulatory intervention as required through the enhanced Telecommunications Act. I believe that combination, with natural incentives, will deliver us a bright future for advanced telecommunications.

Also in last week's online debate, you said that while Labour pledged to keep free local calling, you thought parts of the Kiwi Share could be reviewed. Can you expand on that?

Some of the calculation methodologies need another look. I haven't formed any conclusions yet but there are views in the marketplace, for example, that maybe the calculation formula does not include all of the advantages of having a ubiquitous network to offset some of the costs of providing it. It's certainly true that other companies feel they are providing an undue cross-subsidy to the incumbent. I would like to have a look at those arguments and see where the merit in them lies, if any.

What do you make of Maurice Williamson's often-repeated phrase where it's easy to do things, but harder to do nothing?

I think Maurice Williamson has been an outstanding success at doing nothing and clearly his policy announcements show a determination to carry on in the same vein. I cannot stress strongly enough how gob-smackingly vapid it is to have a so-called telecommunications policy that consists of only two elements, one which says let's go back to the days before the Telecommunications Act ever existed and throw ourselves upon the mercy of Telecom New Zealand. And the second of which seeks to solve a problem that has already been solved, in number portability. We've got a work programme that's virtually guaranteed to deliver a result in the time frame that all parties have agreed to.

I don't think it's an accident that Maurice Williamson's variable comments are full of sound and fury but their written policy signifies nothing ... It has been suggested to me that Maurice Williamson is just out of step with his party leader, and I'm afraid I conclude the game is more sinister than that.

What do you mean by that?

It's very deliberate that this double act goes on where Maurice's variable statements appear to be robust at first instance but the substance of the policy is anything but.

Just out of curiosity, are you an 027 or an 021 man?

I'm an 021 man. I use a Blackberry and I'm very happy with that service. I do however subscribe to Xtra for my ISP services.


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* NATIONAL - MAURICE WILLIAMSON, PAKURANGA CANDIDATE


You've often said that, as a minister, it was harder to do nothing than it was to do things. What then, in your view, is the job of an elected official?

From my perspective, your job is to make as much of the decision-making be taken by the marketplace, especially when you're talking about commerce. An elected official has a different role if you're talking about providing social policy.

But in ICT, the role is to allow the marketplace the most leeway and freedom to solve things for the consumers, and ministers should only interfere with regulation or legislation or whatever if they're absolutely convinced the action they are taking will have net positive benefits for the consumer, rather than just doing this because one or several of the players have been bleating for so long.

I love to give this example because very often it's hard to prove you were right because it's debatable, but what proves I was right is that Vodafone [came in and] ... said, "Can you please stay out of the market and we'll win our customers the old-fashioned way, with price, product and service". So, 10 years later, who's the biggest cellphone company around?

Over the past week, you've suggested doing such things as getting tough on Telecom, forcing number portability to happen faster, leading some observers, including Labour, to say you've made an about-face. Have you?

Not really. I don't think there's a big change, I think it's exactly where I was before. I said if I was ever convinced that the public good would be served by intervening by way of regulation, I would not hesitate ... I used to say that in the 90s as well, that if I ever get to the point where I'm satisfied that the players have been playing too fast and loose and that some sort of a regulatory intervention will deliver the consumer a better outcome, I won't hesitate.

On number portability, given that you've always been in favour of market-led solutions, what's the reason behind your policy of forcing it faster when all parties - including the market - have agreed to the commencement date of April 2007?

I haven't said anything about forcing it faster. My comment is about how dreadfully I got bagged back in the 90s for making so little progress. Labour said, this minister is just letting it drag and if we're elected we'll fix it. We're six years into a Labour Government and it's not yet fixed.

All I was trying to do was make the point that it's not as easy as it looks. You could regulate an outcome from the centre, but quite often what happens is you have a more perverse outcome than what you already have.

If the players can get an agreement together - and it looks like they have and they've got a timeframe for it - the last thing you'd see me do is intervene.

You also said Telecom was getting away with "blue murder" and you would watch the company closely if elected. Is this tough talk or will you do something specific?

In the 90s, for example, they did things that really angered me. When Saturn started a competitive local loop service in the Hutt Valley in Wellington, Telecom started changing its pricing by street. Not even by suburb. If Saturn rolled a piece of cabling down Smith St, the people on Smith St would get letters from Telecom while it was being done offering this new rate for local phone service, but the people on Jones St , where the cable didn't go, weren't eligible.

I said publicly that I've never seen anything so anti-competitive and a complete breach of their dominant position. They soon stopped that stupid pricing ...

I simply can't accept that this is new ... As far back as 1992 where I said publicly, I think it was at a Tuanz conference: "Telecom you're on notice, and I've had it with you and the behaviour is just appalling. If it carries on you will give me no choice but to move by way of regulation".

Those comments and the thing about their behaviour now stems around what I believe has been a gross under-investment in the network where there's no competition.

Telecom, who treat people in the non-competitive area badly, need to be aware that if they keep doing that, some pressure will come on them to change that behaviour. If they carry on acting as a good corporate citizen, they won't have a problem.

Here in Pakuranga-Howick, we have some of the worst investment in local exchanges. Our exchange was installed in 1988. That's prior to Windows, it's prior to the Pentium chip, it's prior to anything. We can't have flexibility in any house here, we can't have caller ID, we can't have anything.

Whenever I take it up with Telecom, they say there are no plans to upgrade the switch at Pakuranga.

If regulation is a last resort in case of market failure, how do you define market failure?

You have to deal with it on a case-by-case basis. You have to try to make judgment calls on what the consumer is receiving, what the benefits of making a change to the regime would be relative to the costs and downsides of it. You try to get good information and comparison stuff to see who's done this and how did it work. I've seen so many attempts at regulating all sorts of things have a perverse outcome. You have to be very careful.

Can you say conclusively one way or the other whether there is a market failure in broadband?

No, I can't at this point. But I think that if Telecom doesn't hit its target, and if we don't see some more robust targets set straight after that for a little bit higher bandwidth, up, down and penetration-wise, I think that's one of the very best measures you'll be able to start using as to how's this work, or do we need to move somewhere else?

Do you have any specific plans on what you would do if they don't hit those targets?

No I don't ... but what I would say is that if they don't hit those pre-defined targets you simply can't leave it at that.

How about in mobile phones?

I don't think so. But I'm very worried about the commissioner's view on regulating termination rates. You may have companies who have got to make a huge amount of investment, say, when they do their numbers and run down their spreadsheets and say, hang on, if we're forced into a termination rate of that, that means it's not actually worth putting this investment into the network.

Again, I take a different view of anybody else to Telecom, who got there by way of being the state-owned monopoly [and] only game in town and has been able to clobber a lot of other people. You can't take the same attitude with someone who comes in, buys the frequency, builds the network from scratch, pays for everything themselves and gets their customers the old-fashioned way.

You could have another cellphone company come in, you could have another two come in - I think that's the real blowtorch to keep on these guys.

Now you get everybody saying we can't afford to build a network. Well, that's kind of like saying, "I'd really like to have an airport company, but I can't afford to build a runway". I'm sorry, but a lot of these things are very capital-intensive.

It's a bit rich to say to somebody like Vodafone, who have done it all with no Government regulation or subsidy, "We've decided what you will charge for your termination rates on your network".

You may want to do that, but I've not got a view at this point on what you may do with all the old-technology stuff, but on the new 3G stuff I would have thought it's very dangerous having a view on that. You may end up with the boys in London saying, "So that's what New Zealand thinks? That's great. We're just going to pull the pin on investment".

Thus far, National has been quiet about any plans to improve New Zealand's woeful OECD broadband and mobile phone rankings. What is your plan to improve this situation?

It's very hard to keep that measure meaningful in the case of mobile phones while we have free local calling.

That brings us to David Cunliffe's criticisms of your views on the Kiwi Share and free local calling.

Which way is it? During last week's online debate, you pledged to keep the free local calling.

We've always done that, actually. What he translated, or I think it was a journalist who translated it, was when I said we need to do a complete review of the Kiwi Share - as did David Cunliffe - to see if the subsidy level rates and the amount it's costing people for access and so on is all the correct way.

I did not ever say we would like to get rid of the free local calling. The minute the journalist said this could include getting rid of free local calling, we issued a statement that day saying we have never said that and have no intention of removing it.

So you're saying there's not really much that can be done about the OECD mobile rankings as long as we have free local calling?

No, I didn't say that, that's putting words in my mouth. I said it's very hard to draw valid comparisons with a country like Finland, where ... kids can call on their mobile phones cheaper than they can on their landlines. Surprise, surprise. I reckon we'd do the same thing here if that was the case. The comparisons aren't valid because the circumstances are different.

So how would you make it cheaper?

You need to get good competition into the market, and the more players that were willing to start investing and winning customers, the better.

What can you do to encourage competition?

One of the ways to get competition in is to get the environment that the players work in so conducive that people want to come and invest. Because I come from the sort of right wing of the economic spectrum, I think that incentives and picking winners can be a huge mistake for Governments. I've seen money squandered on all sorts of projects that have returned very little to the taxpayer and been a waste of time.

Why should one particular industry, like the cellphone industry, get a special grant or privilege or right? I think lower taxes for the corporates overall, better labour laws that allow you to employ people with more flexibility, better economic growth, better access to world markets - all the sort of macroeconomic things, if we do them properly, make us an attractive place for people to come.

It's what we did in the 90s and it made us attractive for Vodafone to come and spend a lot of money and New Zealanders have benefited out of that substantially.

But given that it's such a small population, there isn't a lot of profit incentive for some of these companies to come in. A company such as Vodafone can come in and make a lot of money, and this is reflected in the OECD statistics, because they're charging a lot.

That may be the case, but if they're charging so much and it's so profitable, then when anybody else starts doing due diligence on an investment, they'll say, "Hey, look, the bloody market is such that we could be making a killing here". It's how markets work.

Lastly, are you an 021 or 027 man?

I am one of the very, very first-ever 021s, and have stayed since that day. I am a big fan of the underdog.

Labour Policies

* Improve the speed, price and availability of broadband internet.

* Bring wholesale broadband regulation in line with Australia, Britain and the European Union if Telecom does not meet its 2005 wholesale targets.

* Continue to implement the Digital Strategy (details available at www.med.govt.nz/pbt/infotech/digital-strategy).

* Extend Project Probe and the Advanced Research Network.

* Ensure consumers benefit from a reduction in the cost of terminating calls on mobile networks.

* Monitor Telecom's transition to a next generation network.

* Full policy available on the link below.

National Policies

* Ensure the maintenance of generic competition law.

* Respect property rights.

* Maintain the office of Telecommunications Commissioner but ensure his rulings can be challenged by way of appeal.

* Insist all players co-operate in the immediate implementation of number portability, and regulate an outcome if necessary.

* Full policy available on the link below.