Chris Barton: Broadband prices to come down at last

The winter of broadband users' discontent will soon be over - fittingly perhaps, this winter. That's when Telecom says it's finally going to introduce better pricing to entice more users to its fast internet services.

The fact that news is still to come means our wintry displeasure will be prolonged for another few months. But at least that gives time to anticipate just what the new price will be. And to ponder just why, after all these years, the Telecom monopoly has had a change of heart.

Broadband has been available to New Zealand users since June 1999. But for the most part, the service has been spurned by home users who number just 3 per cent of Telecom lines.

The monopoly has always turned a deaf ear on users' calls for more realistic pricing, but now seems to realise its customers will not pay through the nose for the brave new world of broadband.

Why? Because dial-up is so cheap thanks to the good old Kiwi Share - the only piece of New Zealand telecommunications regulation that has ever helped the consumer.

The Kiwi Share Obligation was attached to the Labour Government's 1990 sale of Telecom to the Ameritech/Bell Atlantic/Fay, Richwhite, Gibbs, Farmer syndicate for $4.25 billion ($1.81 a share). It required "a local free-calling option will be maintained for all residential customers". Strictly speaking, the option isn't really "free" local calling because Telecom charges $39.30 per month on all phone lines. What it should say is untimed local calls.

It was this obligation that drove the uptake of dial-up internet in New Zealand. When the agreement was negotiated in 1990 the Telecom monopoly had no idea people would use their phone lines for accessing the net. Untimed local calling areas combined with flat-rate monthly internet charges - an innovation pioneered by ihug from about 1995 - meant internet users could go on line as long as they liked.

Users loved it and flocked to the net in droves. The Telecom monopoly was not pleased. People were tying up its phone lines for long periods of time. And if they weren't subscribers to its internet service (Xtra), Telecom wasn't getting a bean in extra revenue. Worse still, some internet providers routed their traffic through other telcos so Telecom was getting stung on interconnect payments.

At one stage providers such as i4free were able to offer free dialup access and fund their operations from a share of the per minute border-crossing fees the telcos pay one another for calls terminating on their network.

Telecom spat the dummy, first by introducing its infamous "0867" prefix dialling scheme for all internet providers in June 1999 and later by cutting off i4free's phone lines. The matter is still before the courts in an anti-competitive action brought by the Commerce Commission and joined by i4free, which is suing Telecom for $18.16 million in damages.

But what does this ancient history have to do with broadband prices? Dial-up costs - now between $15 and $28 per month for unlimited access - are driving broadband prices down. How? Because most internet users are content with low cost dial-up and despite the promises and advantages of broadband they aren't changing. Why? Because broadband is far too expensive.

All of which leaves the Telecom monopoly in a bit of a quandary. If users won't move across to its entry-level broadband service at $65 per month, what price will they pay? The answer is very simple - the same, or very close to, dial-up.

Yes, I know it sounds ridiculous. But as anyone who has owned a PC knows, it doesn't matter how much the technology advances, the price stays the same. When I bought my first PC back in the mid 80s, I paid about $3000.

Five years later I bought another that was two or three time as powerful and paid $3000.

Five years later I bought another that was two or three times more powerful again and still paid about $3000.

The same laws of high-tech economics apply to internet access. Why would anyone pay $65 per month for 128Kbps Jetstream Starter when they can get 56Kbps for $27 or less? The only reason Telecom has been able to hold the prices so artificially high is that it has an almost total monopoly on broadband provision.

But lately some serious competitors have emerged - Walker Wireless and Counties Power. Already Walker Wireless is offering equivalent Jetstream Starter services to parts of Auckland at $57 per month. When real competition kicks in - especially when Counties Power is running - entry level prices should be about $40-45 per month. That was the price ihug and others first charged for flat rate internet - later matched by Telecom's Xtra and then bettered in August 2000 when it slashed prices to $25 per month.

When we get those sorts of prices for broadband, we'll know real competition has arrived.

Until then, let's make sure we keep the Kiwi Share in place. Not just to keep dial-up access cheap, but also to keep downward price pressure on broadband.

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