Time for some quality and innovation

New Zealand is an ideal laboratory for social and economic experiments - a small, well-educated population, with a reasonable standard of living.

Unfortunately our politicians are poor students and their advisers not much better, failing to notice when the test tubes boil over or the promised elixir fails to materialise.

The start of mobile phone company 2degrees is a great chance to observe economic phenomena and test hypotheses about competition and the state of the economy.

Telecommunications is an example of where the central planners and politicians and regulators have got things so wrong; bizarre behaviours have sprung up.

People don't talk on their phones, they write with them. They get another landline connection when they move, instead of switching to cellphone. They tell their mobile phone provider whom they are going to call most often, and then call no one else. They won't call or text subscribers to another mobile network, even though the arithmetic of networks is 1+1=1.

If the country stuffs up the introduction of a third mobile phone company, forget any meaningful foreign investment - the only money coming in will be to pick up any remaining New Zealand-owned businesses with assets still to strip, or state monopolies the Key-English Government flogs off in its second term.

Australian telecommunications analyst Paul Budde has warned that because the Commerce Commission has still not made the changes which make competition possible, "there is very little opportunity for 2degrees to become a successful competitor in the New Zealand mobile market".

What we've had until now is two huge trains steaming down separate tracks, hot cinders flying, swathed in steam so passengers can't see where they're going or how their pockets are being picked.

Vodafone is a mobile phone company which bought the network built by BellSouth and has brilliantly worked the referee to maximise its return with minimal extra investment. I don't know where the millions Vodafone claims to be spending on network upgrades is going - my calls still drop out at the same spots on the ride between the airport and the city.

Telecom's business model since the departure of its cash-guzzling initial shareholders has been to squeeze every last dollar from its copper landline network. Its management has extracted huge salaries while driving down shareholder value through this lack of vision.

Its mobile phones are there to prop up the landline business. They didn't work anywhere else, so no global roaming.

High fixed-to-mobile rates suppressed traffic and provide a subsidy for mobile operators. Extrapolating from Commerce Commission estimates that fixed-to-mobile traffic rose from 900 million minutes in 2004 to a billion minutes last year, landline customers have handed more than $2.4 billion to mobile operators over the past decade.

Factor that into Don Brash's productivity review.

Telecom only built a proper mobile network when 2degrees emerged as a real prospect, because a new entrant can win market share either by winning another mobile network's customers, or by encouraging customers to ditch their landline.

It's all about the bundles. Get substandard broadband, mobile and landline services in one convenient package and you're less likely to shop around for a better service.

Throw in "free" SMS text and the customer is locked in. Since SMS and any cheap call offers take advantage of on-network pricing - made possible by poorly conceived regulation and high termination rates - shifting provider means cutting yourself off from friends and family.

The Commerce Commission says in 2008 on-net traffic accounted for more than 80 per cent of all mobile-to-mobile voice traffic and a higher proportion of SMS traffic.

Young people in Auckland may pick up a 2degrees SIM card, but it remains to be seen how long they keep using them when their friends on Vodafone stop texting them (because it costs them to do so). The same applies in Dunedin, where the network of choice for scarfies and high schoolers is Telecom.

If New Zealand had an indigenous mobile phone manufacturing industry, it would be producing phones which took two SIMs. As it is, kids will just have to carry one in each pocket.

There's no sound economic reason for this, apart from anti-competitive behaviour by the incumbents. The arguments about the cost of an SMS message is what fraction of a cent it is - nothing like the 9.5 cents Vodafone and Telecom have been charging each other.

It's a bit like the Auckland Harbour Bridge. By the time tolls were scrapped in 1984, they were costing more to collect than they were contributing to bridge repayments.

Most of the cost of SMS is in wrapping a billing system around it.

The Commerce Commission wants to regulate because it says rates for provision of mobile termination access services are well above cost and a barrier to efficient market entry and expansion.

That means at least another two or three years of policymaking, politics and litigation, plus the bureaucratic effort of arguing with large multinationals about their real costs.

Better to do what they did on the bridge - take away the toll booths, and let the companies compete on signal quality and innovative services.

* adamgifford5@gmail.com