Tuesday, March 07, 2006

Peter Nowak: Chance to get unbundling process right

The Government's decision in 2004 not to unbundle Telecom's local loop is the best thing to ever happen to telecommunications in this country.

That's overstating it, but the optimist could say that New Zealand now has the benefit of hindsight. Our Government can look elsewhere to see what has worked and, more importantly, what hasn't. As far as regulation is concerned, we're in the very favourable position of having the chance to be best rather than first.

During the initial debate in 2003, Telecom argued there wasn't a lot of evidence to show that unbundling would lead to an increase in broadband uptake. A wholesale scheme, it said, would be a much quicker way to get the masses using broadband.

Telecom was right on three counts: There wasn't a lot of proof; subsequent evidence has shown that unbundling alone doesn't automatically boost uptake; and the company's wholesale scheme probably was faster.

But - and this is a giant 'but' - all of that is based on the idea of simple unbundling. As British Telecom's example shows, the United Kingdom has had unbundling since 2000, yet broadband uptake has only surged since 2004. Why the delay?

It's because of the way unbundling works, which really isn't all that different from the current wholesale setup. Now, Telecom rents its lines to competitors, who add in their own charges and profit margin and then resell services to customers. The deal TelstraClear signed in January, for example, would see it pay Telecom up to $30 per customer. TelstraClear could then reasonably be expected to resell services for between $35 and $45.

This wholesale scheme has proven to be flawed, as our woeful broadband uptake rankings can attest to. Essentially, Telecom still largely controls the prices and speeds its competitors can offer.

Unbundling has a similar pricing setup in that competitors need to pay the incumbent for usage of its lines. If simple unbundling had been instituted in 2004, Telecom could have charged whatever rents it wanted. In the end, there would be no real difference between Telecom charging TelstraClear $26 under wholesale or $26 under unbundling.

This is precisely the reason unbundling - and thus broadband uptake - failed to catch on in the UK for the first four years it was available. In 2004, the regulator stepped in and forced BT to lower its unbundled rents - lo and behold, broadband uptake has skyrocketed since.

The lesson to be learned is that when the New Zealand Government institutes unbundling - and from what I understand this is a case of when, not if - it needs to attach additional terms to the regulation.

A set rent needs to be implemented. Service provider ihug has said it would be happy with a charge of about $12. Such a price could allow it to offer broadband for about $25 a month.

Industry sources indicate the Government understands this need, and it is thinking of instituting an even lower rent - perhaps as low as $9 a month. Now that would be progressive.

But even price regulation is not the whole answer. Everyone agrees that infrastructure-based competition is the best solution for all problems. Unfortunately, it hasn't materialised here for a number of reasons - the main being the immense cost of building doesn't stack up to the relatively paltry small-market revenue to be gained.

Regulation therefore needs to include investment guarantee clauses - if a competitor wants unbundled access to Telecom's network, it needs to invest a certain amount each year in rolling out its own infrastructure.

This will lead to industry consolidation, as most internet service providers won't be able to afford any form of building. But with almost 30 ISPs around, that's not necessarily a bad thing. The other end result is that in a few years time, there will be enough infrastructure to facilitate proper competition.

Lastly, the Government needs to be wary of Telecom's gaming in regards to the next-generation network it is building. The company has already suggested that if unbundling is instituted, it won't be able to invest in its network properly. This is a transparent bluff that must be called. If there's money to be made from customers, somebody will invest to make it - whether that's Telecom or one of its competitors is irrelevant.

Once unbundling is instituted, Telecom will also argue its new network is different from the old one and therefore not subject to unbundling rules. If that line is bought, it's back to square one. The unbundling rules need to have clearly defined and broad perpetuity clauses that apply to any future infrastructure.

The big difference between now and 2003 is that the Government seems to understand the issue. Last time around they missed the boat, so let's hope they don't squander the learning experience.

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