Unleashing the loop

Devise a drinking game in which the viewers watching the mini-series must drain a glass every time one of the main players — communications minister Maurice Williamson — expresses deep faith in the regulatory environment; or threatens to wade in and take action if things don’t improve, and then doesn’t do so. You’d have some pretty shickered viewers by the time the credits rolled.

Back then, the pressure for regulatory change came from pretty much the same parties as it does now: would-be competitors to Telecom, and big customers represented by Ernie Newman, boss of the Telecommunications Users Association of New Zealand (Tuanz). And they rallied around the same flag: local loop unbundling.

The unbundling case held that the copper telephone network — the local loop, or “last mile” from the exchange to the customer’s residence — was a natural monopoly. It would not and could not be replicated, and so the incumbent, Telecom, had to be required by law to make this vital channel to the customer available on fair terms to its competitors. Otherwise, it was said, New Zealand would miss its place in the broadband, digital economy.

Piffle, Williamson, would say, with some justification. The existing environment — and in particular, the Kiwi Share’s mandated free local calling — saw New Zealanders take to the internet in greater numbers than almost any other nation in the world. Anyway, copper was surely on the way out. He predicted a future of fibre optic cables to every home, so why argue over the sunset technology of the local loop, when its replacement was inevitable?

This is indeed what subsequently happened in the Auckland CBD, when, in a protracted process, trenches were dug, and multiple vendors dropped in their own cables, leaving the inner city fairly flush with bandwidth.

That expansion has brought competition and useful synergies. Ihug, which might have gone to the wall if it had to rely on the consumer internet market that is increasingly the preserve of Telecom’s Xtra, now serves inner city internet cafes over cable owned by Tangent, a subsidiary of the electricity lines company Vector. Another electricity company, Counties Power, operates a wholesale business on a growing “open access” fibre and wireless network in the Franklin and Pukekohe districts around Auckland, with Ihug, Iconz and others acting as internet service retailers.

That’s all very well. But it’s the suburbs that are the problem. Cost and consent issues will make it difficult to reach even a fraction of city dwellers with cable. The alternative is digital subscriber line (DSL) — the technology behind Telecom’s JetStream service. DSL allows the tired old copper network to not only carry voice calls, but to function as a high-capacity data circuit, at a fraction of the implementation cost of cable. Opened up, it could be the basis of a new, competitive market in residential services — but Telecom shows no sign of letting that happen.

The emergence of DSL in the late 1990s revived the old arguments about access to the local loop. In addition, the prospects for regulatory reform increased with the change of government in 1999. Labour’s Telecommunications Act 2001 called for, among other things, an inquiry into local loop unbundling by the Commerce Commission. The inquiry received 12 submissions in response to an issues paper released in April and will deliver a verdict on September 18.

Among those submissions was one from TelstraClear, which strongly favours unbundling — a familiar call from the Clear side of the business, but a change of tune for Telstra. Remember that, as TelstraSaturn, it came to New Zealand promising to build its own local access network.

“TelstraSaturn was a pre-tech-wreck business model,” says TelstraClear chief executive Rosemary Howard. “It was very much a build-it-and-they-will-come mentality, and it’s very difficult to justify that now.” What TelstraClear wants to do is use its own backbone network to reach Telecom exchanges, where it will install its own DSL hardware, and then purchase wholesale access to Telecom’s local loop to reach the customer.

Howard blames Telecom’s monopoly on the copper — and the consequent stiff pricing — for New Zealand’s poor uptake of broadband, which is amongst the worst in the OECD. Choice and competition, she says, could change all that.

Telecom’s Bruce Parkes acknowledges the poor uptake of broadband — less than 4% of households, compared to the world-beating 64 % in South Korea. But he has a different theory: “We think one of the major issues is the Kiwi Share. The existence of good-quality and very cheap dial-up internet access makes the equation for customers to trade up from narrowband to broadband a really hard sell in New Zealand.”

New JetStream pricing, along with much higher caps on monthly data allowances, is imminent from Telecom. It has been planned all year, not as a response to demand, but to the entry of Walker Wireless to the residential market — apparently bearing out Howard’s point about competition. Parkes says the arrival of Walker Wireless — which is firmly against unbundling — proves the local loop is no longer a natural monopoly. With wireless offerings from Walker and BCL, he says, “there’s every chance of widespread network-based competition emerging from now on... The concept of the local loop in the telecommunications world being a natural monopoly is almost comical.”

Pie in the sky, says Howard. Wireless still has too many technical limitations — capacity fills up and performance is degraded quickly as traffic and customer numbers increase, she says. It’s also costly, both in terms of network equipment and what’s required in the customer’s residence. “Maybe that’ll change one day, but at the moment it’s very early in its commercial evolution, and if you look around the world you’ll find a litany of difficulties with it.”

Telecom gives the impression of being relatively comfortable with slightly heavier regulation applied since the appointment of Telecommunications Commissioner Douglas Webb, who has instructed it to offer wholesale access to a range of services, at a 16% discount. But it’s not hard to see why it is so resistant to having its monopoly on the local loop broken: after all, it has been valued since privatisation on the assumption that it has sole access to its own copper.

So what happens in other countries? The European Union has introduced a form of unbundling. After delays and squabbles it seems to be bearing fruit in Britain in the form of higher uptake and lower prices — although there’s debate about how much credit can go to unbundling, and, Europe-wide, fewer than 3% of DSL services use unbundled local loops.

In the US, a 1996 law mandated unbundling where “necessary” and where local competition was “impaired”, but hopes that it would gradually fuel new infrastructure competition haven’t been borne out, and broadband cable was withdrawn from unbundling requirements this year. In Japan, it’s been a raging success — in the first quarter of this year Japan became the fastest-growing market for DSL, ahead of South Korea and the US, and Japanese consumers enjoy the lowest retail DSL prices in the world. In South Korea, the remarkable uptake of broadband is largely down to direct government funding of the incumbent telco. Canada, another broadband winner, has unbundled, but as a transitory measure, with sunset clauses in its law.

Unbundling could introduce a regulatory complexity previously unknown in our environment, and create practical problems in areas such as fault management. Yet local loop competition would be a boon for consumers. In the end, the Commerce Commission inquiry may choose to push for competition by targeting specific problems rather than recommending across-the-board unbundling of the local loop.

And one problem area that could do with such a “solution” is JetStream. Any ISP can sell JetStream, but competition from Telecom’s Xtra effectively limits margins to only $20 a month. Even TelstraClear, which won a wholesale deal for JetStream, has to pay for access to Telecom’s international bandwidth as part of the contract, when all it wants is JetStream from the exchange to the customer.

At a guess, the inquiry may decide to bring Telecom’s wholesaling into line rather than throw open access to the copper. We will, once again, find our own regulatory solutions.
We can only hope they work better than they did in the 1990s.