16/12/2005

WHY NZ SHOULD BE UNBUNDLED

In a previous blog I posted some excerpts from research by the Australian telecoms analyst Paul Budde about wireless internet provider Woosh Wireless. Budde has strong views about why New Zealand is in the toilet when it comes to broadband penetration and our comparability to other OECD countries in the area of telecommunications. He thinks the Government stuffed up big time not forcing Telecom to unbundle its network a couple of years ago and I agree with him.

Below I've posted his latest sumary of the case for unbundling now:

Unbundle New Zealand

1.1 Telecom not exposed to competition

By far the most debated issue during my roundtables in New Zealand was the issue of local loop unbundling (LLU). There is still significant confusion on this issue. Innovative telecommunications services in New Zealand are very limited, there is no competition, and there is little understanding of what the new technologies have to offer if they are made available in a competitive environment.

On the one hand, Telecom is reluctant to move into the brave new world of convergence as it has a vast existing service (voice) and network to protect, and it is trying, like many other telcos around the world, to find the right business models. Given the lack of significant competition there is little pressure on Telecom to be more entrepreneurial in its approach towards broadband and new business models such as triple play. So this has led to the current state of inertia.

1.2 Entrepreneurs are shackled

On the other hand, the competitors, first of all, don’t have the opportunities to add their entrepreneurship to the telecoms market, as, under the current regulatory system, Telecom is protected – and, unlike most other incumbents in the western world, it doesn’t have to provide an LLU service that would allow the competitors to build their own broadband products and try out their own triple play and other innovative business models.

But even if they were to have access to such an environment they are too small to have a major impact on the overall development of the market. Nevertheless, this is, in the foreseeable future, the country’s only hope of maximising competitive impact on the market.

By the way, I don’t expect TelstraClear to come back in a hurry, or to re-enter the residential market in any major way soon.

The tragedy is that the entrepreneurs who are establishing in the ISP market - Ihug, Orcon, ICONZ etc - exist only for as long as they keep their heads down. Telecom can snuff them out any time as it showed in 1999 with the 0867 debacle. Its power to steamroll the market sadly has not really diminished.

1.3 Government doesn’t seem to understand the issue

Because of the lack of exposure to new developments in this market (unlike the situation in Europe and North America for the last 5 to 7 years, and in Australia for at least the last 18 months) on a government level also there doesn’t seem to be a good understanding of the issue.

It was only two years ago that New Zealand appeared to have got it right. There was widespread support for LLU, the industry, the regulator and the Minister were all aligned on the issue; but apparently the Prime Minister personally intervened, most likely under lobbying pressure from Telecom, and in a very undemocratic way implementation of LLU was prevented. As was only exposed in December again there appears to be an unhealthy closeness in the relationship between top government figures and the top management of Telecom. The core problem is that the government still sees Telecom as a quasi state agency, and Telecom milks that positioning for all it is worth.

1.4 A new USB monster

The signs are not good. Instead of embarking on the LLU issue the government in its infinite wisdom is trying to introduce an ugly little monster into the market – a USB product in the form of a vanilla, best-effort broadband pipe that can be used by the competitors to be resold. While, potentially, the speeds could be up to 7.5Mb/s, there are no guarantees, no QoS, no product differentiation. This applies both to Telecom and to its competitors.

There is little or no incentive for Telstra to upgrade, improve or enhance the ‘pipe’ and, as it still is a simple ‘retail minus’ wholesale product, the competitors can’t do anything other than simply resell – no stimulus at all for new business models such as triple play, innovation and product differentiation.

1.5 Voluntary LLU offerings

I would argue that, considering how ugly this product could be for Telecom, they should quickly take the initiative and voluntarily start introducing LLU. They may initially lose revenue to those who will immediately take up LLU for price competition purposes, but in the long run, when the real advantages of broadband become clearer, the national operator will be able to offer a more differentiated level of services to its wholesale customers and this would allow them to sell other value-added infrastructure services to them.

It would be a real shame if telecommunications in New Zealand were to sink to such a low level that it is not utilised to help the country improve people’s lifestyles and to stimulate innovative new broadband developments.

Furthermore, if Telecom were willing to take a leadership role in developing the broader telecoms market it would also be able to guide the regulatory process in what would be, for them, a more favourable direction.

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