22 June 2004
It was billed as the most important decision in telecommunications in a decade, but that didn't stop the Government from rushing its decision.
Ironically, the Government's rush to conclude the unbundling debate came at the end of a very long chain of events going back to the early 1990s when Telecom was first privatised.
Back then, Telecom's network was seen as non-core business and something that a government shouldn't be involved in. The Government sold Telecom lock, stock and barrel with very few restraints on how the new company should do business.
The Kiwi Share required Telecom to offer free local calls and to restrict line rental rises to the rate of inflation each year and ensured rural customers were offered the same deals as their city cousins.
Other than that, standard commercial law was deemed to be enough to regulate the industry.
Ten years on, the newly installed Clark Labour Government appointed Hugh Fletcher to lead an inquiry into the industry and finally, in 2001, the Telecommunications Act was introduced.
A Telecommunications Commissioner, Douglas Webb, was appointed and given the brief to look into the unbundling of the local loop.
Unbundling is one of those esoteric areas of interest that only hardened telco observers care about, yet it can have a huge impact on the industry and both business and residential customers.
Unbundling would give other telcos the right to install equipment in Telecom's exchanges and thus offer their services over Telecom's copper lines. Telecom doesn't want it, naturally enough, because it loses control over the market.
Telecom's competitors for the most part are chomping at the bit to offer services above and beyond what Telecom is willing to offer.
Telecom wants to take a more measured approach to rolling out new services that will see the incumbent retain the bulk of the customers and hence the bulk of the income. On any given measure of the telco industry in New Zealand, Telecom is either number one or an aggressive number two.
Overall the vast majority of the market is Telecom's by default, with the other players left to fight over a market share that is often in the single digits. This is why unbundling is seen as being so important to the industry.
In his draft report, released in the middle of last year, Webb recommended unbundling.
His final report, released just before Christmas, reversed that position and shocked the entire industry. I don't think even Telecom was expecting it, but Webb said there was not enough commercial incentive to introduce such heavy-handed regulation.
Communications Minister Paul Swain would have been gob-smacked. He'd carefully constructed a telco environment that left the politicians out of the loop almost entirely.
The Telco Act ensures that no Minister of Communications can simply take advice from the commissioner and implement his own solution. He has to accept or reject the advice.
Swain would have been caught flat-footed by Webb's change of direction. Instead of a decision to unbundle, which Swain could have distanced himself from, while privately being quite happy about it, Swain found himself back in the spotlight as the minister charged with the unthinkable: not unbundling the local loop.
Internationally, unbundling has been introduced in nearly all OECD countries. New Zealand is the only nation to have looked at the issue and not introduced unbundling. It has to be said unbundling has not been the "silver bullet" everyone hoped. Britain's BT has something of a reputation for making life as difficult as possible for new players and to date only a handful of exchanges have been opened up to competitors.
Incumbent players have dragged the chain to astonishing lengths. The Swiss incumbent has been challenging its own Government in court, claiming the Government has no right to even consider unbundling let alone implement it. Only the Finnish incumbent voluntarily embraced unbundling without any regulatory requirement.
Unbundling gives competitors a huge weapon in their arsenal. Unbundling is used as the big stick to threaten the incumbent into giving competitors a better wholesale agreement. The option to unbundle isn't taken up by many competitors but it's vital that it's there. So Swain was caught by his own cleverness - by building a regime that didn't allow him to implement his own vision, whatever that might be, he was forced to find another way to question the commissioner's decision. He went to the Ministry of Economic Development for advice and received a report that damned the commission's decision.
The ministry recommended going back to the commission and asking it to look again at pretty much all the aspects of the final report and to come back to Swain with an additional report by next October.
Swain took that recommendation to the Cabinet on May 12. According to the Prime Minister a robust debate ensued, after which Swain was sent on his way. Apparently the Cabinet was not happy with the added delay to the conclusion and didn't want the issue dragging on any longer.
After 13 years the Government wasn't content to wait a further five months.
One week later Swain again reported to the Cabinet, this time with two options: either go back to the commission or accept the commission's findings but issue a stern warning to Telecom that it had better offer a proper wholesale product.
The latter option was chosen and the rest is history.
Telecom, to its credit, has introduced a new wholesale model. Where the commission demanded only a bare-bones entry-level service, Telecom has opted to give its internet provider customers a greater degree of control over the product. Where the commission limited the service to a "non-real time" solution, meaning the product didn't have to be capable of delivering voice services, the Government has strongly suggested that Telecom offer just such a service.
But at the same time, Telecom is still in control of the environment. It has demanded all internet providers pay a $150 "transfer fee" for any broadband customer that moves to a competing provider, and requires that all providers pay a "prompt payment" bond rumoured to run into hundreds of thousands of dollars each. I say rumoured because Telecom is requiring its competitor-customers to sign non-disclosure agreements, forcing the commercial environment into the back rooms from which it had only just emerged.
Doubt has been cast over the whole environment. The ministry, charged with ensuring NZ's economic prosperity, says the commission was wrong. The minister himself recommended the commission redo its sums.
Can we trust the commission to get it right when it comes to number portability, or the Telecommunications Share Obligation, or any of the numerous other regulatory decisions that must be made to finally ensure we have that level playing field we've heard so much about?
©Copyright 2004, NZ Herald