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The Itch to Regulate Broadband

The Itch to Regulate Broadband

Last week saw two developments in the broadband debate.

First, Telecom announced substantial price reductions for broadband services at faster speeds. No doubt the moves were driven by some combination of technological advances, competition, customer pressures and regulatory threats.

Second, the government engaged in some heavy breathing about further regulation, repeating claims that New Zealand is lagging behind other countries in broadband penetration.

Many urban myths surround the broadband debate.

The reality is that almost 100% of homes and businesses in New Zealand can access broadband capability. New Zealand compares favourably with the OECD average on this indicator.

The issue might therefore be one of affordability. The current level of penetration (about 20% of households) puts New Zealand 22nd in the OECD, as the prime minister noted in parliament. This is about the same as New Zealand’s ranking for income per capita, and broadband uptake is positively correlated internationally with incomes.

This suggests one remedy for the alleged problem is a more effective economic growth strategy to raise average incomes – on present policies, New Zealand is not on track to move up the OECD ladder.

In addition, the price reductions (including a dollar a day entry plan) and better services announced by Telecom will improve affordability. The new prices will be below average prices in other OECD countries. Further improvements in speed are in the pipeline with the rollout of the next generation of ADSL.

2 Nevertheless, as the government’s statements indicate, there is always an itch to ‘hasten history’. Customers always want lower prices and competitors are prone to ask for the helping hand of regulation.

Regulation could mean local loop unbundling, price controls or other forms of intervention.

All have downsides. The Commerce Commission wisely changed its mind in 2003 and recommended against local loop unbundling.

As has happened so often in the telecommunications industry, that idea could soon be irrelevant. Telephone exchanges may become a thing of the past with the next generation network (NGN) which uses internet protocol.

Critics argue that most OECD countries have some form of mandated unbundling, but that proves very little. Most OECD countries have agricultural subsidies too. Governments routinely intervene at the behest of vested interests, not the general public interest.

Overseas, unbundling has been fraught with difficulties. In Britain, where local loop unbundling has been in place for over 5 years, fewer than 300,000 lines have been unbundled. In New Zealand terms that amounts to around 20,000 lines, about the number of broadband connections Telecom sells every 6 weeks. In Australia the number of unbundled loops is also low and the industry is embroiled in major legal and policy debates on the issue.

Dynamic competition based on new technology and high rates of investment are far more important for the future of telecommunications than ‘parasitical’ competition involving forced access to incumbents’ networks.

Where technological change is bowling along, over-regulation inhibits investment and the uptake of new technologies.

To encourage investment, property rights should be respected and not altered without overcoming a substantial burden of proof and addressing the issue of compensation. Infrastructure investors won’t invest if the environment is hostile and uncertain. Would-be entrants should expect to negotiate access to facilities on commercial terms, not be given a ‘free ride’.

Marketplace competition seldom operates perfectly, but just because a fish can’t fly doesn’t mean a rhinoceros can do better. The heavy hand of regulation is often far worse.

Greater intervention by the government in electricity has led to the current unholy mess in that industry. Do we want telecommunications to go the way of state-controlled electricity and roads? Before contemplating new regulation of any industry, it is always wise to look at current regulations that may be impeding its performance.

A case in point in telecommunications is the Kiwi Share or Telecommunications Service Obligation, which has long outlived its usefulness. Among its many perverse effects is that it artificially subsidises dial-up internet, to the detriment of broadband uptake.

ISPs and others clamouring for broadband regulation should be careful what they wish for, because they might get it. Regulation begets more regulation, as the electricity situation demonstrates. Companies like Vodafone that have concentrated on competing in the marketplace rather than lobbying for government favours have done best.

New Zealand has benefited hugely by moving from a state-owned telecommunications monopoly to a competitive private industry with relatively lighthanded regulation. We should keep it that way.

Rob McLeod is the chairman of the New Zealand Business Roundtable

ENDS

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