Video | Agriculture | Confidence | Economy | Energy | Employment | Finance | Media | Property | RBNZ | Science | SOEs | Tax | Technology | Telecoms | Tourism | Transport | Search


Webb: TUANZ Telecommunications Day 2006

TUANZ Telecommunications Day 2006

Douglas Webb, Telecommunications Commissioner, 24 May 2006

The Changing Competitive Landscape

Douglas Webb, Telecommunciations Commissioner

I want to thank TUANZ for the invitation to speak to you today. I have spoken at this event regularly over recent years, generally looking at the state of competition, the major regulatory decisions of the previous year, and the agenda for the coming year.

This time around though, all other issues have been swamped by the Government’s announcement earlier this month of its new telecommunications policy.

The announcement makes it clear that the Government is seeking changes both in the absolute levels of performance in telecommunications and in the relative levels of performance compared with other countries.

The goal of changes in absolute performance is entirely within our control. Industry, Government and the regulator all have a part to play. Meeting the goal will require a blend of increased investment, stronger competition and smart regulation.

Changes in relative performance with other countries will flow from success in improving our absolute performance levels, but importantly will also be affected by the extent to which we outperform others.

This last point underlines the need for regular progress monitoring, and mid-course refinements if needed. I am glad to see that the package will give the Commission a clear role in this respect, as well as the necessary information-gathering powers.

The package of initiatives reflects the significance of telecommunications for economic growth and stability, the rapid pace of change in the sector since the Fletcher Inquiry and the need for a fair and comprehensive wholesale market where competitors and Telecom succeed because of their investment, innovation and ability to give customers what they want, rather than by their patience and skills in finessing the regulatory process.

This package is clearly intended to be viewed in total. It recognises the inter-dependencies between each of the new regulated services, crucially in the area of wholesale access pricing.

We are studying the changes and what they will mean for the regulatory process. As a number of commentators have pointed out, the detail of the legislation will be extremely important.

While the expansion of the options for unbundled access to the local loop has grabbed the headlines, other elements of the package will also have important long-term effects on how the competitive process is to work. .

I want to say something today about several of those elements and how I see them working. I will also touch on what we are doing on related issues concerning the mobile markets.

The Government has reaffirmed the importance of the modernisation of technology and upgrading of infrastructure for the future of New Zealanders. Overseas trends clearly show that increasingly intensive use of information and knowledge is driving value creation, productivity and economic growth. The package reaffirms the role of competition and the need for a strong regulatory framework to make this happen.

The Commission will be able to be more proactive, with an enhanced capacity to approach regulation strategically. On the one hand it allows us to go beyond a limited focus on bilateral access disputes and towards genuine industry solutions. On the other, we will have a greater capacity to anticipate emerging issues and deal with them before they become entrenched problems. We will have a framework of tools for identifying and dealing with current and emerging issues.

The framework established in 2001 was appropriate for that time, with its mixture of measures to resolve legacy issues such as interconnection and access, and forward looking reviews and investigations.

The new regime proposed in the package is explicitly aimed at achieving an even-handed, transparent and viable wholesale market and driving competition to ensure New Zealand’s broadband uptake improves rapidly.

Some thoughts that stand out to me at this early stage…

Under the new regime there is a significant re-balancing of the previous allocation of responsibilities between industry and the regulator. The existing policy settings are based on bargaining between the parties, with the backstop of regulatory intervention as an incentive. It is a regime of "last resort" and has its difficulties and risks. These reforms recognise that the interaction between commercial negotiations and the regulatory regime has had both its successes and its failures.

The current "negotiate and then arbitrate" model is based on a central assumption that the incumbent has strong incentives to negotiate reasonable access terms with new entrants. Those incentives are to avoid the issue ending in front of the regulator, with the risks and uncertainties that brings.

There are several problems with that assumption.

First, the incumbent has no obligation to share with the potential entrant any information about its network, the applications running over it, and the incumbent’s back-office systems. This makes negotiation, and the judgment as to the value of the regulatory alternative, something of a guessing game.

Second, the regulatory risk is also a deterrent to the potential entrant – in some ways a greater risk, because the time spent in the regulatory process is time that the competitor is out of the market.

Third, incumbents are able to strengthen their position in negotiations by raising the bar for the competitor to succeed in the regulatory process. They have been able to do this by signalling that they will raise the costs of applying for regulated access by a variety of means. This has been a particular deterrent to smaller operators.

Even where a competitor has been prepared to go through the full regulatory process, the fact that the outcome is applicable only between the named parties to the dispute has meant that other competitors have faced the difficulty of achieving similar terms.

Some of the shortcomings of the current model can be seen in the case of the regulated unbundled bitstream service. The process of competitors gaining access to the service has been a difficult and frustrating one, where the Commission had no power either to insist on the provision of a full blown regulated service at the outset, or to make the regulated service generally available to all players in the market at the end.

While some valuable results were produced for consumers – speeds increased and prices declined (particularly for business consumers) as the commercial outcomes loosely tracked the regulatory outcomes – more could have been achieved sooner if the scope for delay and gaming had been less.

This dynamic will change once the package has been implemented.

The Commission will gain two significant powers – the ability to require that a standard offer of access terms approved by the Commission is open to anyone, and the power to compel incumbents to disclose information so that competitors know in advance the "what and how" of the regulated services.

By providing for information disclosure and the regulator setting the terms and conditions for service, the scope for negotiation becomes more limited. However, given the recent experience of negotiations, with all the limitations I have just described, this re-balancing will provide better incentives for the players in the market.

A consequence will be a shift from an episodic, topic-by-topic regime to one in which there is continuous engagement of the regulator through a market monitoring role.

Under the current regime there are limited opportunities for sustained monitoring of the evolution of the market or strategic review of its overall competitiveness. While the Commission has frequently used its powers to carry out investigations into the need for regulatory changes, those processes are not well suited to providing regular updates on the state of competition across the range of telecommunications markets. Those investigations are also quite complex and controversial because they focus on the exact form of regulatory changes, and lead to a Government decision on the recommendations made.

Because the package accommodates a more consistently strategic regulatory focus, it will provide powers for the Commission to use the information generated by market monitoring as the basis both of regulatory action and to inform stakeholders about how we are doing in meeting performance goals. It is equally encouraging that the government intends to give the Commission new powers to increase the transparency of the costs of the provision of regulated services.

Though the package is primarily concerned with the fixed line market, it was noted that the Commission will be doing more work on mobile issues.

You will all be aware that submissions have just closed on our final report to the Minister on the regulation of mobile termination rates.

In the report, the Commission has recommended regulation of fixed to mobile voice calls on both mobile networks. We believe that a regulated reduction of mobile termination rates will be passed through to consumers, and that the benefits of this will increase over time as competition between fixed operators develops. Through regulation of the termination price, fixed-to-mobile providers will pay a similar charge to that which would exist in a competitive wholesale market.

My expectation is that should the government accept our recommendations, we will soon see an application for a price determination on mobile termination rates. I would also expect that a shift to cost-based termination will result in increased competition in the fixed-to-mobile market and downward pressure on calling prices.

We are also getting underway with an examination of the reasons for the persistence of the current mobile duopoly. So why this current interest in the mobile market? Over recent years the mobile market has been growing fast. The mobile termination report projects that penetration will exceed 100 percent in the near future.

At the same time, prices appear to be high in comparison to other OECD countries and there is little direct evidence to suggest this is because we have higher network costs in New Zealand. Unsurprisingly, mobile markets with only two players typically have higher prices than those with three or more competitors.

The market dynamic between Telecom and Vodafone seems to be focussed more on brand differentiation than on the type of product innovation and pricing levels we would expect to see if the market was effectively competitive.

The combination of high prices and modest retail competition would ordinarily suggest that the conditions are favourable for new entry. But we have been hearing from potential entrants for some time that the investment case isn’t strong because regulatory settings aren’t supportive.

While the Commission has explored some of the likely barriers to entry and expansion in its work on mobile termination, there is more work to be done to explain how these contrasting incentives interact.

Some of the submissions we received as part of the termination rate review contended that there are artificial barriers to entry beyond simply the sunk costs of rolling out a national network. We want to understand whether this is right, what those barriers if any are, and whether there is a case for regulation to deal with them. For example, is it difficult attracting investment because the market is saturated, or because of high entry costs or are there concerns about anti competitive behaviour in the market? What weight should be placed on regulatory issues such as number portability, co-location and roaming in this context? Is it some or all of the above?

We will be examining the lack of new market entry to date and the future prospects for entry so we can better understand whether a more in-depth investigation of the mobile market is warranted.

In conclusion, I believe we are at an important tipping point in the telecommunications regulatory regime. We are evolving from a hands off, light regulatory system to one where there is a much firmer ‘hand on the shoulder’ to steer the direction. The broadband market in particular is in for concentrated attention.

I recognise that there are high expectations that the changes will deliver strong gains for consumers and for the wider economy. As always with major changes, we will need to be aware of the risk of unintended consequences. The transition will need to be managed carefully so that the improved wholesale environment can start to deliver benefits as quickly as possible.

The Commission has a great deal of work to do as the changes to the regulatory system are rolled out. Like the bedding in process that took place when the 2001 Act came in, there are some issues like the bitstream service, where we have extensive experience and knowledge, and will be able to get off the mark relatively quickly once the legislation is passed. Others, like accounting separation and local-loop unbundling will raise many new implementation issues and therefore take longer to develop. I am optimistic however that we will start to see positive benefits to consumers quite soon after the package is in force, if not earlier.

There is an important opportunity for Telecom to work openly with the rest of the industry and with the Commission to accelerate the change process. I would like to see action now in response to the clear intent of the Government’s package, without attempts to foreclose future access by competitors to a regulatory solution if needed.

Most importantly, I would urge Telecom to work openly and collaboratively with other carriers and internet service providers to find practical solutions to the reasonable needs of those competitors, so that customers can start to see the gains from increased competition sooner rather than later. It should not be necessary to wait for the fine print before getting on with the job.

Thank you.


© Scoop Media

Business Headlines | Sci-Tech Headlines


Media Mega Merger: StuffMe Hearing Argues Over Moveable Feast

New Zealand's two largest news publishers are appealing against the Commerce Commission's rejection of the proposal to merge their operations. More>>


Approval: Northern Corridor Decision Released

The approval gives the green light to construction of the last link of Auckland’s Western Ring Route, providing an alternative route from South Auckland to the North Shore. More>>


Crown Accounts: $4.1 Billion Surplus

The New Zealand Government has achieved its third fiscal surplus in a row with the Crown accounts for the year ended 30 June 2017 showing an OBEGAL surplus of $4.1 billion, $2.2 billion stronger than last year, Finance Minister Steven Joyce says. More>>


Mycoplasma Bovis: One New Property Tests Positive

The newly identified property... was already under a Restricted Place notice under the Biosecurity Act. More>>

Accounting Scandal: Suspension Of Fuji Xerox From All-Of-Government Contract

General Manager of New Zealand Government Procurement John Ivil says, “FXNZ has been formally suspended from the Print Technology and Associated Services (PTAS) contract and terminated from the Office Supplies contract.” More>>