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Cunliffe Address for the 6th Annual ICT Summit

David Cunliffe Keynote Address for the 6th Annual Telecommunications and ICT Summit

It is now more than 40 years since the Canadian academic, Marshall McLuhan, made two statements that continue to shape how we think about communications and media. The more famous of those statements is the observation that mass media would create a “global village”.

We are now so comfortable with this notion that it has become a cliché. What he noticed before anyone else was how an electronic nervous system was rapidly integrating life on earth, so that events in one part of the world could be experienced in real-time from other parts. Space and time were no longer the obstacles they had been, and human experience could revert in significant ways to what it was like when we lived in small villages.

The reality, as many will point out, is that our global village has first and second-class citizens. One can live in the global village and yet not fully enjoy its benefits.

McLuhan’s second famous observation was the rather cryptic equation: “the medium is the message”. Some have wrongly concluded that McLuhan was saying was that information content was inconsequential, and that what really mattered was the technology that conveyed it.

In fact, McLuhan’s insight was that when a new innovation appears, we focus on what it is intended to do, what it might replace, and what its advantages and disadvantages might be. But what we fail to notice is the change in personal, social and business dynamics that the innovation brings with it.

The ultimate significance of technology is not so much its initial specifications as how ordinary people use it to change the way they live and do business.

The question I want to address today is: how much of this promise is being fulfilled in New Zealand households, communities and businesses? Is communications technology the force that we want it to be for economic and social innovation? For building a knowledge society? For bringing small, beautiful New Zealand niche exporters in contact with a large and hungry market? For strengthening our cultural identity, our civic virtues and our democracy?

The immediate answer is a collective ‘could do better’. This is not to lay the blame on anyone in particular; but it is the driving impetus behind the Digital Strategy released recently, in which we all have a role: technology providers, network industries, central and local government, and community representatives.

I want to approach this topic through two main strands today: outlining some of the drivers behind the Digital Strategy. This primarily addressed enabling the demand side of New Zealand's ICT markets and delivering real, usable benefits to all New Zealanders

Second, I want to focus in on some of the key regulatory challenges that are before us. In particular I will reflect on the importance of competitive markets for achieving a step change in broadband pricing and service offerings; note the role that regulation can play to assist the development of competitive markets; and note the rather mixed and sobering picture presented by recent benchmarking.

The Digital Strategy

The Digital Strategy identified three enablers – content, confidence, and connection – and three agents of change – communities, business and government. It set out the key challenges that lie ahead, and put forward specific targets to be attained within definite timeframes.

In the area of content we are seeking to unlock New Zealand’s immense store of information that is potentially valuable to businesses, communities and individuals. That will involve a major exercise in digitizing existing content, streamlining access to it through initiatives like the online Cultural Portal, and filling current gaps in the availability of government information.

In doing this we need to address intellectual property rights and balance the need for protections with the opportunities to build value. I expect to see a major whole-of government e-content strategy emerge from this preliminary work over the course of the next year.

The second enabler, confidence, is one of our greatest challenges. While children nowadays seem to have an extra gene that bestows digital literacy almost at birth, a large portion of the population are limited in their ability to engage in the digital world.

New Zealand cannot afford, and must not allow, access to information technology to layer over existing divides of wealth and poverty. To do so would be not only unjust, but also errant nonsense for a country seeking to build a high-wealth, knowledge-intensive economy.

It has been said that the internet will not truly transform societies until it appears on our TV screens, accessed with ease by grandma and granddad wielding the remote control.

This scenario implies two parallel developments. The first is a wide dissemination of skills, through education and training programmes, including the Digital Horizons initiative. And the second is a framework for electronic security, through initiatives such as the National Computer Security Campaign and anti-spam legislation. It is my intention to see the Unsolicited Electronic Messages Bill introduced to the House before this year's general election.

The scenario also implies a third development, which is the last of the enablers in the Digital Strategy: improved rates of connection. Our target is to achieve upper-quartile OECD broadband performance by 2010 – this means a far higher uptake by residential customers, probably around 80 percent. In other words, to compete with our target OECD peers today, we would need over 600,000 residential broadband connections. By 2010 that will mean at least 800,000 broadband customers.

I believe this is achievable, but it will require a step change in attitudes and market behaviour. Douglas Webb has offered us some very challenging thoughts today. While it is not for me to comment on his individual suggestions at this point, I would note the Government's shared conviction that the broadband wholesaling market is a critical ingredient in the mix. I will pick up the regulatory theme later in my remarks.

The Digital Strategy sets out the stimulatory role that government can play in promoting high performance connectivity, including through:

The Broadband Challenge, which aims to have open access fibre networks in 15 cities and towns, and have the conditions for all major public institutions (hospitals, libraries and councils) to have access to 1 gigabyte per second connection;

Project PROBE continues its roll out, delivering high-speed internet access to all schools and their surrounding communities, and thereby ensuring that we do not end up with a rural/urban digital divide. The project has already led to a reduction of around $50 per month in the price of wireless connection, a trend that has also been encouraged by government action to free up the spectrum;

Meanwhile we are funding the Advanced Research Network that features fibre optic connection a 1 gigabit per second or more. While this is designed for use by researchers, academics and the pre-commercial innovation sector, it will create a significant ripple effect.

The Digital Strategy also gets serious about unlocking demand in business, government and the community. Time does not permit me to list the initiatives – you can find them for yourselves at, but I would highlight briefly:

$11 million to improve ICT education and training among the 87% of New Zealand businesses that employ 5 people or less, building on prior success with the programme;

$20 million to stimulate grass roots community ICT projects, working with local government, local businesses and communities through the Community Partnership Fund; and

a determination to press harder on government ICT procurement processes to ensure that they are both efficient and fair to the needs of small providers.

Implementation of the Digital Strategy is already well underway. Our project managers are already finding overwhelming interest in the Broadband Challenge. I announced my appointments to the Digital Strategy Advisory Group last week. The first task of this group will be to recommend criteria for project selection for the Broadband Challenge and the Community Partnerships Fund. We are aiming to be open for business by September.

Given the magnitude of the challenges before us, you can expect me to drive the implementation of the Digital Strategy hard – there are only 185 sleeps left before Christmas! Make no mistake about the government's seriousness in this regard - $400 million over 5 years represents a significant upgrade in our commitment to the development of the sector.

Competition and broadband uptake

Increasing broadband uptake is at the heart of the challenge facing the sector. It means developing both the supply and the demand sides of the market.

On the supply side, the key issue I believe is pricing. In practical terms, upper-quartile OECD broadband performance means trebling the current 200,000 broadband connections in 2005, and, if we are keep pace with the rate of growth throughout the OECD, adding another 200,000 connections by 2010.

This is a very steep growth curve, even with the encouraging rates of new connections in of 80 percent in 2003 and 200 percent 2004. It is hard to see us sustaining this kind of increase without a significant step down in pricing. How much is a matter for experimentation, although personally I suspect that getting significantly below a dollar a day would cross an important psychological threshold for many New Zealanders.

This means increasing competition in broadband access to drive down prices and improve service. This will in turn change consumers’ value perceptions and drive uptake, which will drive economies of scale, generate shareholder returns, and attract further investment.

I do not think it is an overstatement to say that broadband pricing is one of the crucial issues for the whole economy. If we succeed in this regard, our economy acquires an extra gear. If we do not, we should not be surprised if our solid economic performance in the past five years starts to falter. It is hard to imagine being in the top half of the OECD in terms of per capita GDP and yet towards the bottom in terms of telecommunications.

To achieve top half of OECD performance we are aiming for is an ICT industry that is characterised by a significant number of players, large and not so large, making investments in new capability, driving innovation and taking risks. The industry has never been one for the faint-hearted; but there is enormous potential value to be extracted from growing the market in both size and sophistication.

We have never made any secret of the fact that greater competition is the key structural change we want to bring about in the ICT industry. What we have is market structure emerging from the legacy of state monopoly. It is a matter of straightforward economics that where there is little competition, and especially where there are monopolistic conditions, the result is a combination of higher prices, a more conservative approach to investment and hence deadweight losses that mean lost opportunities for consumers, be they businesses or individuals.

On the other hand, an increase in competition tends to lower prices and margins, but it can also increase the size of the market and create a dynamic that unlocks new value for both consumers and shareholders.

That is why my government will continue to pursue greater competition in the telecommunications market. We see an open market, where there is co-operation around setting standards and protocols, and vigorous competition within a clear regulatory framework. We see a future where a multitude of players are engaged in innovating new products and services in order to better serve New Zealand businesses and ordinary consumers.

Regulating for increased competition: progress to date

We have made some significant steps along that path. When we came into office five years ago, competition in the telecommunications market was barely more than a theoretical possibility. It had occurred in a truncated form only in long distance calls and in larger business districts. The local loop was closed to competition, and there was limited competition for value added services and limited price competition in the mobile market.

Since that time, we have passed the Telecommunications Act 2001 and established a new regulatory framework with a more effective ‘referee’ in the Telecommunications Commissioner.

The purpose of the Act is pro-competitive and focuses first on consumers: "to promote competition for the long run benefit of end users within New Zealand". However in taking a long-term view, and with the requirement to consider efficiency effects, it recognises the need for investment to drive productivity gains over time.

In its short life, this new system has delivered some valuable advances, including:

Fixed network interconnection.

Wholesale provision of a wide range of Telecom’s retail services; and

Freephone number portability.

Let us recall for a moment the interconnection debacle of the 1990's. After a decade of governmental inaction and expensive, time consuming litigation over the interconnection price, this government outlawed the key Baumol-Willing pricing rule , and with the final cost-based pricing principle now in place, an issue that dogged the industry throughout that decade has now gone away. That old world ended, not with the expected bang, but with barely a whimper.

These successes tend merely to focus the spotlight more intensely on what has still to be resolved. The agenda remains a full one, with much of the focus on fixed telephone and cellular number portability and bitstream unbundling.

While the rate of progress on these issues is frustrating to many of us, we need to acknowledge the complexity involved. A rushed process may mean we end up locked into a second or third-best solution that does not deliver.

Having said this, it is important to be specific about the end point we want to achieve for New Zealand telecommunications consumers. Nor will we be content to see those benefits to consumers pushed off into the indeterminate future.

Bringing benchmarking into the centre of the debate

That is where benchmarking performance becomes a crucial touchstone. If we look at where we stand in relation to other OECD countries, we find that the price of our fixed telephone service, both for households and businesses, has consistently ranked about three quarters of the way down the OECD for many years.

However, this does not take into account the fact that the average residential user local call usage in New Zealand is around five times the standard OECD basket usage – which in turn is largely because residential local calling is free. When adjustments are made for this, New Zealand’s residential telephone pricing ranks in the top quartile.

When we look at mobile pricing, the picture appears much bleaker. Using the measures accepted by the Commerce Commission:

We currently have very high pricing for fixed to mobile calling. In fact, we are at or near the bottom of the OECD.

We are also at or near the bottom of the OECD for cellular pricing.

New Zealand is one of the most expensive countries in the OECD for users of mobile phones, and that the comparison becomes even less favourable as usage levels increase.

The result has been restricted demand for and use of cellular services relative to the OECD average.

The providers claim that the cellular market is very competitive and that the benchmark results are not relevant on current evidence. I don’t agree. We clearly need improved performance.

Finally, on broadband performance, the key findings are:

That we have good broadband access availability, in the region of 95 percent of dwellings (albeit at lower speeds than those enjoyed by some of our OECD peers);

That New Zealand’s broadband uptake, which was near the bottom of the OECD at the end of last year, is now growing at nearly 200% per annum, following a price drop by the main provider.

However, while pricing of typical residential user broadband data usage is now comparable with the mid point of the OECD, the price of business broadband service for medium and heavy business users is significantly above the OECD average, with the main factors being high per megabyte data transmission charges or very slow upstream data rates. The only exceptions are where there is significant broadband competition.

Rankings tell us only part of the picture. We also need to ask what quantum of change would be required to achieve better performance against benchmarks. If we are off the pace, how much ground do we have to make up?

What the figures show is that the price reduction needed to bring New Zealand into the top half of the OECD varies significantly according to service type:

The price of a standard business telephone service basket would need to fall in price by around 30 per cent;

Cellular service price would need to fall by about 40 per cent;

Business broadband prices would typically need to come down by about half, with faster upload speeds

As I suggested before, demand elasticities suggest that residential prices sustainably below $1 per day will be needed to achieve our uptake targets.

It would be wrong to conclude that these figures reflect the level of price gouging in the New Zealand telecommunications market, or that price reductions of this magnitude would immediately flow from specific enhancements to the competitive regime. The difference also reflects access to economies of scale and scope in much larger markets than New Zealand’s.

Having said that, there are a number of high-performing OECD economies that share many similarities with New Zealand. Certainly in the government’s view the benchmarks are valid. What is more, regardless of what causes these price differentials, their very existence is a drag on our competitiveness and a barrier to growth. My government is committed to eliminating them as far as is possible. Indeed that will be one of the bases upon which we evaluate the effectiveness of the regulatory regime.

Next steps

Where do we go next? Two parallel tracks of activity. First, we are continuing to develop and implement a suite of measures aimed at making New Zealanders more sophisticated consumers of telecommunications products, including broadband internet. This is a key focus of the Digital Strategy, as outlined earlier

Our second strategy will be to take a firm but fair approach to the regulatory system in the next few years to achieve some specific indicators of progress.

Work on the Telecommunications Act Review is just about complete, and I will be taking it to Cabinet for sign off by the end of July. Clearly I cannot comment on the specifics of the review yet, but I do want to stress that we are very serious about keeping the legislative framework for telecommunications up to date, and that any changes that are identified as necessary would be a high priority on the government’s legislative agenda.

We will also be watching very closely the progress of bitstream and fixed public data network unbundling to ensure that the promise it offers is not thwarted. Progress so far is encouraging:

Take up of residential broadband is on track to meet the target volunteered by Telecom, with around 180,000 connections from a 2005 target of 250,000;

However more work will be required for Telecom to achieve its commitment of one third or 83,000 of those connections to be wholesaled. I have already signalled publicly that the Government regards a healthy and competitive broadband wholesaling market as essential. Telecom New Zealand's wholesaling commitment is important, and a response will follow if it is not met.

The price of residential and business broadband has reduced and service capability has improved, although it is fair to say that are still looking for the kind of step down in broadband pricing that will bring a much larger tranche of New Zealanders into the market, and create a virtuous cycle of retail service development targeted at those users.

Telecom is also making progress in building a next generation network capable of delivering a full range of broadband based multi-services for residential and small business users, and we look forward to seeing a definite timetable for mass market service delivery.

We will be looking to broadband service competition in so-called double and triple play services such as VOIP and video conferencing to stimulate more competitive pricing in fixed network telephone services.

We are looking to achieve full local number portability in 2006 and mobile number portability by April 2007.

With respect to the mobile market, we are looking for significant reductions in fixed to mobile call pricing, if necessary through regulation. It is clearly not appropriate for me to speculate on my impending decision on the commissioner's recommendation in this regard. What I can say is that my consideration will be careful and thorough, and faithful to the purpose of the Telecommunications Act.

Summing up

To sum up, I have today outlined two key strands of the Government's thinking designed to lift New Zealand's ICT performance to the top half of the OECD, and to ensure that New Zealand is a world leader in using ICT for economic, social and cultural gain.

On the demand side, the Digital Strategy contains an integrated package of measures designed to enable faster growth of connection, consumer confidence and capability, and e-content. We are already moving quickly to implement this and I am determined that the pace will stay hot.

On the supply side, I have touched – necessarily only in outline in some cases – on the key regulatory issues that are before us. Announcements will be made at an appropriate time on mobile termination, the review of the Telecommunications Act and other matters. What is important today is to show how these individual decisions fit into the broader picture of the portfolio as a whole.

Competition changes the industry culture too

More broadly our aim is to foster a culture shift in the New Zealand telecommunications market. It has in the past been marked by conservatism in investment strategies, a lack of cooperation between players even where that offers potential win-win situations, and a somewhat defensive attitude towards customers.

The new market we want to foster will be able to embrace new phenomenon like MUSH networks, which pool a range of different interests and find synergies between them.

We also expect to see improved performance in dealing with customer complaints. This is not the job of the regulatory system. There is no reason why the old Toyota motto, “Complaints are gold”, cannot be the prevailing attitude in our ICT industry.

That culture shift needs to reflect the fact that as we achieve greater levels of uptake and confidence in ICT amongst ordinary New Zealanders we will reach what sociologists call a ‘tipping point’. That is the point at which those unforeseen changes that Marshall McLuhan talked about 40 years ago will start to become apparent.

It is the point at which the evolution of technology makes, as it were, a species-leap and fuses with the evolution of new business opportunities and new cultural paradigms. It is the many-layered interactions of a global village square. We want easy interaction with multiple parties. We want a cross between a marketplace, a conversation pit and a sports field. We want to make transactions, participate in auctions, play games, be entertained, shout our news from soapboxes, and hold passionate arguments.

What New Zealanders want is, to put it bluntly, community, the broader, richer, economically stronger community that telecommunications technology in its many new forms promises. It is our job and our business to give it to them.

Thank you.

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